[Federal Register Volume 83, Number 223 (Monday, November 19, 2018)]
[Rules and Regulations]
[Pages 58338-58429]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24423]



[[Page 58337]]

Vol. 83

Monday,

No. 223

November 19, 2018

Part II





Securities and Exchange Commission





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17 CFR Parts 240 and 242





Disclosure of Order Handling Information; Final Rule

  Federal Register / Vol. 83 , No. 223 / Monday, November 19, 2018 / 
Rules and Regulations  

[[Page 58338]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 242

[Release No. 34-84528; File No. S7-14-16]
RIN 3235-AL67


Disclosure of Order Handling Information

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') is adopting amendments to Regulation National Market System 
(``Regulation NMS'') under the Securities Exchange Act of 1934 
(``Exchange Act'') to require additional disclosures by broker-dealers 
to customers regarding the handling of their orders. The Commission is 
adding a new disclosure requirement which requires a broker-dealer, 
upon request of its customer, to provide specific disclosures related 
to the routing and execution of the customer's NMS stock orders 
submitted on a not held basis for the prior six months, subject to two 
de minimis exceptions. The Commission also is amending the current 
order routing disclosures that broker-dealers must make publicly 
available on a quarterly basis to pertain to NMS stock orders submitted 
on a held basis, and the Commission is making targeted enhancements to 
these public disclosures. In connection with these new requirements, 
the Commission is amending Regulation NMS to include certain newly 
defined and redefined terms that are used in the amendments. The 
Commission also is amending Regulation NMS to require that the public 
order execution report be kept publicly available for a period of three 
years. Finally, the Commission is adopting conforming amendments and 
updating cross-references as a result of the rule amendments being 
adopted in this rule.

DATES: Effective date: January 18, 2019.
    Compliance date: May 20, 2019.

FOR FURTHER INFORMATION CONTACT: Theodore S. Venuti, Assistant 
Director, at (202) 551-5658, Steve Kuan, Special Counsel, at (202) 551-
5624, Sarah Albertson, Special Counsel, at (202) 551-5647, Michael 
Bradley, Special Counsel, at (202) 551-5594, Amir Katz, Special 
Counsel, at (202) 551-7653, Emerald Greywoode, Special Counsel, at 
(202) 551-7965, or Andrew Sherman, Special Counsel, at (202) 551-7255, 
Division of Trading and Markets, Securities and Exchange Commission, 
100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting: (1) Amendments 
to 17 CFR 242.600 and 242.606 (respectively, ``Rule 600'' and ``Rule 
606'' of Regulation NMS) under the Exchange Act to require additional 
disclosures by broker-dealers to customers about the routing of their 
orders; (2) amendments to 17 CFR 242.605 (``Rule 605'' of Regulation 
NMS) to require that the public order execution reports be kept 
publicly available for a period of three years; and (3) conforming 
changes and updated cross-references in 17 CFR 240.3a51-1(a) (``Rule 
3a51-1(a) under the Exchange Act''), 17 CFR 240.13h-1(a)(5) (``Rule 
13h-1(a)(5) of Regulation 13D-G''), 17 CFR 242.105(b)(1) (``Rule 
105(b)(1) of Regulation M''), 17 CFR 242.201(a) and 242.204(g) (``Rules 
201(a) and 204(g) of Regulation SHO''), 17 CFR 242.600(b), 
242.602(a)(5) and 242.611(c) (``Rules 600(b), 602(a)(5), and 611(c) of 
Regulation NMS''), and 17 CFR 242.1000 (``Rule 1000 of Regulation 
SCI'').

Table of Contents

I. Introduction
II. Overview of Adopted Rule Amendments
III. Amendments to Rule 600, Rule 605, and Rule 606
    A. Customer-Specific Order Handling Reports
    1. Applicability of Customer-Specific Disclosures in Rule 606(b)
    2. Definition of Actionable Indication of Interest
    3. Scope of Broker-Dealer's Obligation Under Rule 606(b)(3)
    4. Timing and Frequency Requirements for Customer-Specific Order 
Handling Report
    5. Format of Customer-Specific Order Handling Reports
    6. Rule 606(b)(3) Report Content
    7. Rule 606(c) Quarterly Aggregated Public Report of Rule 
606(b)(3) Information
    B. Public Order Routing Report Under Rule 606(a)
    1. Orders Covered By Rule 606(a) Public Disclosures
    2. Marketable Limit Orders and Non-Marketable Limit Orders
    3. Payment for Order Flow Disclosures--Rules 606(a)(1)(iii) and 
(iv)
    4. Format of Public Order Routing Report
    5. Division of Rule 606(a) Report's Section on NMS Stocks by S&P 
500 Index and Other NMS Stocks
    6. Calendar Month Breakdown
    7. Execution Metrics
    C. Amendment to Disclosure of Order Execution Information
IV. Paperwork Reduction Act
    A. Summary of Collection of Information
    1. Customer-Specific Disclosures Under Rule 606(b)(3)
    2. Amendment to Current Public and Customer-Specific Disclosures
    3. Amendment to Current Disclosures Under Rule 605
    B. Use of Information
    1. Customer-Specific Disclosures Under Rule 606(b)(3)
    2. Amendment to Current Public and Customer-Specific Disclosures
    3. Amendment to Current Disclosures Under Rule 605
    C. Respondents
    1. Initial Estimate
    2. Estimate for Adopted Rule [Amendments to 605 and 606]
    D. Total Initial and Annual Reporting and Recordkeeping Burdens
    1. Customer-Specific Disclosures Under Rule 606(b)(3)
    2. Proposed Public Aggregated Report on Orders Subject to the 
Customer-Specific Disclosures Under Rule 606(b) Not Adopted
    3. Proposed Requirement to Document Methodologies for 
Categorizing Order Routing Strategies Not Adopted
    4. Amendment to Current Public and Customer-Specific Disclosures
    5. Revisions to Compliance Manuals
    6. Amendment to Disclosures Under Rule 605
    E. Collection of Information Is Mandatory
    F. Confidentiality of Responses to Collection of Information
    G. Retention Period for Recordkeeping Requirements
V. Economic Analysis
    A. Introduction
    B. Baseline
    1. Current $200,000 Threshold
    2. Current Reporting for NMS Stock Orders of $200,000 and Above
    3. Publication Period for Reports Required by Rules 605 and 606
    4. Available Information on Conflicts of Interest
    5. Available Information on Execution Quality
    6. Format of Current Reports
    7. Quality of Broker-Dealer Routing Practices for Not Held NMS 
Stock Orders
    8. Use of Actionable IOIs
    9. Competition, Efficiency, and Capital Formation
    C. Costs and Benefits
    1. Customer-Specific Order Handling Disclosures
    2. Public Order Handling Report
    3. Disclosure of Order Execution Information
    4. Structured Format of Reports
    5. Other Definitions in Adopted Amendments to Rule 600
    D. Alternatives Considered
    1. Alternative Scope for the Customer-Specific Reports
    2. Scope of Broker-Dealer's Obligation Under Rule 606(b)(3)
    3. Public Availability of Aggregated Rule 606(b)(3) Order 
Handling Information
    4. Automatic Provision of Customer-Specific Not Held Order 
Handling Report (Adopted Rule 606(b)(3))
    5. Submission to the Commission of Not Held NMS Stock Order 
Handling Reports (Adopted Rule 606(b)(3))
    6. Categories of NMS Stocks for Rule 606(a)
    7. Disclosure of Additional Information About Not Held NMS Stock 
Order Routing and Execution

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    8. Order Handling Reports at the Stock Level (Adopted Rule 
606(b)(3))
    9. Alternative to Three-Year Posting Period (Adopted Amendments 
to Rules 605(a)(2) and 606(a)(1))
    E. Economic Effects and Effects on Efficiency, Competition, and 
Capital Formation
    1. Effects of Adopting Amendments on Efficiency and Competition
    2. Effects of Adopting Amendments on Capital Formation
VI. Regulatory Flexibility Certification
VII. Statutory Authority and Text of the Proposed Rule Amendments

I. Introduction

    In July 2016, the Commission proposed to amend Rules 600 and 606 
under Regulation NMS to require additional disclosures by broker-
dealers to customers about the handling of their orders, to amend Rules 
605 and 607 for consistency with the proposed amendments to Rule 606, 
and to amend other rules to update cross references as appropriate.\1\ 
As discussed below, after careful review and consideration of the 
comments received, the Commission is adopting these amendments with 
certain modifications.
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    \1\ See Securities Exchange Act Release No. 78309, 81 FR 49432 
(July 27, 2016) (``Proposing Release'' or ``Proposal'').
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    Transparency has long been a hallmark of the U.S. securities 
markets, and the Commission continuously strives to ensure that 
investors are provided with timely and accurate information needed to 
make informed investment decisions. In recent years, the Commission and 
its staff have undertaken a number of reviews of market structure and 
market events, and much of this effort has aimed to enhance 
transparency for investors.\2\ The amendments being adopted today to 
Rule 606 of Regulation NMS represent the Commission's continued 
commitment to enhance transparency for investors.
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    \2\ The Commission recently adopted amendments to Regulation ATS 
that enhance the operational transparency of alternative trading 
systems (``ATSs'') that transact in National Market System (``NMS'') 
stocks (``NMS Stock ATSs''). See Securities Exchange Act Release No. 
83663 (July 18, 2018), 83 FR 38768 (August 7, 2018) (``ATS-N 
Adopting Release''). In addition, the Commission has proposed a 
Transaction Fee Pilot for NMS stocks to help inform the Commission, 
market participants and the public about the effects, if any, that 
transaction-based fees and rebates may have on order routing 
behavior, execution quality, and market quality. See Securities 
Exchange Act Release No. 82873 (March 14, 2018), 83 FR 13008 (March 
26, 2018) (``Transaction Fee Pilot Proposing Release'').
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    Rule 606 encourages competition by enhancing the transparency of 
broker-dealer order handling and routing practices.\3\ Rule 606(a) 
requires broker-dealers to provide a publicly available quarterly 
report of information regarding routing of non-directed orders.\4\ Rule 
606(b) requires broker-dealers to provide customers, upon request, 
certain information about the routing of their orders. Prior to the 
amendments being adopted today, the Rule 606(a) requirements applied to 
smaller dollar-value orders more typical of retail investors but did 
not apply to large dollar-value orders more typical of institutional 
investors.\5\ As discussed in detail in the Proposing Release, equity 
market structure, as well as order handling and routing practices, have 
changed significantly since Rule 606 was adopted in 2000, presenting a 
need to update the rule such that it provides transparency into broker-
dealer order handling and routing practices that continues to be useful 
in today's automated and vastly more complex national market system.\6\
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    \3\ See Securities Exchange Act Release No. 61358 (January 14, 
2010), 75 FR 3594, 3602 (January 21, 2010) (``Concept Release on 
Equity Market Structure'').
    \4\ 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-dealer to route to a particular venue for execution. See 17 
CFR 242.600(b)(19). As discussed below, these definitions are being 
revised in connection with the amendments to Rule 606 so that they 
no longer only apply to ``customer orders,'' but otherwise are 
remaining the same. See infra Section III.A.1.b.vii.
    \5\ The Commission limited the scope of Rule 606(a) to smaller 
dollar-value orders by defining a ``customer order'' to which the 
rule applied as an order to buy or sell an NMS security that is not 
for the account of a broker-dealer, but not 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).
    \6\ See Proposing Release, supra note 1, at 49433-44 for a 
detailed description of the history and the market developments 
leading to the Proposal.
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    As the Commission noted when it originally adopted Rule 606, in a 
fragmented market ``the order routing decision is critically 
important'' and ``must be well-informed and fully subject to 
competitive forces,'' \7\ and, further, the public disclosure of order 
routing practices ``could provide more vigorous competition on . . . 
order routing performance.'' \8\ By updating the Rule 606 disclosure 
regime, the rule as amended will provide disclosures more relevant to 
today's marketplace that encourage broker-dealers to provide effective 
and competitive order handling and routing services, and that improve 
the ability of their customers to determine the quality of such broker-
dealer services.\9\
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    \7\ See Securities Exchange Act Release No. 43590 (November 17, 
2000), 65 FR 75414, 75415 (December 1, 2000) (``Rule 606 Predecessor 
Adopting Release''). For clarity, when this release references 
``Predecessor Rule 606,'' it is referring to the version of the rule 
adopted in the Rule 606 Predecessor Adopting Release.
    \8\ See id. at 75417.
    \9\ If any of the provisions of these rules, or the application 
thereof to any person or circumstance, is held to be invalid, such 
invalidity shall not affect other provisions or application of such 
provisions to other persons or circumstances that can be given 
effect without the invalid provision or application.
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II. Overview of Adopted Rule Amendments

    To facilitate enhanced transparency regarding broker-dealers' 
handling and routing of orders in NMS stock, the Commission proposed to 
amend Rules 600(b) and 606 such that all orders of any dollar value in 
NMS stock \10\ submitted by a customer to a broker-dealer would be 
covered by order handling and routing disclosure rules. Under the 
proposed amendments, new Rule 606(b)(3) would require broker-dealers to 
make detailed, customer-specific order handling disclosures for NMS 
stock orders available to institutional customers in particular, who 
previously were not entitled to disclosures under the rule for their 
order flow, or were entitled to disclosures that have become inadequate 
in today's highly automated and more complex market.\11\ The Commission 
also proposed to require a broker-dealer to make publicly available a 
report that aggregates the information required for the detailed 
customer-specific order handling reports for all NMS stock orders that 
it receives across all of its customers.\12\ Further, the Commission 
proposed updating Rule 606(a) to provide retail customers in particular 
with certain enhanced disclosures regarding a broker-dealer's order 
routing practices.\13\
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    \10\ ``NMS stock'' and ``NMS security'' are defined in Rule 600 
of Regulation NMS. See 17 CFR 242.600(b)(46)-(47).
    \11\ See proposed Rule 606(b)(3); see also Proposing Release, 
supra note 1, at 49447.
    \12\ See proposed Rule 606(c); see also Proposing Release, supra 
note 1, at 49447.
    \13\ See proposed Rule 606(a); see also Proposing Release, supra 
note 1, at 49462.
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    The Commission received comments on the Proposal.\14\ The 
commenters, many of which also commented on Rule 606 in connection with 
the Concept Release on Equity Market Structure, overwhelmingly 
supported updating the disclosures required by Rule 606. Most also 
expressed support for, or offered constructive critiques of, specific 
components of the Proposal, and several suggested alternatives to 
specific provisions of the Proposal, but all comments received 
recognized a need for enhanced transparency and

[[Page 58340]]

supported the goals of the Proposal.\15\ In addition, the Equity Market 
Structure Advisory Committee (``EMSAC'') provided recommendations with 
respect to Rules 605 and 606 on November 29, 2016, to provide 
meaningful execution quality and order handling disclosures from a 
retail and an institutional perspective.\16\
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    \14\ Comments received on the Proposal are available on the 
Commission's website, available at https://www.sec.gov/comments/s7-14-16/s71416.htm.
    \15\ See, e.g., Letter from John A. McCarthy, General Counsel, 
KCG Holdings, Inc., dated October 31, 2016 (``KCG Letter'') at 1; 
Letter from Joseph Kinahan, Managing Director, Client Advocacy and 
Market Structure, TD Ameritrade, Inc., dated October 18, 2016 
(``Ameritrade Letter'') at 1; Letter from Tyler Gellasch, Executive 
Director, Healthy Markets Association, dated September 26, 2016 
(``HMA Letter'') at 3-4; Letter from Micah Hauptman, Financial 
Services Council, Consumer Federation of America, dated September 
26, 2016 (``CFA Letter''); Letter from Stuart J. Kaswell, Executive 
Vice President and Managing Director, General Counsel, Managed Funds 
Association, dated September 23, 2016 (``MFA Letter'') at 1.
    \16\ See EMSAC Recommendations Regarding Modifying Rule 605 and 
Rule 606 (``EMSAC Rule 606 Recommendations''), November 29, 2016, 
available at https://www.sec.gov/spotlight/emsac/emsac-recommendations-rules-605-606.pdf.
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    After careful review and consideration of the comment letters and 
upon further consideration by the Commission concerning how to further 
the goal of more useful and effective disclosure of order handling 
information under Regulation NMS, the Commission is adopting the 
proposed amendments to Rules 600 and 606 (and the other corresponding 
proposed amendments) with certain modifications.\17\
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    \17\ The amendments to Rule 606 would not limit any other 
obligations that broker-dealers may have under applicable federal 
securities laws, rules, or regulations, including the anti-fraud 
provisions of the federal securities laws.
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    Specifically, the Commission is amending Rule 606(b) of Regulation 
NMS \18\ to require a broker-dealer, upon request of a customer that 
places, directly or indirectly, one or more orders in NMS stock that 
are submitted on a ``not held'' basis with the broker-dealer,\19\ to 
provide customer-specific disclosures, for the prior six months, broken 
down by calendar month, regarding: (1) Its internal handling of such 
orders; (2) its routing of such orders to various trading centers; \20\ 
(3) the execution of such orders; 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.\21\ 
Generally, the information is available upon request by customers who 
submitted ``not held'' NMS stock orders through the broker-dealer, and 
is required to be provided for each venue and divided into separate 
sections for directed orders and non-directed orders.\22\ This new 
disclosure requirement is subject to two de minimis exceptions.\23\ A 
``not held'' NMS stock order that is subject to either de minimis 
exception is covered by the existing customer-specific disclosures in 
Rule 606(b)(1), as is any ``held'' NMS stock order submitted by a 
customer to any broker-dealer.\24\ For the reasons explained below, the 
Commission is not adopting the proposed requirement that the Rule 
606(b)(3) disclosures be divided into passive, neutral, and aggressive 
order routing strategies.
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    \18\ 17 CFR 242.606(b).
    \19\ Typically, a ``not held'' order provides the broker-dealer 
with price and time discretion in handling the order, whereas a 
broker-dealer must attempt to execute a ``held'' order immediately.
    \20\ A ``trading center'' is defined in Rule 600 of Regulation 
NMS. See 17 CFR 242.600(b)(78).
    \21\ See Rule 606(b)(3).
    \22\ See id.
    \23\ See Rules 606(b)(4) and (b)(5).
    \24\ See Rule 606(b)(1). As discussed below, while the 
amendments to Rule 606(b)(1) modify the orders that are covered by 
Rule 606(b)(1), the required disclosures under Rule 606(b)(1) are 
not changing. See infra Section III.A.1.b.vi.
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    In connection with the new disclosure requirement, the Commission 
is amending Rule 600(b) of Regulation NMS \25\ to include definitions 
of the terms ``actionable indication of interest,'' ``orders providing 
liquidity,'' and ``orders removing liquidity,'' and to revise the 
existing definitions of the terms ``directed order'' and ``non-directed 
order.'' \26\ The Commission is not adopting the proposed defined term 
``institutional order'' in Rule 600(b) and therefore also is not 
adopting the proposed $200,000 market value threshold for orders to 
qualify for the new customer-specific disclosures in Rule 
606(b)(3).\27\
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    \25\ 17 CFR 242.600(b).
    \26\ The newly defined terms are being incorporated into Rule 
600(b) in alphabetical order, in keeping with Rule 600(b)'s existing 
alphabetical organization of the terms defined therein, and the 
numbered provisions for existing defined terms in Rule 600(b) are 
being adjusted accordingly. For ease of reference however, 
throughout this release, citations to pre-existing defined terms in 
Rule 600(b) are to their pre-existing numbered provisions, unless 
otherwise indicated.
    \27\ See Rule 606(b)(3); see also infra Section III.A.1.b.ii. 
Relatedly, the Commission also is not amending Rule 600(b) to rename 
the term ``customer order'' as ``retail order,'' as was proposed.
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    As discussed in Section III.A.7, infra, the Commission is not 
adopting the proposed amendment to Rule 606 of Regulation NMS to 
require a broker-dealer to make publicly available, on an aggregate 
basis, the order handling information required under Rule 
606(b)(3).\28\
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    \28\ See proposed Rule 606(c). Because the Commission is not 
adopting proposed Rule 606(c), pre-existing Rule 606(c), which 
addresses ``Exemptions'' from the rule and which the Commission 
proposed to renumber as Rule 606(d) under the Proposal, is not being 
renumbered as such and remains unchanged as Rule 606(c).
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    The Commission is amending Rule 606(a) of Regulation NMS such that 
the aggregated order routing disclosures that broker-dealers must make 
publicly available on a quarterly basis pertain to orders of any dollar 
value in NMS stock that are submitted on a ``held'' basis. Further, the 
Commission is making targeted enhancements to these public disclosures 
to: (1) Require limit order information to be split into marketable and 
non-marketable categories (relatedly, the Commission is adopting a 
definition of the term ``non-marketable limit order'' under Rule 
600(b)); \29\ (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 their order routing decisions; and 
(4) require that broker-dealers keep the order routing reports posted 
on a website that is free and readily accessible to the public for a 
period of three years from the initial date of posting on the 
website.\30\ In addition to what was proposed, the Commission is 
replacing the Rule 606(a) requirement to group order routing 
information for NMS stocks by listing market with a requirement to 
group such information by stocks included in the S&P 500 Index as of 
the first day of the quarter and other NMS stocks.
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    \29\ 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'' is 
defined in Rule 600 of Regulation NMS. 17 CFR 242.600(b)(42). The 
Commission is adopting new Rule 600(b)(54) 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.2.
    \30\ See Rule 606(a); see also Proposing Release, supra note 1, 
at 49462. ``Payment for order flow'' has the meaning provided in 17 
CFR 240.10b-10. See 17 CFR 242.600(b)(54). A ``profit-sharing 
relationship'' is defined in Rule 600 of Regulation NMS. See 17 CFR 
242.600(b)(56).
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    Finally, consistent with the amendments to Rule 606(a), the 
Commission is amending Rule 605 to require market centers \31\ to keep 
execution reports required by the rule posted on a website that is free 
and readily accessible to the public for a period of three years from 
the initial date of posting on the website. The Commission also is 
adopting

[[Page 58341]]

amendments to other rules to update cross-references in connection with 
the other rule amendments being adopted today.\32\
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    \31\ 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).
    \32\ The Commission is adopting amendments to: 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), and 611(c) of Regulation NMS; and Rule 
1000 of Regulation SCI.
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    Consistent with the Proposal, the Commission continues to believe 
that generally requiring more detailed, standardized, baseline order 
handling information to be made available to customers upon request for 
orders in NMS stocks should enable those customers--and particularly 
institutional customers--to more effectively assess how their broker-
dealers are carrying out their best execution obligations and the 
impact of their broker-dealers' order routing decisions on the quality 
of their executions, including the risks of information leakage and 
potential conflicts of interest.\33\ In addition, the Commission 
believes that these more detailed customer-specific disclosures will 
further encourage broker-dealers to minimize information leakage,\34\ 
as well as better enable customers to verify that their broker-dealers 
are following their order handling instructions. Unlike the Proposal 
and in response to commenters' feedback, the Commission believes that 
the applicability of these new order routing disclosures should be 
based on order type (``not held'' orders in NMS stocks) rather than the 
dollar value of an order.
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    \33\ See infra Section III.A; see also Proposing Release, supra 
note 1, at 49434.
    \34\ See id.
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    Similar to the Proposal, the Commission believes that simplifying 
and enhancing the current publicly available disclosures, particularly 
with respect to financial inducements from trading centers, should 
assist customers in evaluating better the order routing services of 
their broker-dealers and how well they manage potential conflicts of 
interest.\35\ Unlike the Proposal and in response to commenters' 
feedback, the Commission believes that this goal would be targeted more 
effectively by having these disclosures apply to ``held'' orders in NMS 
stocks rather than those under $200,000.
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    \35\ See Proposing Release, supra note 1, at 49434.
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III. Amendments to Rule 600, Rule 605, and Rule 606

    Section III discusses in detail the adopted rule amendments. 
Subsection A addresses the customer-specific order handling disclosures 
required by new Rule 606(b)(3) and amended Rule 606(b)(1). This section 
also discusses a part of the Proposal we are not adopting: Proposed 
Rule 606(c)'s requirement that broker-dealers make publicly available 
an aggregated report of the Rule 606(b)(3) customer-specific order 
handling information across all of their customers. Subsection B 
addresses the enhanced public report required under amended Rule 
606(a). The newly defined and re-defined terms that the Commission is 
adopting in Rule 600 in connection with the amendments to Rule 606 are 
discussed where relevant in subsections A and B. The adopted amendment 
to Rule 605 is discussed in subsection C.
    The staff will review these amendments, including in particular the 
de minimis exceptions described in Section III.A.1.b.iv below, not 
later than one year after the compliance date of the amendments, and 
report to the Commission.

A. Customer-Specific Order Handling Reports

1. Applicability of Customer-Specific Disclosures in Rule 606(b)
a. Proposal
    The Commission proposed to delineate the types of orders that would 
trigger a broker-dealer's obligation to provide a customer with the 
order handling disclosures required by new Rule 606(b)(3) by amending 
Rule 600(b) to include a definition of ``institutional order.'' \36\ 
Specifically, the Commission proposed to define an ``institutional 
order'' 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.\37\ As proposed, Rule 606(b)(3) would 
apply only to such ``institutional orders.''
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    \36\ See proposed Rule 600(b)(31).
    \37\ See id. The proposed definition of institutional order 
applied only to orders for NMS stocks and, therefore, did not 
include orders in NMS securities that are options contracts.
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    The Commission's proposed definition of ``institutional order'' 
dovetailed with the current definition of ``customer order,'' \38\ such 
that all orders in NMS stocks routed by broker-dealers for their 
customers, regardless of order dollar value, would be covered by order 
routing disclosure rules.\39\ The Commission's proposed definition 
maintained a dollar-value threshold analysis to identify the 
``institutional orders'' for which the Rule 606(b)(3) disclosures would 
be available and distinguish them from ``retail orders'' that were too 
small to meet the dollar-value threshold in the definition and for 
which other disclosures would be available.\40\
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    \38\ See supra note 5.
    \39\ See Proposing Release, supra note 1, at 49445. Relatedly, 
the Commission proposed to rename term ``customer order'' in Rule 
600(b) as ``retail order.'' See infra Section III.B.1.
    \40\ See id. The Commission preliminarily believed that this 
would be an effective method of focusing the Rule 606(b)(3) 
disclosures on orders from institutional customers. See Proposing 
Release, supra note 1, at 49444-45 for additional detail on the 
Proposal.
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    The Commission solicited comment on alternatives to a dollar-value 
threshold approach. For example, the Commission asked commenters among 
other things: (1) Whether dollar value is the proper criterion for 
defining an institutional order, and (2) whether there are other order 
characteristics the Commission should consider to distinguish between 
retail and institutional orders, in addition to, or instead of, a 
dollar-value threshold.\41\
---------------------------------------------------------------------------

    \41\ See id. at 49445.
---------------------------------------------------------------------------

    The Commission also asked whether commenters believe a de minimis 
exemption from customer-specific reporting under proposed Rule 
606(b)(3) is appropriate. Specifically, the Commission asked if 
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.\42\ The 
Commission also asked if 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.\43\
---------------------------------------------------------------------------

    \42\ See id. at 49449.
    \43\ See id.
---------------------------------------------------------------------------

    The Commission received comments on the proposed dollar-value 
threshold as well as comments in response to its questions regarding a 
potential de minimis exemption from Rule 606(b)(3) and, after further 
consideration, is modifying its approach.
b. Final Rule and Response to Comments
i. Comments Regarding Dollar-Value Threshold
    The Commission received significant comment on the proposed 
definition of ``institutional order'' that criticized the proposed 
$200,000 threshold as an ineffective proxy for institutional trading 
interest.\44\ Many commenters

[[Page 58342]]

expressed concern that defining institutional order using the proposed 
$200,000 threshold would be both over-inclusive by including orders 
from retail investors with a market value over $200,000 and under-
inclusive by excluding orders from institutional customers with a 
market value less than $200,000, and result in the misclassification of 
a large number of orders.\45\ Two commenters stated that they receive 
retail investor orders that exceed $200,000 in market value.\46\
---------------------------------------------------------------------------

    \44\ See, e.g., Letter from Theodore R. Lazo, Managing Director 
and Associate General Counsel, The Securities Industry and Financial 
Markets Association, dated October 17, 2016 (``SIFMA Letter'') at 2-
3; Letter from Mary Lou Von Kaenel, Managing Director, Financial 
Information Forum, dated September 26, 2016 (``FIF Letter'') at 2-3; 
Letter from Mary Lou Von Kaenel, Managing Director, Financial 
Information Forum, dated November 7, 2016 (``FIF Addendum'') at 2; 
Letter from David W. Blass, General Counsel, Investment Company 
Institute, dated September 26, 2016 (``ICI Letter'') at 3-7; Letter 
from John Russell, Chairman of the Board, and James Toes, President 
and Chief Executive Officer, Security Traders Association, dated 
September 26, 2016 (``STA Letter'') at 4; HMA Letter at 5-6; Letter 
from Tyler Gellasch, Executive Director, and Chris Nagy, Director, 
Healthy Markets Association dated January 6, 2017 (``HMA Letter 
II'') at 2; CFA Letter at 6-7; Letter from Dennis M. Kelleher, 
President and Chief Executive Officer, Stephen W. Hall, Legal 
Director and Securities Specialist, and Lev Bagramian, Senior 
Securities Policy Advisor, Better Markets, Inc., dated September 26, 
2016 (``Better Markets Letter'') at 5; MFA Letter at 3.
    \45\ See, e.g., Letter from Robert J. McCarthy, Director of 
Regulatory Policy, Wells Fargo Advisors, LLC, dated September 26, 
2016 (``Wells Fargo Letter''); Letter from David M. Weisberger, 
Managing Director, IHS Markit, dated September 26, 2016 (``Markit 
Letter''); Letter from Jeff Brown, Senior Vice President, 
Legislative and Regulatory Affairs, Charles Schwab & Co. Inc., dated 
September 26, 2016 (``Schwab Letter'').
    \46\ See Schwab Letter at 3; Letter from Marc R. Bryant, Senior 
Vice President and Deputy General Counsel, Fidelity Investments, 
dated September 26, 2016 (``Fidelity Letter'') at 2-3.
---------------------------------------------------------------------------

    Several commenters stated that, for reasons such as obtaining a 
better price, achieving faster execution, avoiding potential 
information leakage, avoiding market effect, or the advancement in the 
sophistication of institutional trading systems, many institutional 
customers, before submitting their order flow to their broker-dealers, 
internally divide their order flow into smaller ``child'' orders that 
may not meet the proposed $200,000 dollar-value threshold.\47\ Multiple 
commenters offered their own analyses of internal and external data 
indicating that a large percentage of orders from institutional 
customers would fall below the $200,000 threshold.\48\ One of these 
commenters stated that the proposed definition of institutional order 
could exclude disproportionately more orders of smaller funds, orders 
in less liquid stocks that fall below the $200,000 threshold, and 
larger orders that are broken up into smaller child orders by 
institutional customers.\49\
---------------------------------------------------------------------------

    \47\ See Markit Letter at 6-7; Letter from Greg Babyak, Head, 
Global Regulatory and Policy Group, Bloomberg LP, and Gary Stone, 
Market Structure Strategy, Bloomberg Tradebook and Bloomberg LP, 
dated September 26, 2016 (``Bloomberg Letter'') at 11; Letter from 
Erin K. Preston, Chief Compliance Officer and Associate General 
Counsel, Dash Financial LLC, dated September 26, 2016 (``Dash 
Letter'') at 3; Letter from Richard Foster, Senior Vice President 
and Senior Counsel for Regulatory and Legal Affairs, Financial 
Services Roundtable, dated September 26, 2016 (``FSR Letter'') at 3-
4; MFA Letter at 3; FIF Letter at 3; FIF Addendum at 2; Letter from 
Nathaniel N. Evarts, State Street Global Advisors, dated September 
26, 2016 (``SSGA Letter'') at 1.
    \48\ See Markit Letter at 6-7; Letter from Matt D. Lyons, Global 
Trading Manager, The Capital Group of Companies, Timothy J. Stark, 
Market and Transactional Research, The Capital Group of Companies, 
and Michael J. Triessl, Senior Vice President and Senior Counsel, 
Capital Research and Management Company, dated September 30, 2016 
(``Capital Group Letter'') at 2; Bloomberg Letter at 11-12.
    \49\ See Letter from Adam C. Cooper, Senior Managing Director 
and Chief Legal Officer, Citadel Securities, dated October 13, 2016 
(``Citadel Letter'') at 2.
---------------------------------------------------------------------------

    One commenter expressed concern that the dollar-value threshold 
would exclude the majority of orders from institutions from the 
enhanced institutional order handling disclosure requirements, 
diminishing the value of the disclosure and forcing institutional 
investors to continue individual negotiations to obtain order handling 
information.\50\ Another commenter stated that excluding an unknown 
portion of a large institution's orders (and perhaps all of a smaller 
institution's orders) from heightened scrutiny may create opportunities 
for abuse and evasion, and that investors may therefore seek to 
deliberately avoid identifying their orders as institutional 
orders.\51\ Another commenter stated that different securities trade 
differently based on available liquidity and their capacity to move the 
market.\52\ The commenter stated that the proposed definition may force 
customers to choose between placing orders above the threshold to 
receive disclosures but at the risk of higher market impact costs or 
staying below the threshold to protect order information but 
sacrificing their right to disclosures.\53\
---------------------------------------------------------------------------

    \50\ See ICI Letter at 3.
    \51\ See HMA Letter at 6.
    \52\ See CFA Letter at 7.
    \53\ See id.
---------------------------------------------------------------------------

    As illustrated by these comments, there was broad opposition to the 
$200,000 dollar-value threshold in the proposed definition of 
institutional order. The Commission is not adopting the proposed 
definition. Rather than attempt to capture within a definition of 
``institutional order'' the orders that account for most institutional 
order dollar volume, the comments indicate that market participants 
would prefer a different approach to order handling disclosures.\54\ In 
light of these comments, the Commission believes that a modified 
approach to delineating the orders covered by new Rule 606(b)(3) would 
be more consistent with the expectations of market participants.
---------------------------------------------------------------------------

    \54\ See, e.g., ICI Letter at 3, 6-7 (noting that adopting a 
definition of institutional order that would apply to all orders, 
regardless of size, that an institutional customer submits to its 
broker-dealer would best enable the Commission to accomplish the 
objective of providing information necessary for institutional 
investors to understand broker-dealers' order routing decisions); 
Letter from Amy B.R. Lancellotta, Managing Director, Independent 
Directors Council, dated September 26, 2016 (``IDC Letter'') at 2 
(supporting ICI's recommendation); Capital Group Letter at 2-3; HMA 
Letter II (agreeing with Capital Group, and noting that covering all 
institutional orders is one of the most important aspects of the 
rule).
---------------------------------------------------------------------------

ii. Commenter Recommendations Regarding a Modified Approach
    Many commenters urged the Commission to replace the proposed 
dollar-value threshold with a different approach for identifying the 
orders covered by the new customer-specific order routing 
disclosures.\55\ They generally supported two different approaches: A 
number of commenters suggested that the applicability of the new order 
routing disclosures be based on order type (``held'' versus ``not 
held'' orders); \56\ and a number of other commenters suggested that 
their applicability be based on the characteristics (e.g., type or 
regulatory status) of the entity placing the order.\57\
---------------------------------------------------------------------------

    \55\ See, e.g., MFA Letter at 3-4; CFA Letter at 6-8; FIF Letter 
at 2-3, 14-15; ICI Letter at 3, 6-7; STA Letter at 3-4; SIFMA Letter 
at 1-3; FIF Addendum at 2; Healthy Markets Letter at 2; Jon 
Schneider, Chairman of the Board, and James Toes, President and 
Chief Executive Officer, Security Traders Association, dated April 
11, 2017 (``STA Letter II'') at 2.
    \56\ See, e.g., SIFMA Letter at 3; Bloomberg Letter at 12; 
Citadel Letter at 2-3; FIF Letter at 2-3, 14-15; FIF Addendum at 2; 
STA Letter II at 2. See also EMSAC Rule 606 Recommendations, supra 
note 16.
    \57\ See SSGA Letter at 1; ICI Letter at 3, 6-7; IDC Letter at 
2; MFA Letter at 3; Fidelity Letter at 3; CFA Letter at 8; Better 
Markets Letter at 5.
---------------------------------------------------------------------------

    Commenters who supported an order type-based approach suggested 
that the not held order type classification would be an effective proxy 
for identifying orders typical of institutional investors for which the 
existing customer-specific disclosures are inapplicable or inadequate 
because institutional investor orders are generally not held to the 
market.\58\ Commenters attributed

[[Page 58343]]

this to the fact that a broker-dealer has time and price discretion in 
executing a not held order, and institutional investors in particular 
rely on such discretion for reasons such as minimizing price impact, 
whereas a broker-dealer must attempt to execute a held order 
immediately, which typically better suits retail investors who seek 
immediate executions and rely less on broker-dealer order handling 
discretion.\59\ As one commenter put it, the Rule 606(b) disclosure 
requirements should be based on whether the broker-dealer has 
discretion when handling the client's order and, as a general matter, 
broker-dealers have no discretion in handling retail investor held 
orders but do have discretion in handling institutional investor not 
held orders.\60\ One commenter also stated that the held/not held 
approach would provide a targeted, deterministic solution to the issues 
presented by the proposed order dollar-value-based distinction between 
retail and institutional orders, and would alleviate the need to 
identify certain orders as institutional and others as retail for 
purposes of order routing disclosure.\61\
---------------------------------------------------------------------------

    \58\ See Ameritrade Letter at 2; Letter from Richie Prager, 
Senior Managing Director, Head of Trading, Liquidity and Investments 
Platform, Hubert De Jesus, Managing Director, Co-Head of Market 
Structure and Electronic Trading, Supurna VedBrat, Managing 
Director, Co-Head of Market Structure and Electronic Trading, and 
Joanne Medero, Managing Director, Government Relations and Public 
Policy, BlackRock, Inc., dated September 26, 2016 (``BlackRock 
Letter'') at 2; Citadel Letter at 2-3; Markit Letter at 4; Schwab 
Letter at 3; Capital Group Letter at 2-3; KCG Letter at 4; FIF 
Letter at 2-3; FIF Addendum at 2; STA Letter II at 2. One commenter 
noted its belief that the vast majority of orders entered by 
institutional customers are with not-held instructions and the vast 
majority of orders entered by retail investors are with held 
instructions. See STA Letter at 4.
    \59\ See Wells Fargo Letter at 5; Markit Letter at 3 n.7; 
Capital Group Letter at 3; Schwab Letter at 3; Ameritrade Letter at 
2 n.2; KCG Letter at 4; FIF Addendum at 2.
    \60\ See SIFMA Letter at 3; see also Capital Group Letter at 2; 
KCG Letter at 4.
    \61\ See FIF Letter at 2-3, 14-15.
---------------------------------------------------------------------------

    Several commenters also stated that basing the Rule 606(b) 
disclosure requirements on whether an order is held or not held would 
be straightforward and minimally burdensome because: Broker-dealers and 
other market participants are very familiar with these order type 
classifications; classifying orders as held or not held would be 
consistent with current industry practice; and the terms held and not 
held are common terms of usage in the securities markets.\62\ One of 
these commenters stated that broker-dealers already must mark orders 
that they execute as held or not held,\63\ and another commenter stated 
that the held/not held order classifications are commonly recognized in 
the FIX Protocol.\64\ Two commenters pointed out that the held and not 
held order classifications are already utilized in the Commission's 
definition of ``covered order'' in Rule 600(b)(15).\65\ One of these 
commenters stated that not held orders are generally distinguished from 
held orders in regulations and firms' monitoring processes, and 
specifically noted that broker-dealers already characterize orders on a 
held or not held basis to comply with Rule 605's covered order 
requirement, OATS technical specifications, and other rules such as 
FINRA Rule 5320.\66\
---------------------------------------------------------------------------

    \62\ See Citadel Letter at 3; Markit Letter at 3, 7-8; KCG 
Letter at 4; Capital Group Letter at 2-3; SIFMA Letter at 3.
    \63\ See Capital Group Letter at 3.
    \64\ See Citadel Letter at 3.
    \65\ See SIFMA Letter at 3 and n. 4; Market Letter at 3 and n. 
8.
    \66\ See Markit Letter at 3-4, 7.
---------------------------------------------------------------------------

    Two commenters objected to the held or not held analysis and stated 
that the applicability of the new customer-specific disclosures should 
not be based on order type because the held/not held classification is 
within the control of the order sender.\67\ One commenter stated that 
the held/not held order type-based distinction is an imprecise proxy 
for the status of the underlying customer, would not cover all 
institutional orders, and that the distinction may leave out many 
smaller investment advisers that currently trade through or have some 
portion of assets under management through ``retail'' channels.\68\ 
This commenter also stated that the distinction would allow for 
potential gaming, and that amidst rising concerns with broker-dealers' 
conflicts of interests, some institutional investors have increasingly 
come to use held orders.\69\ Another commenter, however, understood 
that some not held orders may come from retail customers, and that 
institutional clients may send broker-dealers a small amount of held 
orders, but nevertheless supported scoping the disclosures by the held 
and not held order classifications.\70\
---------------------------------------------------------------------------

    \67\ See HMA Letter at 7; Dash Letter at 4.
    \68\ See HMA Letter II at 2-3.
    \69\ See id.
    \70\ See SIFMA Letter at 3; see also Markit Letter at 7-8; 
Schwab Letter at 3; Letter from Manisha Kimmel, Chief Regulatory 
Officer, Wealth Management, Thomson Reuters, dated September 26, 
2016 (``Thomson Reuters Letter'') at 1; Citadel Letter at 3.
---------------------------------------------------------------------------

    Some commenters suggested that the applicability of the customer-
specific disclosures should be based on the type of the entity placing 
the order.\71\ One commenter argued that this approach would be 
preferable to an approach based on order type classification because 
broker-dealers already must know whether their customers are 
institutional investors.\72\ Another commenter stated that orders 
should not be classified according to the unique order handling typical 
of an entity, as that characteristic may change over time, whereas the 
entity type itself remains constant.\73\
---------------------------------------------------------------------------

    \71\ See, e.g., ICI Letter at 6-7; MFA Letter at 3; Fidelity 
Letter at 3; STA Letter at 4; CFA Letter at 8.
    \72\ See HMA Letter II at 2.
    \73\ See Better Markets Letter at 5.
---------------------------------------------------------------------------

    Most of the commenters that supported an entity-centric approach 
suggested that the Commission rely on FINRA Rule 4512(c), which defines 
the term ``institutional account'' for purposes of that rule, as a 
source for such an approach.\74\ Two commenters also suggested as a 
source FINRA Rule 2210(a)(4), which defines the term ``institutional 
investor'' for purposes of that rule, and also incorporates the 
definition of ``institutional account'' from FINRA Rule 4512(c).\75\ 
One commenter stated that, because all broker-dealers that handle 
customer orders for equity securities are FINRA members, they should be 
accustomed to using the standards supplied in FINRA's rules.\76\
---------------------------------------------------------------------------

    \74\ See ICI Letter at 6-7 n.19; MFA Letter at 3-4; Fidelity 
Letter at 3; STA Letter at 4; CFA Letter at 8; Bloomberg Letter at 
13; see also FIF Letter at 3.
    \75\ See MFA Letter at 3-4; ICI Letter at 6-7 n.19.
    \76\ See ICI Letter at 6-7 and n.19; see also CFA Letter at 8.
---------------------------------------------------------------------------

    Some commenters offered additional considerations or 
recommendations regarding how an entity-based approach should be 
crafted. For example, one commenter suggested that the new customer-
specific disclosures should apply to any order attributed to any entity 
that is a ``large trader'' under Section 13(h) of the Exchange Act.\77\ 
Another commenter stated that institutional and retail investors should 
be defined according to whether the investor is an entity or 
individual.\78\
---------------------------------------------------------------------------

    \77\ See SSGA Letter at 1; see also 15 U.S.C. 78m(h). Another 
commenter expressed concern that a large trader-based definition of 
institutional order would result in considerable overlap among 
retail customers that also are large traders under Rule 13h-1. See 
STA Letter at 4. This is one of several examples of commenters 
critiquing or supporting the views expressed by other commenters 
regarding the definition of institutional order. See, e.g., IDC 
Letter at 2 (supporting ICI Letter's recommendations on how to 
expand the definition of ``institutional'' order); STA Letter at 4 
(supporting remarks made in FIF Letter); Citadel Letter at 3 (noting 
support for similar proposal from Blackrock Letter and ICI Letter); 
Ameritrade Letter at 2 (noting commenter support for defining 
institutional orders by the type of order submitted); HMA Letter II 
at 2-3 (noting broad commenter support for not defining 
institutional orders by dollar size).
    \78\ See Better Markets Letter at 5.
---------------------------------------------------------------------------

    In addition to the foregoing commenter recommendations, a few 
commenters suggested that there should be no distinction between retail 
and institutional customers for purposes of the new Rule 606(b)(3) 
order handling reports and that all orders should be

[[Page 58344]]

covered by the Rule 606(b)(3) reports,\79\ or that retail and 
institutional customers should receive the same disclosures.\80\ One 
commenter stated that the goal with respect to both retail investor and 
large institutional orders should be best execution.\81\
---------------------------------------------------------------------------

    \79\ See HMA Letter at 5; Dash Letter at 3; HMA Letter II at 1-
2; Letter from Abraham Kohen, President, AK Financial Engineering 
Consultants, LLC, dated September 28, 2016 (``Kohen Letter'').
    \80\ See, e.g., Better Markets Letter at 5-7.
    \81\ See HMA Letter at 5.
---------------------------------------------------------------------------

iii. The Commission's Adopted Approach
    The Commission is not adopting a definition of ``institutional 
order'' or an order dollar value-based approach to delineate the 
applicability of new Rule 606(b)(3).\82\ Generally, the amendments to 
Rule 606(b) are designed to apply required order handling disclosures 
to any NMS stock order regardless of its dollar value and to require 
more detailed disclosures regarding how broker-dealers exercise 
discretion when handling and routing customers' NMS stock orders in 
today's electronic markets. These disclosures are designed to provide 
transparency to customers for whom the existing customer-specific 
disclosures under Rule 606(b) are inapplicable or have become 
inadequate. Upon further consideration and in light of the views 
expressed by commenters, the Commission believes that these goals can 
best be accomplished if the detailed, customer-specific, order handling 
disclosures set forth in Rule 606(b)(3) generally apply to orders of 
any dollar value for NMS stock that customers submit to their broker-
dealers on a ``not held'' basis. Accordingly, under Rule 606(b)(3), a 
broker-dealer must provide the disclosures set forth therein, upon 
customer request, to any customer that places, directly or indirectly, 
one or more orders in NMS stock that are submitted on a not held basis 
with the broker-dealer, subject to two de minimis exceptions discussed 
below.\83\
---------------------------------------------------------------------------

    \82\ Relatedly, as discussed below, the Commission is not 
renaming the term ``customer order'' as ``retail order'' in Rule 
600(b). See infra Section III.B.1.
    \83\ See infra Section III.A.1.b.iv; see also Rule 606(b)(3). 
Consistent with what was proposed, Rule 606(b)(3) applies only to 
orders for NMS stocks and does not include orders in NMS securities 
that are options contracts. Some commenters supported this approach. 
See STA Letter II at 2-3; FIF Letter at 12. Other commenters 
recommended that options be included in the amended order handling 
disclosures being adopted today. See Dash Letter at 1-2; HMA Letter 
at 12; Markit Letter at 14. The Commission continues to believe 
that, as noted in the Proposing Release, 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 same market structure complexities that exist 
for NMS stocks do not exist at this time for NMS securities that are 
options contracts to a degree that warrants the more detailed order 
handling disclosures proposed herein. See Proposing Release, supra 
note 1, at 49444 n.101.
---------------------------------------------------------------------------

    We believe that basing the applicability of this requirement on 
whether orders are held or not held serves the purposes of the 
disclosures. A broker-dealer must attempt to execute a held order 
immediately; a not held order instead provides the broker-dealer with 
price and time discretion in handling the order. As a result, the Rule 
606(b)(3) disclosures apply to NMS stock orders for which customers 
have provided their broker-dealers with price and time order handling 
discretion, and do not apply to orders that the broker-dealer must 
attempt to execute immediately. The Commission believes that since the 
disclosures are designed to provide greater transparency into a broker-
dealer's exercise of order handling discretion, they should be provided 
for orders for which broker-dealers actually exercise such discretion. 
Focusing the customer-specific report in this way will better enable 
customers to understand their broker-dealers' order routing decisions 
and the extent to which those decisions may be affected by conflicts of 
interest or create information leakage. Customers also will be better 
able to assess their broker-dealers' skill and effectiveness in 
handling their orders and achieving satisfactory executions.
    Importantly, as noted by multiple commenters, broker-dealers and 
other market participants are familiar with the held and not held order 
type classifications, classifying orders as held or not held would be 
consistent with current industry practice, and the terms ``held'' and 
``not held'' are common terms of usage in the securities markets.\84\ 
Indeed, broker-dealers already utilize the ``held'' and ``not held'' 
order classifications to comply with FINRA OATS technical 
specifications,\85\ and existing Commission rules, such as the 
definition of ``covered order'' in Rule 600(b), rely on market 
participants' ability to distinguish between ``held'' and ``not held'' 
orders. As such, the Commission is not adding definitions of these 
terms to Rule 600(b). The Commission intends for broker-dealers to rely 
on their current methods for classifying orders as ``held'' or ``not 
held'' for purposes of complying with Rule 606. By leveraging the 
established not held order classification, Rule 606(b)(3)'s 
applicability should be easily understood by market participants and 
the implementation burdens broker-dealers encounter in order to comply 
with Rule 606(b)(3) should be lessened to the extent that their order 
handling and routing systems are already configured for not held order 
classifications.
---------------------------------------------------------------------------

    \84\ See Citadel Letter at 3; Markit Letter at 3, 7-8; KCG 
Letter at 4; Capital Group Letter at 2-3; SIFMA Letter at 3.
    \85\ See FINRA OATS Reporting Technical Specifications, 
September 12, 2016, at pp. 4-2 to 4-3, available at http://www.finra.org/sites/default/files/TechSpec_9122016.pdf.
---------------------------------------------------------------------------

    Further, under the Commission's adopted approach, any customer is 
entitled to receive the Rule 606(b)(3) disclosures for their not held 
NMS stock orders, subject to two de minimis exceptions. The Commission 
is not adopting definitions of ``institutional order'' or ``retail 
order,'' and the adopted amendments make no such distinction, based on 
dollar value of the order or otherwise. In this regard, the 
Commission's adopted approach is consistent with comments that stated 
that no such distinction is necessary. Under final Rule 606(b)(3), 
customers may request the disclosures for any not held NMS stock orders 
that they submit (subject to the de minimis exceptions, discussed 
below), including not held NMS stock orders for less than $200,000 in 
market value, which would have been defined as ``retail orders'' and 
not subject to the Rule 606(b)(3) disclosures under the Proposal. The 
Commission believes it is appropriate to make the Rule 606(b)(3) 
disclosures available for all not held NMS stock orders (subject to the 
de minimis exceptions) so customers have information sufficient to 
evaluate the broker-dealers that are exercising order handling and 
routing discretion.
    The Commission believes that it is appropriate for broker-dealers 
to provide the Rule 606(b)(3) disclosures to those customers for whom 
the existing customer-specific order routing disclosures in Rule 606(b) 
are inapplicable or inadequate. Specifically, the Rule 606(b)(3) 
disclosures are particularly suited to customers that submit not held 
NMS stock orders because the disclosures set forth detailed order 
handling information that is useful in evaluating how broker-dealers 
exercise the discretion attendant to not held orders and, in the 
process, carry out their best execution obligations and manage the 
potential for information leakage and conflicts of interest. Moreover, 
many of the commenters that criticized the Commission's proposed 
definition of institutional order suggested that all or nearly all of 
an institutional customer's orders should be covered by the Rule 
606(b)(3) disclosures regardless of order

[[Page 58345]]

dollar value. Some of these commenters supported accomplishing this via 
an entity-based approach to Rule 606(b)(3)'s applicability,\86\ which 
the Commission has not chosen to adopt for reasons set forth below, and 
some of these commenters supported the adopted approach.\87\ By using 
the not held order distinction rather than the proposed $200,000 
threshold, Rule 606(b)(3) as adopted will cover more order flow than 
would have been covered under the Proposal.\88\ In addition, by using 
the not held order distinction, Rule 606(b)(3) as adopted will likely 
result in more Rule 606(b)(3) disclosures for order flow that is 
typically characteristic of institutional customers--not retail 
customers--and will likely cover all or nearly all of the institutional 
order flow.
---------------------------------------------------------------------------

    \86\ See supra note 58.
    \87\ See supra note 56.
    \88\ See infra Section V.C.1.a.i.3.
---------------------------------------------------------------------------

    While some commenters suggested that the new customer-specific 
disclosures in Rule 606(b)(3) should be available to all orders without 
any limitation based on entity type or order classification or 
otherwise, the Commission believes that it is appropriate to 
differentiate between not held orders and held orders for purposes of 
order handling information disclosure because broker-dealers generally 
handle not held orders differently from held orders due to the 
discretion they are afforded with not held orders but not with held 
orders.\89\ As a result, the information pertinent to understanding 
broker-dealers' order handling practices for not held orders is not the 
same as for held orders.
---------------------------------------------------------------------------

    \89\ See, e.g., Schwab Letter at 3.
---------------------------------------------------------------------------

    Indeed, in recent years, routing and execution practices for not 
held orders have become more automated, dispersed, and complex.\90\ In 
today's electronic markets, broker-dealers' commonly handle such orders 
by using sophisticated institutional order execution algorithms and 
smart order routing systems that decide the timing, pricing, and 
quantity of orders routed to a number of various trading centers, and 
that may divide a large ``parent'' order into many smaller ``child'' 
orders, and route the child orders over time to different trading 
centers in accordance with a particular strategy.\91\ The order 
handling disclosures required by Rule 606(b)(3) are designed to take 
this into account and provide relevant disclosures that, in the 
Commission's view, will enable customers to better assess their broker-
dealers' order execution quality and order handling ability overall and 
methods for complying with best execution obligations, as well as, more 
specifically, the degree to which their broker-dealers' order routing 
practices may involve information leakage or the potential for 
conflicts of interest.
---------------------------------------------------------------------------

    \90\ See supra Section I; see also Proposing Release, supra note 
1, at 49436.
    \91\ See id.
---------------------------------------------------------------------------

    By contrast, the Commission's concern regarding how broker-dealers 
handle held orders is less about the difficulties posed by more 
automated, dispersed and complex order routing and execution practices. 
Rather, the Commission believes that enhanced disclosures for held 
orders should provide customers with more detailed information 
including with respect to the financial inducements that trading 
centers may provide to broker-dealers to attract immediately executable 
trading interest, as opposed to the different information geared 
towards not held NMS stock orders that is set forth in Rule 606(b)(3). 
As noted above and discussed below, the quarterly public disclosures 
required under Rule 606(a) are indeed being enhanced to provide more 
detail regarding financial inducements to broker-dealers, and the 
Commission believes that these disclosures are more appropriately 
tailored to the characteristics of held order flow and the needs of 
customers that use held orders.\92\
---------------------------------------------------------------------------

    \92\ As noted supra and infra, the Commission is also is 
amending Rule 606(a) such that it applies to held orders of any size 
in NMS stock.
---------------------------------------------------------------------------

    Also, the Commission does not disagree with one commenter's 
statement that best execution should be the goal for orders from both 
institutional customers and retail investors, and that both types of 
investors deserve to know how their orders are routed and executed.\93\ 
Best execution is the broker-dealer's legal obligation for all orders, 
whether from retail or institutional customers.\94\ While meeting their 
best execution obligations, broker-dealers frequently may choose to 
handle orders in a variety of different ways and choose among a host of 
available order routing destinations. Because the choices broker-
dealers make in this regard are informed by the type of order at hand, 
for the reasons stated above, the Commission believes that separate 
disclosures for not held orders and held orders are the better way to 
help customers understand how their broker-dealers are handling and 
routing their orders and how well their broker-dealers are performing 
these functions. While this commenter also stated that the Proposal's 
reforms for retail customers are inadequate, for the reasons stated 
above, as well as in Section III.B infra, the Commission disagrees.
---------------------------------------------------------------------------

    \93\ See HMA Letter at 5.
    \94\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37538 (June 29, 2005) (``Regulation NMS Adopting 
Release''). FINRA has codified a duty of best execution into its 
rules. See FINRA Rule 5310.
---------------------------------------------------------------------------

    As noted above, other commenters suggested basing Rule 606(b)(3)'s 
applicability on the characteristics of the customer that submits the 
order to the broker-dealer. This entity-centric approach suggested by 
commenters would require the Commission to set forth the types of 
customers that may request the Rule 606(b)(3) disclosures for their NMS 
stock orders, but would not entail any differentiation in the types of 
orders covered by Rule 606(b)(3). As a result, NMS stock orders from 
qualifying customers that are submitted on a held basis would be 
covered by the Rule 606(b)(3) disclosures. This is a sub-optimal 
outcome. Broker-dealers must attempt to execute held orders immediately 
and are afforded no discretion in handling them; therefore, applying 
the Rule 606(b)(3) disclosures to held orders would not provide insight 
into how a broker-dealer exercises order handling and routing 
discretion. Moreover, including a customer's held orders in the Rule 
606(b)(3) report could obfuscate the reports' depiction of the 
discretion actually exercised by the broker-dealer with respect to not 
held orders and undermine the very purpose of these disclosures.
    An entity-based approach also would require the Commission to 
prescribe institutional status criteria that customers must fit in 
order to be entitled to receive the disclosures. A risk with such an 
approach is that the criteria could be over-inclusive or under-
inclusive. The Commission is particularly concerned about potential 
under-inclusiveness because customers that do not fit the criteria 
would not be entitled to receive the disclosures. To mitigate this 
risk, the Commission, as suggested by commenters, could leverage 
certain existing rules that already set forth institutional status 
criteria. For example, several commenters suggested as sources the 
definitions of ``institutional account'' and ``institutional investor'' 
in FINRA Rules 2210(a)(4) and 4512(c), respectively.\95\ But these 
definitions serve a purpose for the noted FINRA rules that is different 
from the purpose similar prescribed criteria would serve

[[Page 58346]]

for the purpose of Rule 606(b)(3). Under FINRA Rule 4512, a broker-
dealer is not required to obtain for ``institutional accounts'' certain 
additional information that it is required to obtain for accounts that 
are not ``institutional accounts.'' \96\ Likewise, under FINRA Rule 
2210(a)(4), a broker-dealer is subject to less prescriptive review 
requirements for ``institutional communications'' that are solely to 
``institutional investors'' than it is subject to for other, ``retail 
communications.'' \97\ Under both of these FINRA rules, exclusion from 
the defined ``institutional'' criteria triggers a more stringent due 
diligence or review obligation for the broker-dealer. The opposite 
would be true under an entity-centric approach to Rule 606(b)--if the 
institutional status criteria adopted by the Commission were not met, 
the market participant would be excluded from the more detailed 
disclosure regime.\98\
---------------------------------------------------------------------------

    \95\ See supra notes 74 and 75 and accompanying text.
    \96\ See FINRA Rule 4512(a)(2).
    \97\ See FINRA Rule 2210.
    \98\ One commenter suggested that the ``large trader'' 
designation under Section 13(h) of the Exchange Act serve as the 
source for the Commission's institutional status criteria (see SSGA 
Letter at 1, supra note 77). This approach would, however, include 
held orders from large traders within the required disclosures. 
Moreover, to qualify as a large trader under Rule 13h-1, a person 
must meet daily or monthly aggregate share volume or market value 
thresholds for transactions in NMS securities. See 17 CFR 242013h-1. 
Therefore, such an approach would exclude orders from an 
institutional customer that does not meet the designated thresholds. 
In addition, because the large trader definition is based on 
transactions in NMS securities, it takes into account transactions 
in option contracts that are NMS securities whereas the Commission's 
amendments to Rule 606(b) apply only to orders for NMS stock. 
Another commenter stated that institutional and retail investors 
should be defined according to whether the investor is an entity or 
individual (see Better Markets Letter at 5, supra note 78). This 
approach similarly would include held orders within the Rule 
606(b)(3) disclosures. Further, certain natural persons may take on 
the characteristics of institutions in their trading behavior and 
utilize not held orders to a significant degree, but they would be 
categorically excluded from receiving the Rule 606(b)(3) disclosures 
for such orders under an approach based on an individual versus 
entity distinction.
---------------------------------------------------------------------------

    This categorical exclusion of some customer types from Rule 
606(b)(3)'s purview is avoided under the Commission's adopted approach. 
By basing the application of Rule 606(b)(3) on the held and not held 
order classifications, no customer is categorically excluded from 
receiving the Rule 606(b)(3) disclosures. The Commission acknowledges 
that some commenters stated that an entity-centric approach to Rule 
606(b)(3)'s coverage based on the noted FINRA rules would coincide with 
familiar industry standards regarding the types of market participants 
that are considered to be ``institutional.'' \99\ But adapting the 
FINRA rules for the Commission's purposes in Rule 606(b) would present 
challenges. For example, private funds such as hedge funds may not be 
covered by the ``institutional'' definitions in FINRA Rules 2210 or 
4512,\100\ yet in the Proposing Release the Commission noted, by way of 
example, that ``[a]n institutional customer includes . . . hedge 
funds,'' among others.\101\ If the Commission relied solely on the 
FINRA rules, contrary to the Commission's contemplation in the 
Proposing Release, hedge funds may not be defined as ``institutional'' 
for Rule 606(b) purposes and would not be entitled to the more detailed 
Rule 606(b)(3) disclosures. Of course, the Commission could modify the 
criteria used in the FINRA rules to better suit its purposes here, but 
even then there would still be a risk of under-inclusiveness in the 
adapted criteria. There also could be new types of market participants 
that evolve and that trade in an institutional manner, but if they were 
not covered by the Commission's prescribed institutional status 
criteria, they would not be entitled to receive the Rule 606(b)(3) 
disclosures under the rule.
---------------------------------------------------------------------------

    \99\ See HMA Letter II at 2; CFA Letter at 8; STA Letter at 4.
    \100\ FINRA Rule 4512(c)(3) contains a catch-all provision that 
includes within the definition of ``institutional account'' the 
account of any person with at least $50 million in total assets. An 
entity that is not otherwise expressly covered by FINRA Rule 
4512(c)(1) or (2), such as a hedge fund for example, is not covered 
by the definition if it has total assets of less than $50 million. 
As such, if the Commission were to rely on the FINRA rules as 
suggested by some commenters, smaller entities with less than $50 
million in total assets may be excluded from Rule 606(b)(3) even 
though they may have less bargaining power than their larger 
competitors and therefore may benefit most from required, 
standardized order routing disclosures. There also could be 
disparate results--for example, a registered investment company with 
less than $50 million in assets would be covered because it is 
expressly identified in the rule, while a hedge fund with less than 
$50 million in assets would not be covered.
    \101\ See Proposing Release, supra note 1, at 49433, n.1.
---------------------------------------------------------------------------

    Moreover, as noted above, commenters also highlighted the industry 
familiarity with the not held order classification.\102\ And, unlike 
the ``institutional'' definitions in the referenced FINRA rules, which 
apply in contexts completely different from broker-dealer order 
handling, the not held order classification is already used by broker-
dealers specifically for order handling purposes, among other things. 
For example, FINRA Rule 7440 requires broker-dealers to record certain 
information, including any ``special handling requests,'' when an order 
is received, originated, or transmitted.\103\ FINRA's OATS Reporting 
Technical Specifications state that, when a FINRA member originates or 
receives an order and then subsequently transmits that order to another 
desk or department within the firm, the member is required to record 
and report to OATS, among other things, ``special handling instructions 
that are communicated by the receiving department to a desk or other 
department, such as `Not Held.' '' \104\
---------------------------------------------------------------------------

    \102\ See Citadel Letter at 3; Markit Letter at 3, 7-8; KCG 
Letter at 4; Capital Group Letter at 2-3; SIFMA Letter at 3.
    \103\ See FINRA Rule 7440(b)(15) and (c)(1)(G).
    \104\ See FINRA OATS Reporting Technical Specifications, 
September 12, 2016, at pp. 4-2 to 4-3, available at http://www.finra.org/sites/default/files/TechSpec_9122016.pdf.
---------------------------------------------------------------------------

    Basing the applicability of Rule 606(b)(3) on customers' not held 
NMS stock orders is, in the Commission's view, the most tailored 
approach to aligning the orders covered by Rule 606(b)(3) with the 
Commission's intent for the rule to provide more detailed disclosure 
and enhanced transparency regarding how broker-dealers handle NMS stock 
orders, and to provide such transparency to customers for whose NMS 
stock orders the current disclosure regime is inapplicable or 
inadequate. This approach also is likely to avoid the problems inherent 
in an entity-centric approach. Further, many commenters, as well as 
EMSAC, supported basing Rule 606(b)(3)'s application on the not held 
order classification. Accordingly, under Rule 606(b)(3), a broker-
dealer must provide the disclosures set forth therein, upon customer 
request, to any customer that places, directly or indirectly, one or 
more orders in NMS stock that are submitted on a not held basis with 
the broker-dealer, subject to the de minimis exceptions discussed 
below.
iv. De Minimis Exceptions
    The Commission is adopting in new Rules 606(b)(4) and (b)(5) two de 
minimis exceptions from Rule 606(b)(3)'s requirements, either of which 
excepts a broker-dealer from the Rule 606(b)(3) requirements. One of 
the exceptions focuses on the broker-dealer firm and the other focuses 
on the individual customer. Specifically, a broker-dealer is not 
obligated to provide the Rule 606(b)(3) report: (i) To any customer if 
not held NMS stock orders constitute less than 5% of the total shares 
of NMS stock orders that the broker-dealer receives from its customers 
over the prior six months,\105\

[[Page 58347]]

or (ii) to a particular customer if that customer trades through the 
broker-dealer, on average each month for the prior six months, less 
than $1,000,000 of notional value of not held orders in NMS stock.\106\ 
These de minimis exceptions are designed such that the Rule 606(b)(3) 
requirements apply when a broker-dealer's order flow consists primarily 
of not held orders for NMS stock and when a customer's trading profile 
is such that it relies heavily on the discretion of the broker-dealer 
and so would sufficiently benefit from the Rule 606(b)(3) disclosures.
---------------------------------------------------------------------------

    \105\ See Rule 606(b)(4). Under the rule, the first time a 
broker-dealer meets or exceeds the 5% threshold, it has a grace 
period of up to three calendar months to provide the Rule 606(b)(3) 
report. There is no such grace period for compliance after the first 
time the threshold is met or exceeded. See id.
    \106\ See Rule 606(b)(5). As discussed below, however, when 
either de minimis exception applies, the broker-dealer still must 
provide, if requested, the Rule 606(b)(1) customer-specific 
disclosures for not held NMS stock orders that it receives from 
customers. See infra Section III.A.1.b.vi.
---------------------------------------------------------------------------

    The Commission received several comments in response to its 
questions regarding a potential de minimis exception from customer-
specific reporting under proposed Rule 606(b)(3). Multiple commenters 
supported an exception from Rule 606(b)(3) reporting for broker-dealers 
that have either a de minimis level of institutional customers or a de 
minimis amount of institutional trading activity as measured by 
executed shares as a percentage of all executed shares.\107\ These 
commenters also supported disclosure based on whether an order is held 
or not held and generally discussed the reasoning for a de minimis 
exception in that context.\108\ Commenters also suggested that firms 
that receive less than 5% of orders from institutions should be exempt 
from requirements to provide disclosures for institutional orders, both 
at the individual investor level and in the aggregate.\109\ One 
commenter stated that the de minimis threshold should be set at 5% of 
not held orders received.\110\ Two commenters noted that there 
currently is a 5% threshold in Rule 606(a) in connection with the 
rule's requirement that broker-dealers disclose the identity of any 
venue to which 5% or more of non-directed orders were routed for 
execution.\111\ One of these commenters stated that the purpose of a de 
minimis exception is to provide relief so that reporting obligations 
for a given entity more closely match its actual core business and 
targeted customer profile.\112\
---------------------------------------------------------------------------

    \107\ See, e.g., FIF Letter at 5, 10; STA Letter at 6; Citadel 
Letter at 3.
    \108\ See, e.g., FIF Letter at 5, 10; STA Letter II at 2; 
Citadel Letter at 3; Thomson Reuters Letter at 1; Ameritrade Letter 
at 2.
    \109\ See STA Letter II at 2; Ameritrade Letter at 2; Wells 
Fargo Letter at 5. See also Letter from Jeff Brown, Senior Vice 
President, Legislative and Regulatory Affairs, Charles Schwab & Co. 
Inc., dated October 30, 2018 (``Schwab Letter II'').
    \110\ See Schwab Letter II at 2.
    \111\ See Ameritrade Letter at 2; Wells Fargo Letter at 5.
    \112\ See Wells Fargo Letter at 5. See also Letter from Stephen 
John Berger, Managing Director, Government and Regulatory Policy, 
Citadel Securities, dated October 23, 2018 (``Citadel Letter II'') 
at 1-2 (noting that the 5% threshold suggested by other commenters 
should ensure that smaller broker dealers are not adversely affected 
by the new disclosure requirement, and noting that a threshold based 
on a percentage of orders or shares received could potentially be 
set lower than a threshold based on a percentage of executed 
shares).
---------------------------------------------------------------------------

    Some commenters stated that the costs incurred by retail broker-
dealers to create systems to generate the Rule 606(b)(3) reports would 
exceed any benefits.\113\ One of these commenters stated that the Rule 
606(b)(3) statistics are not relevant to retail-oriented brokers' 
customer base and would provide them no added benefit, and that 
requiring retail broker-dealers to generate the statistics would be an 
onerous task with significant added expense.\114\ Two commenters 
recommended an exemption from Rule 606(b)(3) reporting for firms with a 
de minimis amount of not held order flow in light of the fact that 
retail customers occasionally submit not held orders.\115\ One 
commenter believed that, if broker-dealers with a de minimis amount of 
not held orders are exempted, the majority of the exemptions would be 
for retail brokers.\116\
---------------------------------------------------------------------------

    \113\ See Ameritrade Letter at 2; Citadel Letter at 3; FIF 
Letter at 5, 10.
    \114\ See FIF Letter at 5. See also Markit Letter at 17.
    \115\ See Thomson Reuters Letter at 1; Schwab Letter at 3.
    \116\ See STA Letter at 8-9.
---------------------------------------------------------------------------

    Other commenters did not support a de minimis exception even if a 
broker-dealer has limited institutional customer order flow, so that 
institutional customers can compare order routing among all broker-
dealers.\117\ One commenter stated that, if a small broker-dealer is 
able to effectively manage orders from institutional customers in the 
current complex market environment, it should be able to provide 
customers with information on their order routing practices.\118\
---------------------------------------------------------------------------

    \117\ See, e.g., Bloomberg Letter at 15; MFA Letter at 4-5. See 
also Markit Letter at 28.
    \118\ See Capital Group Letter at 4.
---------------------------------------------------------------------------

    The Commission believes that a de minimis exception from Rule 
606(b)(3) reporting, as set forth in Rule 606(b)(4), presents 
advantages for certain broker-dealers. Broker-dealers handle different 
types of order flow, and not all broker-dealers handle a significant 
amount of not held NMS stock order flow. Indeed, some broker-dealers 
focus mainly on servicing customers that use held orders in NMS stock, 
and as such, typically do not handle not held order flow in NMS stock. 
The Commission believes that it is appropriate to relieve broker-
dealers with minimal or zero not held order flow from the obligation to 
incur the costs associated with having the capability to provide the 
new Rule 606(b)(3) disclosures for not held NMS stock orders. The 
Commission does not believe that it would be appropriate to require 
every broker-dealer, regardless of its customer base and core business, 
to be compelled to incur the costs required to create the systems and 
processes necessary to generate the Rule 606(b)(3) reports. The 
Commission does not intend to introduce a wholesale change in order 
handling and routing disclosure requirements such that broker-dealers 
whose order flow consists almost entirely of held orders must also 
become prepared to provide disclosures that focus on trading activity 
characteristics of not held orders.
    In the Commission's view, the potential benefits of the Rule 
606(b)(3) disclosures for customers of such broker-dealers do not 
justify the costs to such broker-dealers of developing the necessary 
systems and mechanisms for providing the disclosures. There would be no 
expected benefits of Rule 606(b)(3) in circumstances where a broker-
dealer does not currently handle any not held NMS stock order flow. 
Nevertheless, absent a de minimis exception, such a broker-dealer could 
feel compelled to incur the costs and burdens associated with being 
able to provide the Rule 606(b)(3) disclosures in order to ensure 
compliance with the rule should it receive not held orders in the 
future. The Commission believes that it is appropriate to relieve any 
such broker-dealers of these potential costs and unnecessary burdens.
    Likewise, there would be only limited benefits of Rule 606(b)(3) in 
circumstances where broker-dealers handle a minimal amount of not held 
orders, and the Commission does not believe that such benefits would 
justify the costs to broker-dealers in these circumstances. While some 
commenters opposed a de minimis exemption on grounds that institutional 
customers should be able to compare orders across all broker-dealers 
and that broker-dealers capable of handling institutional customer 
orders should be able to provide the Rule 606(b)(3)

[[Page 58348]]

information,\119\ the Commission believes that these comments rest on 
an unlikely premise that it is broker-dealers that handle primarily 
institutional customer orders that would be excepted under Rule 
606(b)(4). To the contrary, consistent with other commenters' 
views,\120\ the Commission expects the de minimis exceptions to be 
relevant mainly in the context of broker-dealers that handle almost 
entirely held orders from customers but may occasionally handle not 
held orders from customers. Indeed, commenters noted that a small 
percentage of retail customers may submit not held orders, whether for 
purposes of working an order in illiquid securities or for other 
purposes. In these circumstances, the Commission believes that broker-
dealers that focus on servicing such customers should not be required 
to incur the costs or burdens associated with building the systems and 
other capabilities necessary to provide the Rule 606(b)(3) disclosures 
when they are likely to handle not held orders only occasionally and 
separate from their core business of handling held orders.\121\
---------------------------------------------------------------------------

    \119\ See MFA Letter at 4-5; Capital Group Letter at 4.
    \120\ See, e.g., Ameritrade Letter at 2; Citadel Letter at 3.
    \121\ See Wells Fargo Letter at 5.
---------------------------------------------------------------------------

    Accordingly, the firm-level de minimis exception to Rule 606(b)(3), 
as expressed in Rule 606(b)(4), focuses on the broker-dealer's overall 
order flow across all of its customers. The Commission believes that 
the scope of this exception will appropriately cover most broker-
dealers that handle almost entirely held order flow. A broker-dealer 
that handles not held NMS stock order flow that is less than 5% of the 
total shares of NMS stock orders in a six calendar month period that it 
receives from its customers most likely does not make, as a matter of 
course, the routing decisions for which Rule 606(b)(3) is designed to 
provide enhanced transparency. 95% or more of such a broker-dealer's 
NMS stock order flow would be held orders. The Commission does not 
believe that it is appropriate to require such a broker-dealer to 
expend the effort and incur the expense necessary to be able to provide 
disclosures that are primarily aimed at order handling that is rarely, 
if ever, employed by the broker-dealer.
    The Commission is adopting a firm-level de minimis exception that 
is based on the ``percentage of shares of not held orders in NMS stocks 
the broker or dealer received from its customers'' (emphasis added) 
rather than the percentage of not held orders in NMS stocks or other 
measures suggested by commenters.\122\ The purpose of the firm-level de 
minimis exception is to except from the Rule 606(b)(3) disclosure 
requirements those broker-dealers that receive zero or minimal not held 
NMS stock order flow from their customers and whose core business does 
not involve handling or routing such order flow. The Commission 
believes that the percentage of shares of not held orders is an 
appropriate measure for the calculation of the firm-level de minimis 
exception because it more accurately reflects the nature of a broker-
dealer's business activities than other suggested approaches.
---------------------------------------------------------------------------

    \122\ See, e.g., Schwab Letter II at 2.
---------------------------------------------------------------------------

    The other methods that commenters suggested for calculating a firm-
level de minimis threshold--e.g., based on the percentage of not held 
orders (not shares) in NMS stocks--are in the Commission's view less 
accurate indicia of the broker-dealers to whom this aspect of Rule 606 
is intended to apply and therefore would result in a less tailored 
exception. For example, the use of a ``per order'' threshold for the 
firm-wide de minimis exception would result in the equal treatment for 
purposes of a firm's de minimis calculation of, on the one hand, a 
single order for 10 shares of Corporation X, and on the other hand, a 
single order for 100,000 shares of Corporation X. The Commission 
believes that in this example, the two orders should not be afforded 
equal treatment and that the order for 100,000 shares is more 
indicative of the broker-dealer's business and thus should be given 
greater weight than the order for 10 shares.
    Indeed, in the aforementioned example, the broker-dealer would 
likely need to apply more discretion when executing the order for 
100,000 shares (to minimize potential information leakage and price 
impact) than for an order for 10 shares. As discussed above, the new 
Rule 606(b)(3) disclosures are intended to provide customers with 
detailed information concerning how broker-dealers exercise discretion, 
particularly for larger orders (including those broken up into several 
smaller child orders). Thus, if the firm-level de minimis threshold 
were calculated in a manner that did not account for shares received, 
there would be greater risk that a broker-dealer exercising discretion 
in handling larger orders, potentially as a meaningful portion of its 
business, would not be subject to the new Rule 606(b)(3) disclosure 
requirement.
    As noted below, Commission supplemental staff analysis found that 
among 342 broker-dealers that receive not held orders from customers, 
about 8% (28 broker-dealers) would receive a de minimis exception from 
Rule 606(b)(3) requirements pursuant to Rule 606(b)(4).\123\ 23 of the 
28 broker-dealers that would be eligible for the de minimis exception 
receive not held orders less than 2.5% of the total shares of their 
orders in the sample and five of the 28 broker-dealers receive not held 
orders greater or equal to 2.5% and less than 5% of the total shares of 
their orders in the sample.\124\ Thus, the 5% threshold in Rule 
606(b)(4) creates a narrow exception from Rule 606(b)(3) among broker-
dealers that receive not held orders from customers and would allow for 
a reasonably small increase in not held order flow as a percentage of 
total order flow before one of these broker-dealers would be subject to 
the requirements of Rule 606(b)(3). Those broker-dealers covered by the 
exception likely handle not held NMS stock order flow only occasionally 
and separate from their core business, and therefore, in the 
Commission's view, should not be subject to the requirements of Rule 
606(b)(3). In addition, some commenters that supported a firm-level de 
minimis exception specifically suggested that the threshold be set at 
the 5% level.\125\ Accordingly, the Commission believes that the 5% 
threshold for the firm-level de minimis exception is reasonable given 
the goals of the rule.
---------------------------------------------------------------------------

    \123\ See infra Section V.C.1.a.ii.
    \124\ See id.
    \125\ See supra note 109.
---------------------------------------------------------------------------

    A broker-dealer is covered by the firm-level de minimis exception 
as long as its customer not held NMS stock order flow continues to be 
less than the 5% firm-level threshold. A broker-dealer is no longer 
excepted from the purview of Rule 606(b)(3) once and as long as it 
meets or surpasses the firm-level threshold of the de minimis 
exception. Specifically, when a broker-dealer has equaled or exceeded 
the firm-level threshold, it must comply with Rule 606(b)(3) for at 
least six calendar months (``Compliance Period'') regardless of the 
volume of not held NMS stock orders the broker-dealer receives from its 
customers during the Compliance Period.\126\ Therefore, during the 
Compliance Period, the broker-dealer must provide the Rule 606(b)(3) 
report to a customer for any of the customer's not held NMS stock 
orders submitted to the broker-dealer during the Compliance Period 
(subject to the customer-level de minimis exception set forth in Rule 
606(b)(5)). The Compliance Period begins the first

[[Page 58349]]

calendar day of the next calendar month immediately following the end 
of the six calendar month period for which the broker-dealer equaled or 
exceeded the firm-level threshold, unless it is the first time the 
broker-dealer has equaled or exceeded the threshold.\127\ The first 
time a broker-dealer equals or exceeds the firm-level threshold, there 
is a grace period of three calendar months before the Compliance Period 
begins and the broker-dealer must comply with Rule 606(b)(3) 
requirements.\128\ The customer is not entitled to receive Rule 
606(b)(3) reports for orders handled during the grace period, as the 
grace period is not part of the Compliance Period. After the three 
calendar month grace period, beginning the first calendar day of the 
fourth calendar month after the end of the six calendar month period 
for which the broker-dealer equaled or exceeded the firm-level 
threshold, the broker-dealer must provide the Rule 606(b)(3) report 
prospectively for not held NMS stock orders submitted by customers from 
that date through the next six calendar months.
---------------------------------------------------------------------------

    \126\ See Rule 606(b)(4).
    \127\ See id.
    \128\ See id.
---------------------------------------------------------------------------

    The Commission believes that the limited three-month grace period 
is appropriate because it will allow a firm time to come into 
compliance with the Rule 606(b)(3) requirements when its not held NMS 
stock order flow crosses the Rule 606(b)(4) firm-level de minimis 
threshold for the first time. The grace period affords a broker-dealer 
time to develop the systems and processes and organize the resources 
necessary to generate the Rule 606(b)(3) reports. At the same time, 
should such a broker-dealer subsequently fall below the de minimis 
threshold, the Commission believes that no such grace period for Rule 
606(b)(3) is necessary if and when that broker-dealer's not held NMS 
stock order flow again meets or crosses the firm-level de minimis 
threshold such that the broker-dealer is again subject to the Rule 
606(b)(3) requirements. The broker-dealer should already have developed 
the necessary systems and processes for providing the Rule 606(b)(3) 
report in connection with its subjection to Rule 606(b)(3).\129\
---------------------------------------------------------------------------

    \129\ A broker-dealer whose not held NMS stock order flow from 
its customers equals or exceeds the five percent threshold must be 
able to provide the Rule 606(b)(3) reports to its customers 
beginning on the compliance date for these rule amendments. As such, 
broker-dealers will need to determine whether their customer not 
held NMS stock order flow equaled or exceeded the 5% threshold for 
the six calendar month period that ends in the calendar month that 
includes the effective date of these rule amendments. Since the 
compliance date for these rule amendments is 180 days after 
publication in the Federal Register, and since the effective date is 
60 days after Federal Register publication, broker-dealers that 
equaled or exceeded the 5% threshold during the six calendar month 
period ending in the calendar month that includes the effective date 
will have nearly four months between the effective date and 
compliance date to prepare to provide the Rule 606(b)(3) reports.
---------------------------------------------------------------------------

    Rule 606(b)(4) requires compliance with Rule 606(b)(3) for ``at 
least'' six calendar months for a broker-dealer that equals or exceeds 
the firm-level de minimis threshold. The Commission believes that it is 
appropriate to require a minimum Compliance Period of six calendar 
months in order to coincide with the six-month timeframe of Rule 
606(b)(3). Customers of a broker-dealer that is or becomes subject to 
Rule 606(b)(3) therefore will be able to request a Rule 606(b)(3) 
report that contains at least one full time period of disclosures 
contemplated by Rule 606(b)(3).\130\ There is no maximum period of time 
that a broker-dealer may be subject to Rule 606(b)(3)--a broker-dealer 
that consistently receives not held NMS stock orders from its customers 
at a rate that equals or exceeds the 5% threshold will be required to 
comply with Rule 606(b)(3) month after month. Rule 606(b)(4) is 
designed to require broker-dealer compliance with Rule 606(b)(3) for as 
long as the broker-dealer's not held NMS stock order flow from its 
customers equals or exceeds the 5% threshold, subject to the minimum 
Compliance Period of six calendar months.
---------------------------------------------------------------------------

    \130\ As noted above, a broker-dealer is not required to provide 
the Rule 606(b)(3) report for orders received when the broker-dealer 
was not subject to Rule 606(b)(3). So, for example, a broker-dealer 
that is subject to Rule 606(b)(3) as of June 1 would be required to 
provide the Rule 606(b)(3) information for not held NMS stock orders 
received from a customer on June 1 through at least November 30 of 
that calendar year (subject to the customer-level de minimis 
exception and a three-month grace period if first time the firm is 
required to provide a report pursuant to Rule 606(b)(3)). A customer 
could request a Rule 606(b)(3) report prior to the end of that 
period, but the report would only be required to include disclosures 
as of June 1 (if there is no three-month grace period).
---------------------------------------------------------------------------

    Rule 606(b)(4) also is designed to enable a broker-dealer that is 
subject to Rule 606(b)(3) for six calendar months (or longer) 
subsequently to avail itself of the firm-level de minimis exception if 
its not held NMS stock order flow no longer equals or exceeds the 5% 
threshold. Specifically, under Rule 606(b)(4), if, at any time after 
the end of the Compliance Period, the broker-dealer's not held NMS 
stock order flow falls below the 5% threshold for the prior six 
calendar months, the broker-dealer is not required to comply with Rule 
606(b)(3), except with respect to orders received during the Compliance 
Period.\131\ Thus, after the broker-dealer's initial Compliance Period, 
Rule 606(b)(4) provides for a rolling month-to-month assessment of 
whether the broker-dealer must continue to comply with Rule 606(b)(3) 
or may avail itself of the Rule 606(b)(4) de minimis exception.
---------------------------------------------------------------------------

    \131\ See Rule 606(b)(4). An example is set forth in the 
paragraph below.
---------------------------------------------------------------------------

    For example, suppose a broker-dealer has equaled or exceeded the 
firm-level threshold and therefore must comply with Rule 606(b)(3) for 
a six calendar month period that begins on January 1 and ends on June 
30 (assuming this Compliance Period started after a three-month grace 
period, if this was the first time the broker-dealer has had to comply 
with Rule 606(b)(3)). If, in the beginning of July, the broker-dealer 
determines that its not held NMS stock order flow equaled or exceeded 
the threshold for January 1 through June 30, the broker-dealer must 
continue to comply with Rule 606(b)(3) for July. If, on the other hand, 
the broker-dealer determines that its not held NMS stock order flow was 
below the 5% threshold for January 1 through June, the broker-dealer 
would not be required to comply with Rule 606(b)(3) for July 1 through 
July 31. In the beginning of August, the broker-dealer would determine 
if it is subject to Rule 606(b)(3) based on its order flow for the 
prior six calendar month period, which this time would be the period 
from February 1 through July 31. If the broker-dealer met the threshold 
for that six calendar month period, and had also met it for the period 
January 1 through June 30 such that it was required to comply with Rule 
606(b)(3) for July, the broker-dealer would be required to continue 
complying with Rule 606(b)(3) through August. If the broker-dealer met 
the threshold for the February 1 through July 31 period but had not met 
it for the January 1 through June 30 period and was not required to 
comply with Rule 606(b)(3) for July, the broker-dealer would start a 
new Compliance Period that would run from August 1 through January 31 
of the following calendar year. In this scenario, the broker-dealer 
would be required to provide Rule 606(b)(3) disclosures for not held 
NMS stock orders received from a customer during the prior six calendar 
months, except for any such orders that the broker-dealer received 
during July when the broker-dealer was not required to provide reports 
pursuant to Rule 606(b)(3).
    Table A below contains an example of a broker-dealer firm that 
meets or exceeds the 5% de minimis threshold

[[Page 58350]]

for the first time and enters a six-month Compliance Period after a 
three-month grace period. Table A below also reflects that, after the 
initial six-month Compliance Period, the broker-dealer's required 
compliance with Rule 606(b)(3) continues on a rolling month-to-month 
basis. Table B below contains an example where there is no grace period 
and a previously compliant broker-dealer firm begins a new Compliance 
Period after an intervening period of not meeting the 5% threshold.

     Table A--Firm Equals or Exceeds 5% Threshold for the First Time
------------------------------------------------------------------------
                               Period examined for
            Event             qualifying threshold       Obligation
------------------------------------------------------------------------
Firm determines in Jan. 2020  July 1-Dec. 31, 2019  Prepare to collect
 that it equaled/exceeded                            and report required
 threshold for first time;                           data for Compliance
 grace period begins.                                Period beginning
                                                     Apr. 1, 2020.
On Apr. 1, 2020, grace        Reporting is          Begin collection of
 period ends and six-month     mandatory during      required data for
 Compliance Period begins.     Compliance Period     orders received
                               regardless of         during Compliance
                               whether threshold     Period.
                               is equaled or
                               exceeded in prior
                               six calendar months.
May 2020....................  ....................  Provide reports for
                                                     Apr. 1 to Apr. 30,
                                                     2020
June 2020...................  ....................  Provide reports for
                                                     Apr. 1 to May 31,
                                                     2020 (continue
                                                     adding prior
                                                     month's data to
                                                     report each
                                                     successive month of
                                                     the Compliance
                                                     Period).
Initial Compliance Period     ....................  Provide reports for
 ends on Sept. 30, 2020.                             full Compliance
                                                     Period, Apr. 1 to
                                                     Sept. 30, 2020
                                                     (Sept. data not
                                                     required to be
                                                     provided before 7th
                                                     business day of
                                                     Oct.).
On Oct. 1, firm determines    Apr. 1 to Sept. 30,   Provide reports for
 that it equaled/exceed        2020.                 May 1 to Oct. 31,
 threshold; Compliance                               2020.
 Period extends through Oct.
 31, 2020.
On Nov. 1, firm determines    May 1 to Oct. 31,     Provide reports for
 that it equaled/exceed        2020.                 June 1 to Nov. 30,
 threshold; Compliance                               2020.
 Period extends through Nov.
 30, 2020.
Continue assessing, on a      Prior six calendar    Provide reports for
 rolling basis, whether        months, on a          prior six month
 equal/exceed threshold for    rolling basis.        period as long as
 prior six month period.                             threshold continues
                                                     to be met.
------------------------------------------------------------------------


 Table B--Previously Compliant Firm Equals or Exceeds 5% Threshold After
               Intervening Period of not Meeting Threshold
------------------------------------------------------------------------
                               Period examined for
            Event             qualifying threshold       Obligation
------------------------------------------------------------------------
Firm determines in Jan. 2020  July 1 to Dec. 31,    Begin collection of
 that it equaled/exceeded 5%   2019.                 required data for
 threshold (not for the                              orders received
 first time); six-month                              during Compliance
 Compliance Period begins                            Period.
 Jan. 1, 2020.
Six-month Compliance Period   Reporting is          Provide reports for
 ends on June 30, 2020.        mandatory during      full Compliance
                               Compliance Period     Period, Jan. 1 to
                               regardless of         June 30, 2020 (June
                               whether threshold     data not required
                               is equaled or         to be provided
                               exceeded in prior     before 7th business
                               six calendar months.  day of July).
Firm determines in July 2020  Jan. 1 to June 30,    Firm not required to
 that it did not equal/        2020.                 collect or report
 exceed threshold;                                   data for July 2020
 Compliance Period not                               but must continue
 extended.                                           to provide reports
                                                     for prior
                                                     Compliance Period,
                                                     Jan. 1 to June 30,
                                                     2020.
Firm determines in Aug. 2020  Feb. 1 to July 31,    Begin collection of
 that it equaled/exceeded      2020.                 required data for
 threshold; new Compliance                           orders received
 Period begins.                                      during new
                                                     Compliance Period,
                                                     Aug.-Jan. 31, 2021;
                                                     provide reports for
                                                     portion of prior
                                                     six months that is
                                                     covered by a
                                                     Compliance Period,
                                                     i.e., Feb. 1 to
                                                     June 30, 2020 (July
                                                     2020 not within
                                                     Compliance Period).
Oct. 2020...................  Reporting is          Provide reports for
                               mandatory during      Apr. 1 to June 30,
                               Compliance Period     2020; Aug. 1 to
                               regardless of         Sept. 30, 2020.
                               whether threshold
                               is equaled or
                               exceeded in prior
                               six calendar months.
Six-month Compliance Period   ....................  Provide reports for
 ends on Jan. 31, 2021.                              Aug. 1, 2020 to
                                                     Jan. 31, 2021 (Jan.
                                                     2021 data not
                                                     required to be
                                                     provided before 7th
                                                     business day of
                                                     Feb. 2021).
------------------------------------------------------------------------

    The other de minimis exception to Rule 606(b)(3) focuses on each 
customer's order flow.\132\ Whereas the firm-level de minimis exception 
is designed to relieve mainly broker-dealers that do not regularly 
handle not

[[Page 58351]]

held orders of the Rule 606(b)(3) obligations, the customer-level 
exception is designed to relieve broker-dealers from the obligation to 
provide the Rule 606(b)(3) disclosures to particular customers that do 
not trade NMS stocks in a manner that generally relies on a broker-
dealer's use of discretion over order routing and handling.
---------------------------------------------------------------------------

    \132\ See Rule 606(b)(5).
---------------------------------------------------------------------------

    The Commission expects that the benefits of the Rule 606(b)(3) 
disclosures will accrue mainly for customers that trade regularly with 
significant levels of not held NMS stock order flow. The new customer-
specific order handling disclosures are intended to provide such 
customers with insight into how their brokers exercise order handling 
discretion over a period of time. In order to accurately reflect a 
broker's order handling behavior, the customer-specific disclosures 
must contain ample order data. The Commission believes that $1,000,000 
of notional value traded on average each month for the prior six months 
is a level of order flow that would allow for meaningful order handling 
disclosures. A Rule 606(b)(3) report covering a customer's prior six 
months of trading activity would include at least $6 million worth of 
the customer's trades. The Commission believes that such a sample of 
trading activity would be large enough to not be misleadingly colored 
by one-off or infrequent routing choices by the broker-dealer or order 
handling requests by the customer. Therefore, such a sample size would 
provide the customer with an accurate and reliable depiction of how its 
broker-dealer generally handles its not held NMS stock order flow.
    The Commission also believes that the customer-level de minimis 
threshold is set at a sufficiently low level such that the exception 
captures customers that do not trade regularly or in significant 
quantity and who would not therefore realize the benefits of the rule. 
Based on the Commission's experience and understanding of the frequency 
and quantities in which various market participants tend to trade, the 
Commission believes that this threshold is a relatively low one for 
more active traders, including customers that have an interest in 
evaluating their broker-dealers' order handling services, but high 
enough such that the exception will capture customers that trade 
infrequently or in small quantities and for whom the detailed Rule 
606(b)(3) report would not be warranted or meaningful. Indeed, 
customers that trade on average each month for the prior six months 
less than $1,000,000 of notional value of not held orders through the 
broker-dealer are not likely to require the more complex order handling 
tools offered by the broker-dealer that would warrant or make 
meaningful a detailed review of the broker-dealer's order handling 
decisions. Even if a customer is sufficiently sophisticated to utilize 
not held orders and analyze the Rule 606(b)(3) information, unless the 
customer submits not held orders to a degree that generates a 
meaningful sample of order handling and routing data, the Rule 
606(b)(3) report will not provide a reliable basis for assessing the 
broker-dealer's activity.
    In addition, as discussed below,\133\ part of the reason why the 
Rule 606(b)(3) information is provided in the aggregate for all orders 
sent to each venue, and not on an order-by-order basis, is to protect 
broker-dealers from potentially disclosing sensitive or proprietary 
information regarding their order handling techniques. If the rule 
allowed customers to request the disclosures for discrete not held 
orders or a de minimis level of not held order flow, there would be 
heightened risk that customers could gain insight into the broker-
dealer's order handling techniques by perhaps reverse engineering how 
the broker-dealer handled a particular order. A broker-dealer's 
internal process for determining how to handle and route individual 
orders--such as, for example, the specific routing destinations chosen 
and the timing for sending child orders--is typically highly sensitive 
and proprietary information that broker-dealers guard closely. By 
requiring the Rule 606(b)(3) disclosures only for non-de minimis levels 
of not held trading activity, the customer-level de minimis exception 
helps ensure that the aggregated information provided under Rule 
606(b)(3) reflects a robust amount of trading activity from which a 
customer is unable to glean this sensitive or proprietary information.
---------------------------------------------------------------------------

    \133\ See infra Section III.A.6.
---------------------------------------------------------------------------

    While broker-dealers may, by rule, be excepted from Rule 606(b)(3) 
due to the firm-level de minimis exception, or excepted from providing 
the Rule 606(b)(3) disclosures to certain customers due to the 
customer-level de minimis exception, the Commission notes that some 
broker-dealers, for business reasons, may choose to provide the new 
customer-specific order handling disclosures to their customers 
regardless of the de minimis exceptions and that customers below the 
customer-level de minimis threshold could move their order flow to such 
firms.
v. Orders for the Account of a Broker-Dealer
    As noted above, the Commission's proposed definition of 
institutional order explicitly excluded orders for the account of a 
broker-dealer, and such orders were not covered by proposed Rule 
606(b)(3). Consistent with what was proposed, Rule 606(b)(3), as 
adopted, does not apply to orders from broker-dealers. Some commenters 
argued that orders for the account of a broker-dealer should be 
included in the order handling reports required under Rule 606 and, 
therefore, such orders should not be excluded from the proposed 
definition of institutional order in Rule 600(b).\134\ The Commission 
understands these comments to pertain to the proper scope of a broker-
dealer's reporting obligations under Rule 606(b)(3), and as such they 
are discussed in detail in Section III.A.3, infra. As discussed in 
Section III.A.3, infra, the Commission continues to believe that the 
scope of a broker-dealer's obligation under Rule 606(b)(3) properly 
does not extend to orders placed by a broker-dealer.
---------------------------------------------------------------------------

    \134\ See Markit Letter at 3 n.6, 18; Dash Letter at 1, 4-5; FIF 
Letter at 2, 8, 16-17; SIFMA Letter at 1, 3.
---------------------------------------------------------------------------

vi. Rule 606(b)(1)
    To incorporate new Rule 606(b)(3) into the existing regulatory 
structure, the Commission must make corresponding revisions to Rule 
606(b)(1), which is the pre-existing customer-specific order routing 
disclosure rule. Prior to today, Rule 606(b)(1) did not differentiate 
between NMS stock orders from customers submitted on a held or not held 
basis. As a result, absent amendment to Rule 606(b)(1), not held orders 
in NMS stock that are covered by Rule 606(b)(3) also would be covered 
by Rule 606(b)(1). This is not the Commission's intent. As discussed 
above, the Commission is requiring Rule 606(b)(3) disclosures to be 
available for not held NMS stock orders, subject to two de minimis 
exceptions. For held NMS stock orders, or for instances when a de 
minimis exception would except a broker-dealer from providing Rule 
606(b)(3) disclosures, the existing disclosure requirements of Rule 
606(b)(1) would apply.
    The Commission is amending Rule 606(b)(1) to require a broker-
dealer, upon customer request, to provide the disclosures set forth in 
Rule 606(b)(1) for orders in NMS stock that are submitted on a held 
basis, and for orders in NMS stock that are submitted on a not held 
basis and for which the

[[Page 58352]]

broker-dealer is not required to provide the customer a report under 
Rule 606(b)(3).\135\ As a result, any NMS stock order from a customer 
triggers Rule 606(b) order handling disclosure requirements. This is 
consistent with the Commission's stated intent in the Proposal for all 
orders in NMS stock routed by broker-dealers for their customers to be 
encompassed by order routing disclosure rules regardless of order 
size.\136\
---------------------------------------------------------------------------

    \135\ See Rule 606(b)(1). Rule 606(b)(1) also requires a broker-
dealer to provide the disclosures for orders (whether held or not 
held) in NMS securities that are option contracts. As explained 
above (see supra note 83), the Commission is not altering Rule 
606(b)'s application to orders for NMS securities that are option 
contracts, and so the adopted amendments to Rule 606(b)(1) continue 
the rule's prior application to option contract orders.
    \136\ See Proposing Release, supra note 1, at 49445.
---------------------------------------------------------------------------

    Because there is no dollar-value threshold in Rule 606(b) as 
adopted, there are two categories of NMS stock orders that would have 
been covered by Rule 606(b)(3) under the Proposal but instead are 
covered by Rule 606(b)(1) under the adopted approach. First, a 
customer's held NMS stock order that has a market value of at least 
$200,000 will be covered by the Rule 606(b)(1) disclosures (and, as 
discussed below, the Rule 606(a) public disclosures) whereas, under the 
Proposal, such an order would have been covered by the Rule 606(b)(3) 
disclosures.\137\ As discussed above,\138\ because broker-dealers must 
attempt to execute held NMS stock orders immediately and have no price 
or time routing discretion with such orders, the Commission does not 
believe that the Rule 606(b)(3) disclosures are appropriate for such 
orders, even if they are for $200,000 or more. Indeed, as explained 
supra and infra,\139\ the Commission's concerns with respect to broker-
dealer handling of held NMS stock orders relate mainly to financial 
inducements to attract held order flow from broker-dealers, and those 
concerns persist regardless of the size of the held order. Held NMS 
stock orders of any dollar value should therefore be covered by 
disclosures designed to provide more transparency into such financial 
inducements and the potential conflicts of interest faced by broker-
dealers which, as discussed infra, is what the enhancements to Rule 
606(a) in particular are designed to achieve.\140\
---------------------------------------------------------------------------

    \137\ Conversely, a customer's not held order in NMS stock that 
has a market value less than $200,000 will be covered by the Rule 
606(b)(3) disclosures whereas, under the Proposal, such an order 
would have been covered by the Rule 606(b)(1) disclosures (and the 
Rule 606(a) public disclosures). The Commission believes this is the 
proper result for the reasons set forth supra in Section III.A.1.b.
    \138\ See supra Section III.A.1.b.iii.
    \139\ See id.; see also infra Section III.B.1.b.
    \140\ See infra Section III.B.1.b.
---------------------------------------------------------------------------

    Second, compared to the Proposal, a not held NMS stock order for at 
least $200,000 that is from a customer that does not meet the customer-
level de minimis threshold or that the customer submits to a broker-
dealer that qualifies for the firm-level de minimis exception will be 
covered by Rule 606(b)(1) whereas, under the Proposal, any not held NMS 
stock order for at least $200,000 would have been covered by Rule 
606(b)(3). The Commission believes that it is the appropriate result 
for Rule 606(b)(3) not to apply to such an order and for Rule 606(b)(1) 
to apply instead. As discussed above,\141\ the firm-level de minimis 
exception in Rule 606(b)(4) targets broker-dealers that mainly handle 
customer held orders but may occasionally handle a not held order from 
one of their customers. The Commission believes that such a broker-
dealer should be entitled to the relief from Rule 606(b)(3) provided by 
the firm-level de minimis exception if it receives a large not held NMS 
stock order, including one that is for $200,000 or more, yet still does 
not receive aggregate not held NMS stock order flow that exceeds the 
firm-level de minimis threshold.
---------------------------------------------------------------------------

    \141\ See infra Section III.A.1.b.iv.
---------------------------------------------------------------------------

    The Commission believes that, in most cases, a customer that trades 
in NMS stock order dollar values of $200,000 or more and is 
sufficiently sophisticated to utilize not held orders, will also be 
sufficiently sophisticated to submit such orders to broker-dealers that 
are not excepted from Rule 606(b)(3) by the firm-level de minimis 
exception, should the customer desire the Rule 606(b)(3) information 
(and meet or surpass the customer-level de minimis threshold). In 
addition, as discussed above, the customer-level de minimis exception 
targets customers whose trading activity is not substantial enough to 
provide a sample of data that would accurately and reliably reflect a 
broker-dealer's order handling behavior and make the Rule 606(b)(3) 
disclosures meaningful. Thus, should a customer that submits a not held 
NMS stock order for $200,000 or more not meet the customer-level de 
minimis threshold (a scenario that the Commission believes is unlikely 
to occur in most cases), the Commission believes that Rule 606(b)(1) is 
the appropriate recourse for the customer regardless of the dollar 
value of any of the customer's individual orders. If requested, the 
Rule 606(b)(1) disclosures provide the customer with information as to 
the venues to which its orders were routed, whether the orders were 
directed or non-directed, and the time of any transactions that 
resulted from the orders. The Commission believes that these 
disclosures provide information that is more meaningful in light of the 
overall extent to which the customer trades, and are sufficient to 
provide a basis for the customer to engage in further discussions with 
its broker-dealer regarding the broker-dealer's order handling 
practices.
vii. Definitions of ``Directed Order'' and ``Non-Directed Order''
    The Commission is adopting revised definitions of the terms 
``directed order'' \142\ and ``non-directed order'' \143\ under Rule 
600(b). These terms are used throughout Rule 606. They are referenced 
in Rule 606(a) and Rule 606(b)(1) and, as discussed infra,\144\ are 
referenced in new Rule 606(b)(3). Therefore, these terms are being 
defined compatibly with Rule 606 as amended, which as adopted does not 
distinguish between NMS stock orders based on order dollar value.
---------------------------------------------------------------------------

    \142\ A directed order is a customer order that the customer 
specifically instructed the broker-dealer to route to a particular 
venue for execution. See 17 CFR 242.600(b)(19).
    \143\ A non-directed order is any customer order other than a 
directed order. See 17 CFR 242.600(b)(48).
    \144\ See Section III.A.5.b.
---------------------------------------------------------------------------

    Specifically, Rule 600(b) prior to these amendments defines the 
terms directed order and non-directed order in reference to a 
``customer order,'' and the term ``customer order'' includes a $200,000 
dollar value threshold for NMS stock orders that the Commission is not 
incorporating into Rule 606 as amended. Thus, the Commission is 
removing the reference to ``customer order'' from the definitions of 
``directed order'' and ``non-directed order'' to eliminate the $200,000 
dollar-value threshold for NMS stock orders incorporated into those 
terms. Accordingly, as amended, the term ``directed order'' means an 
order from a customer that the customer specifically instructed the 
broker-dealer to route to a particular venue for execution, and the 
term ``non-directed order'' means any order from a customer other than 
a directed order.\145\ By eliminating the term ``customer order'' and 
instead referring to ``an order from a customer,'' these amended 
definitions do not incorporate the dollar value limitations in the 
definition of the term ``customer order.''
---------------------------------------------------------------------------

    \145\ See Rules 600(b)(20) and 600(b)(49).
---------------------------------------------------------------------------

    Otherwise, however, the amended definitions of ``directed order'' 
and

[[Page 58353]]

``non-directed order'' are consistent with the pre-existing 
definitions. While the amended definitions eliminate the previously 
existing order dollar value limitation in the cross-referenced term 
``customer order,'' they maintain the pre-existing definitions' 
exclusion of orders from a broker-dealer. In this regard, the 
Commission notes that the amended definitions of ``directed order'' and 
``non-directed order'' continue to incorporate the term ``customer,'' 
which is defined in Rule 600(b) as any person that is not a broker-
dealer.\146\ Thus, the defined terms ``directed order'' and ``non-
directed order,'' as amended, apply only to orders that are from a 
person that is not a broker-dealer.
---------------------------------------------------------------------------

    \146\ See 17 CFR 242.600(b)(16).
---------------------------------------------------------------------------

2. Definition of Actionable Indication of Interest
a. Proposal
    To further facilitate the updated order handling disclosure regime, 
the Commission proposed to amend Rule 600 to include a definition of 
``actionable indication of interest.'' \147\ Specifically, the 
Commission proposed that, under proposed Rule 600(b)(1) of Regulation 
NMS, an actionable IOI 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.'' \148\
---------------------------------------------------------------------------

    \147\ See proposed Rule 600(b)(1). 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. See 
Securities Exchange Act Release No. 60997 (November 13, 2009), 74 FR 
61208, 61210 (November 23, 2009) (``Regulation of Non-Public Trading 
Interest Proposing Release'').
    \148\ See proposed Rule 600(b)(1). See also Proposing Release, 
supra note 1, at 49445-49447 for additional detail on the 
Commission's proposal. As noted in the Proposing Release, this 
definition is based on and substantively similar to the Commission's 
description of actionable IOIs in the Regulation of Non-Public 
Trading Proposing Release in 2009. See Regulation of Non-Public 
Trading Interest Proposing Release, supra note 147.
---------------------------------------------------------------------------

b. Final Rule and Response to Comments
    The Commission is adopting as proposed the definition of actionable 
indication of interest under Rule 600(b)(1) of Regulation NMS.\149\ 
Accordingly, under final Rule 600(b)(1), actionable IOI 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: (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.
---------------------------------------------------------------------------

    \149\ See Rule 600(b)(1).
---------------------------------------------------------------------------

    By defining actionable IOIs in this manner, the Rule 606(b)(3) 
order handling reporting requirements mandate that a broker-dealer 
disclose its activity communicating to external liquidity providers for 
them to send an order to the broker-dealer in response to a not held 
NMS stock order of a customer of the broker-dealer. The Commission 
continues to believe that including these disclosures relating to 
actionable IOI activity in the Rule 606(b)(3) order handling reports 
would better enable customers to understand and evaluate how broker-
dealers handle their orders, in particular with respect to the 
potential for information leakage stemming from broker-dealers' use of 
actionable IOIs. The Commission also continues to believe that the 
definition of actionable IOI is appropriately designed to capture 
trading interest that is the functional equivalent to an order or 
quotation.
    Commenters generally supported the creation of a definition of 
actionable IOI in Rule 600(b), but some commenters expressed concerns 
about and suggested revisions to the Commission's proposed 
definition.\150\ One of the main concerns was that it was not 
sufficiently clear from the Proposal what it means for an IOI to be 
``actionable.'' \151\ In this regard, some commenters suggested that 
the proposed definition could be read to capture conditional orders or 
IOIs that require additional negotiation or ``firming up'' to be 
executable by the broker-dealer,\152\ and several commenters asserted 
that such conditional trading interest is distinguishable from an 
actionable IOI and therefore should be excluded from the definition of 
actionable IOI and the disclosures required by Rule 606.\153\
---------------------------------------------------------------------------

    \150\ See, e.g., Fidelity Letter at 3-4; FIF Letter at 7; 
Bloomberg Letter at 13-15; SIFMA Letter at 6.
    \151\ See, e.g., FSR Letter at 2, 6-7; Bloomberg Letter at 13-
14; FIF Letter at 7; HMA Letter at 10. One of these commenters 
stated that broker-dealer order routers respond to IOIs but do not 
send them, and that the inclusion of IOIs in the Proposal appeared 
out of context with order routing transparency. See Bloomberg Letter 
at 13. This is not consistent with the Commission's understanding, 
which, as noted in the Proposing Release, is that broker-dealers may 
send an actionable IOI to select external liquidity providers to 
communicate to send orders to the broker-dealer to trade with the 
order that is represented by the actionable IOI at the broker-
dealer. See Proposing Release, supra note 1, at 49453; see also 
Section III.A.6.a, infra.
    \152\ See FSR Letter at 2, 6-7; Fidelity Letter at 4; Letter 
from Timothy J. Mahoney, Chief Executive Officer, BIDS Trading L.P., 
dated October 7, 2016 (``BIDS Letter'').
    \153\ See Markit Letter at 4, 12-13; Bloomberg Letter at 14; 
BIDS Letter; SIFMA Letter at 6; EMSAC Rule 606 Recommendations, 
supra note 16, at 3. One commenter stated that, absent 
clarification, the Proposing Release's definition of actionable IOIs 
would be inconsistent with the Commission's published understanding 
of conditional orders in the ATS-N Proposing Release. See BIDS 
Letter at 4. The clarification, set forth below, of the difference 
between actionable IOIs versus IOIs or conditional orders that 
require additional agreement of the broker-dealer responsible for 
the IOI or conditional order before an execution can take place is 
consistent with what is stated in the ATS-N Adopting Release. See 
ATS-N Adopting Release, supra note 2, at 38847-38848.
---------------------------------------------------------------------------

    As stated above and in the Proposing Release, for an IOI to be 
actionable it must convey (explicitly or implicitly) information 
sufficient to attract immediately executable orders to the venue 
sending the indication of interest.\154\ In addition, Rule 3b-16 
defines an order as any firm indication of a willingness to buy or sell 
a security, as either principal or agent, including any bid or offer 
quotation, market order, limit order, or other priced order.\155\ When 
the Commission adopted Rule 3b-16 in connection with the adoption of 
Regulation ATS, the Commission stated:
---------------------------------------------------------------------------

    \154\ See Proposing Release, supra note 1, at 49446.
    \155\ See 17 CFR 240.3b-16.

    Whether or not an indication of interest is `firm' will depend 
on what actually takes place between the buyer and seller. . . . At 
a minimum, an indication of interest will be considered firm if it 
can be executed without further agreement of the person entering the 
indication. Even if the person must give its subsequent assent to an 
execution, however, the indication will still be considered firm if 
this subsequent agreement is always, or almost always, granted so 
that the agreement is largely a formality. For instance, indications 
of interest where there is a clear prevailing presumption that a 
trade will take place at the indicated price, based on 
understandings or past dealings, will be viewed as orders.\156\
---------------------------------------------------------------------------

    \156\ See Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844, 70850 (December 22, 1998).

    The Commission believes that this language is instructive here in 
light of the Commission's intention for the definition of actionable 
IOIs to apply to IOIs that are the functional equivalent of orders or 
quotations, i.e., firm representations of trading interest. 
Specifically, the Commission intends that the actionable IOI definition 
would include, at a minimum, an IOI that represents an order that can 
be executed against by the IOI recipient without

[[Page 58354]]

further agreement of the broker-dealer that communicated the IOI. 
Moreover, indications of interest where the agreement of the parties to 
the terms of a trade is presumed from the facts or circumstances, such 
as past dealings or a course of conduct between the parties, may also 
be considered actionable IOIs. Indeed, in the context of dark pools, 
the Commission has previously noted that IOIs may communicate 
information explicitly or implicitly, such as through a course of 
conduct, based on which the recipient of the IOI can reasonably 
conclude that sending a contra-side marketable order responding to the 
IOI will result in an execution if the trading interest has not already 
been executed against or cancelled.\157\ The Commission believes that, 
generally, it would consider an IOI from a broker-dealer to be 
actionable if it fits this description, i.e., if the IOI recipient can 
reasonably conclude that sending a contra-side marketable order to the 
broker-dealer will result in an execution against trading interest 
represented by the IOI that has not already been executed against or 
cancelled.
---------------------------------------------------------------------------

    \157\ See Regulation of Non-Public Trading Interest Proposing 
Release, supra note 147, at 61211.
---------------------------------------------------------------------------

    So-called ``conditional'' orders referenced by several commenters 
would not, therefore, constitute actionable IOIs if they require 
additional agreement by the broker-dealer responsible for the 
conditional order before an execution can occur, unless facts or 
circumstances suggest that the broker-dealer's agreement can be 
presumed. The Commission believes that IOIs that do not enable the IOI 
recipient to send a marketable order to the IOI sender that is 
executable against the interest represented by the IOI without further 
agreement by the IOI sender may not function equivalently to orders or 
quotations and therefore do not represent the sort of order handling 
activity that the Rule 606(b)(3) order handling reports are meant to 
capture.
    Moreover, as noted in the Proposal, actionable IOIs have the 
capacity to communicate information about the existence of a large 
parent order, and as such their usage, like other components of broker-
dealers' order handling and routing practices, creates the potential 
for information leakage.\158\ The Commission believes that disclosing 
in the Rule 606(b)(3) order handling reports information regarding a 
broker-dealer's use of actionable IOIs could help enable its customers 
to assess the degree to which the trading interest they route to the 
broker-dealer is subject to potential information leakage. By contrast, 
the Commission does not believe that this same utility would exist if 
non-actionable IOIs (those that are not executable without further 
agreement) were to be included in the customer-specific order handling 
reports, as the Commission does not understand such non-actionable IOIs 
to present the same risk of information leakage as actionable IOIs.
---------------------------------------------------------------------------

    \158\ See Proposing Release, supra note 1, at 49446.
---------------------------------------------------------------------------

    In addition, the Commission continues to believe that the four 
elements contained in the 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 that is 
immediately executable against trading interest of a customer of the 
broker-dealer responsible for the IOI. The Commission emphasizes that 
these pieces of information may be implicitly conveyed, such as via a 
course of dealing between the IOI sender and the recipient. For 
example, given that Rule 611 of Regulation NMS generally prevents 
trading centers from executing orders at prices inferior to the NBBO, 
if a broker-dealer sends an IOI communicating an interest to buy a 
specific NMS stock, the IOI recipient reasonably can assume that the 
associated price is the NBBO or better.\159\ Moreover, the IOI 
recipient may have responded previously with orders to the IOI sender 
and repeatedly received executions at the NBBO or better with a size of 
at least one round lot.\160\ In this example, the IOI communicated by 
the broker-dealer would be actionable, with explicit conveyance of the 
symbol and side elements and implicit conveyance of the price and size 
elements. Indeed, the Commission understands that IOIs are frequently 
conveyed with explicit side and symbol terms and implicit price and 
size terms, and can be executed against by the IOI recipient without 
further agreement of the IOI sender.
---------------------------------------------------------------------------

    \159\ See Regulation of Non-Public Trading Interest Proposing 
Release, supra note 147, at 61211.
    \160\ See id.
---------------------------------------------------------------------------

    One commenter stated that, for the purpose of routing brokers 
determining whether to send an order to a non-displayed venue, an IOI 
should have, at a minimum, a symbol.\161\ Another commenter stated 
that, at a minimum, symbol and side (buy or sell) must be included with 
an IOI in order for it to be an actionable IOI, and that size or price 
do not need to be explicitly included.\162\ While these comments may 
suggest that an IOI could still be actionable with less than the four 
noted elements in the definition, the Commission believes that, without 
the inclusion of all four elements (symbol, side, price, and size) 
explicitly or implicitly with the IOI, the IOI recipient could require 
additional information before executing against the IOI and the IOI 
therefore may not be actionable. To the extent these comments suggest 
that one or more of the four noted elements of an actionable IOI may be 
implicitly conveyed, as noted above, the Commission agrees. One 
commenter stated that the Commission has captured all the necessary 
elements for the actionable IOI definition, but that the definitions of 
two of the elements--quantity and price--should be expanded to include 
relative measures in addition to absolute measures.\163\ The Commission 
notes in response that if each of the four elements is communicated--
explicitly or implicitly--such that the IOI recipient can respond to 
the IOI with an order that is executable against trading interest 
represented by the IOI without further agreement by the IOI sender 
(taking into account the relevant facts and circumstances, including 
any course of dealing between the parties), that communication would 
constitute an actionable IOI under the definition in Rule 600(b)(1).
---------------------------------------------------------------------------

    \161\ See Markit Letter at 15.
    \162\ See Letter from Elizabeth K. King, General Counsel and 
Corporate Secretary, NYSE Group, dated October 31, 2016 (``NYSE 
Letter'') at 2.
    \163\ See Capital Group Letter at 3-4.
---------------------------------------------------------------------------

    The Commission does not believe that it is necessary for purposes 
of the definition of actionable IOI to draw a distinction between IOIs 
that are communicated manually (such as via the telephone, for example) 
versus IOIs that are communicated electronically. Some commenters drew 
such a distinction, and suggested that only IOIs that are communicated 
and accessible electronically should constitute actionable IOIs under 
Rule 600(b)(1).\164\ The Commission believes that whether an IOI is 
actionable should not turn on the level of automation involved in the 
communication of the IOI. Once an IOI is communicated by a broker-
dealer to the IOI recipient, regardless of whether the communication is 
manual (such as via telephone) or electronic, if that IOI recipient can 
respond to the IOI with an order that is executable against the trading 
interest represented by the IOI without further agreement by the 
broker-dealer responsible for the IOI, then the IOI should be 
considered an actionable IOI under Rule 600(b)(1). An actionable IOI 
has the potential to leak information as to the existence of an

[[Page 58355]]

order regardless of whether the actionable IOI is transmitted 
electronically or manually. Thus, order handling statistics regarding 
both electronic and manual actionable IOIs could be valuable to 
customers in evaluating the order routing practices of their broker-
dealers and the degree to which those practices may leak information 
regarding their not held NMS stock orders.
---------------------------------------------------------------------------

    \164\ See Bloomberg Letter at 13-15; FIF Letter at 7; FIF 
Addendum at 4 n.7; Fidelity Letter at 4; SIFMA Letter at 6.
---------------------------------------------------------------------------

    One commenter urged the Commission to follow the commenter's 
characterization of how IOIs were described in the Regulation of Non-
Public Trading Interest Proposing Release by targeting IOIs sent by 
venues such as ATSs, and to consider whether other market participants 
that send IOIs, such as exchanges, should be included within the scope 
of the rule.\165\ The purpose of the Regulation of Non-Public Trading 
Interest Proposing Release, however, was different from the 
Commission's purposes here in adopting the definition of actionable IOI 
for the new customer-specific order handling reports. There, due to the 
Commission's concern about potentially deleterious effects of dark 
pools' transmission to selected market participants, and not the public 
broadly via the consolidated quotation data, of valuable pricing 
information in the form of actionable IOIs that function similarly to 
quotations, the Commission proposed to amend the Exchange Act quoting 
requirements in Rule 602 of Regulation NMS and Rule 301(b)(3) of 
Regulation ATS to apply expressly to actionable IOIs.\166\ Here, by 
contrast, the Commission's purpose is to require broker-dealers to 
provide order handling and routing information that is sufficient for 
their customers to understand the methods their broker-dealers use to 
carry out their best execution obligations and assess the potential 
impact of information leakage and conflicts of interest, not to provide 
public access to comprehensive pricing information or encourage the 
public display of quotations. The Commission believes that the 
definition of actionable IOI being adopted today is appropriately 
tailored to serve the purpose of this rulemaking, and that the concerns 
it expressed in the Regulation of Non-Public Trading Proposing Release 
are outside the scope of this rulemaking.
---------------------------------------------------------------------------

    \165\ See Bloomberg Letter at 13-15; see also Regulation of Non-
Public Trading Interest Proposing Release, supra note 147.
    \166\ See Regulation of Non-Public Trading Proposing Release, 
supra note 147, at 61211-12.
---------------------------------------------------------------------------

    For similar reasons, the Commission is not excluding from the 
definition of actionable IOI in Rule 600(b)(1) an IOI for a quantity of 
NMS stock having a market value of at least $200,000 that is 
communicated only to those who are reasonably believed to represent 
current contra-side trading interest of at least $200,000, as suggested 
by one commenter.\167\ The Commission likewise is not requiring broker-
dealers to disclose in the publicly available reports the percentage of 
orders that were exposed through so-called ``size-discovery IOIs,'' as 
suggested by another commenter.\168\ These commenters noted that the 
Regulation of Non-Public Trading Proposing Release proposed to exclude 
such ``size-discovery IOIs'' from the rule amendments proposed 
therein,\169\ but the Commission again notes that the purpose of the 
Commission's actions here is different from what it was in the 
Regulation of Non-Public Trading Proposing Release. There, the 
Commission recognized that the benefits of certain size-discovery 
mechanisms could be undermined if their narrowly tailored IOIs for 
large size were required to be included in the public quotation 
data.\170\ Here, by contrast, the Commission is not requiring that 
actionable IOIs be included in public quotation data, and thus the 
Commission does not believe that the same concern is implicated.
---------------------------------------------------------------------------

    \167\ See Bloomberg Letter at 14-15.
    \168\ See NYSE Letter at 1-2.
    \169\ See Bloomberg Letter at 14; NYSE Letter at 2.
    \170\ See id. at 61213.
---------------------------------------------------------------------------

    Finally, in response to commenters who requested clarification as 
to whether rules, regulations, and guidance applicable to quotes or 
orders would be applicable to actionable IOIs under the final 
rule,\171\ the Commission is defining actionable IOIs at this time for 
purposes of the Rule 606 amendments also being adopted today. The 
Commission is not expanding the scope of existing rules, regulations, 
or guidance related to orders or quotations, other than Rule 606 and 
guidance related thereto, with regard to actionable IOIs.
---------------------------------------------------------------------------

    \171\ See Fidelity Letter at 4; SIFMA Letter at 6.
---------------------------------------------------------------------------

3. Scope of Broker-Dealer's Obligation Under Rule 606(b)(3)
a. Broker-Dealer Required To Provide Report on Its Order Handling To 
Customer Placing Order With the Broker-Dealer
i. Proposal
    The Commission proposed in Rule 606(b)(3) that every broker-dealer 
shall, on request of a customer that places, directly or indirectly, an 
institutional order with the broker-dealer, disclose to such customer a 
report on its handling of institutional orders for that customer.\172\ 
The Commission noted in the Proposal that, pursuant to this rule 
language, a broker-dealer would be required to provide the order 
handling report to the customer placing the institutional order with 
the broker-dealer, even if the customer is acting on behalf of others 
and is not the ultimate beneficiary of any resulting transactions.\173\ 
Thus, the broker-dealer would not be required to provide the order 
handling report to the underlying clients of that customer.
---------------------------------------------------------------------------

    \172\ See proposed Rule 606(b)(3).
    \173\ See Proposing Release, supra note 1, at 49448.
---------------------------------------------------------------------------

    The Commission also noted that 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.\174\ By way of example, the Commission stated that 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.\175\
---------------------------------------------------------------------------

    \174\ See id. at 49447.
    \175\ See id.
---------------------------------------------------------------------------

    Further, the Commission did not propose to change the existing 
definition of customer in Rule 600(b), which states that ``customer'' 
means any person that is not a broker-dealer.\176\ In utilizing this 
defined term, proposed Rule 606(b)(3) therefore required a broker-
dealer to provide the customer-specific institutional order handling 
report only to a non-broker-dealer.\177\
---------------------------------------------------------------------------

    \176\ See 17 CFR 242.600(b)(16).
    \177\ See Proposing Release, supra note 1, at 49447-48 for 
additional detail on the Commission's proposal.
---------------------------------------------------------------------------

ii. Final Rule and Response to Comments
    Notwithstanding that Rule 606(b)(3) is modified from what was 
proposed such that the adopted rule covers not held NMS stock orders of 
any dollar value (subject to the two de minimis exceptions), the person 
or entity to which the broker-dealer must provide the Rule 606(b)(3) 
report is the same as under the Proposal. Specifically, under Rule 
606(b)(3), every broker-dealer must, on request of a customer that 
places, directly or indirectly, one or more orders in NMS stock that 
are submitted on a not held basis with the broker-dealer, disclose to 
such customer a report on its handling of such orders

[[Page 58356]]

for that customer. In other words, the broker-dealer must provide the 
Rule 606(b)(3) report to the customer that places with the broker-
dealer the orders covered by Rule 606(b)(3), even if the customer is 
acting on behalf of others and is not the ultimate beneficiary of any 
resulting transactions. In addition, broker-dealers remain excluded 
from the definition of ``customer'' in Rule 600(b), and that exclusion 
is maintained for purposes of Rule 606(b)(3), which cross-references 
the defined term ``customer.'' As a result, under Rule 606(b)(3) as 
adopted, a broker-dealer is required to provide the report only to non-
broker-dealers.
    For the same reasons as stated in the Proposal, the Commission 
continues to believe that a broker-dealer should be required to provide 
the customer-specific order handling report to the customer that places 
the order with the broker-dealer, even if that customer may be acting 
on behalf of others and is not the ultimate beneficiary of any 
resulting transactions, such as when an investment adviser, as the 
customer of a broker-dealer, places an order with the broker-dealer 
that represents the trading interest of clients of the investment 
adviser.\178\ Multiple commenters supported this delineation of Rule 
606(b)(3)'s scope.\179\ In addition, the Rule 606(b)(3) report 
requirement covers instances where an order is handled either directly 
by the broker-dealer or indirectly through systems provided by the 
broker-dealer. The Commission continues to believe that requiring the 
reports to be provided to the customer that places the order with the 
broker-dealer--whether the customer is the account holder or an 
investment adviser or other fiduciary--is appropriate because it would 
require the broker-dealer to provide detailed information to the person 
that is responsible for making the routing and execution decisions for 
such order and for assuring the effectiveness of those functions. 
Despite one commenter's assertion that an investment adviser's 
underlying client also should be entitled to receive the Rule 606(b)(3) 
report from the adviser's broker-dealer,\180\ the Commission does not 
believe it is appropriate to require a broker-dealer to create 
individualized order handling reports for and make its execution data 
available to an end user with whom the broker-dealer may have no direct 
relationship.
---------------------------------------------------------------------------

    \178\ As discussed infra in this section, a broker-dealer is 
required to report to the customer that places the order with the 
broker-dealer so long as the customer is not itself a broker-dealer.
    \179\ See Markit Letter at 16, 18; Bloomberg Letter at 16; 
Capital Group Letter at 4; FIF Letter at 7-8, 16; EMSAC Rule 606 
Recommendations, supra note 16, at 3.
    \180\ See Better Markets Letter at 7-8.
---------------------------------------------------------------------------

    One commenter stated that an account-level report should not be 
required because accounts often are assigned after the order is entered 
via an allocation process that is different from the system that 
handles routing, and thus it would be costly.\181\ This commenter also 
stated it would require brokers, when using a third party to generate 
the reports, to transmit client account numbers, which are more 
sensitive and confidential than the name of the institutional 
manager.\182\ This commenter also stated, however, that reporting 
information in the aggregate should prevent any secret routing 
strategies from being divulged.\183\ In addition, another commenter 
stated it did not believe that customers will able to reverse engineer 
the way a smart order router works or discern any other proprietary 
information about the broker's technology or order handling techniques 
from the proposed disclosure information.\184\
---------------------------------------------------------------------------

    \181\ See Markit Letter at 16, 19-20.
    \182\ See id.
    \183\ See id. at 19.
    \184\ See Capital Group Letter at 5.
---------------------------------------------------------------------------

    Consistent with these comments, the Commission continues to believe 
that, because the Rule 606(b)(3) customer-specific order handling 
disclosures will aggregate information to be disclosed to a specific 
customer across all of the customer's not held NMS stock orders, the 
risk that such disclosures would reveal sensitive, proprietary 
information about broker-dealers' order handling techniques should be 
minimal. The customer-level de minimis exception from Rule 606(b)(3) 
also is relevant in this regard, as it should help ensure that there is 
a significant level of trading activity reflected in the aggregated 
information provided to the customer under Rule 606(b)(3), and not 
information regarding just one or a few orders from which the customer 
may be able to discern aspects of the broker-dealer's sensitive or 
proprietary order handling techniques. A broker-dealer's sensitivity 
lies with its methods for determining how, where, and when to route a 
specific, individual order. By providing information for all of the 
customer's orders in the aggregate, the report conceals a broker-
dealer's proprietary determinations with respect to any specific, 
individual order. Even if the report reflected that the broker-dealer 
sent a small number of orders to a particular venue, the report would 
not reveal why the broker-dealer chose that particular venue, when the 
broker-dealer routed the orders to that venue, what market signals 
informed the broker-dealer's choices as to venue and timing, or what 
type of routing strategy the broker-dealer utilized. As to one 
commenter's assertion that account-level disclosure would require 
broker-dealers that use third-parties to generate the Rule 606(b)(3) 
report to disclose sensitive client account numbers to such third-
parties, the Commission is not adopting any requirement that the Rule 
606(b)(3) disclosures be provided at the client account level, and thus 
nothing in Rule 606(b)(3) compels a broker-dealer to disclose client 
account numbers to third-parties.
    The Commission further notes that, because it is not altering the 
broker-dealer exclusion from the definition of customer, and because 
Rule 606(b)(3) utilizes this defined term, the rule does not require a 
broker-dealer to report to another broker-dealer. This is consistent 
with what was proposed and with the order routing disclosure regime 
that has existed under Rules 606(a) and 606(b)(1).\185\
---------------------------------------------------------------------------

    \185\ The Commission did not propose to modify the definition of 
``customer'' in Rule 600(b)(16), which defines ``customer to mean 
any person that is not a broker or dealer.'' See Rule 600(b)(16).
---------------------------------------------------------------------------

    Some commenters argued that the broker-dealer exclusion should be 
eliminated because a broker-dealer should be required, under Rule 
606(b)(3), to report to the customer that places the order with the 
broker-dealer even if that customer is itself a broker-dealer.\186\ Two 
commenters stated that, absent a modification to the Proposal, the Rule 
606 report received by the end-customer of a broker-dealer that 
utilizes another broker-dealer's technology for execution would reflect 
only that the customer's orders were sent by its broker-dealer to the 
other executing broker-dealer, and lack the level of detail that is 
necessary for the customer to assess execution quality.\187\ Another 
commenter suggested that the Rule 606 reports exclude only those orders 
received from other broker-dealers and foreign banks acting as broker-
dealers and routing to U.S. execution venues that were directed by such 
broker-dealers and foreign banks acting as broker-dealers to a 
particular execution venue.\188\
---------------------------------------------------------------------------

    \186\ See Markit Letter at 3 n.6, 18; Dash Letter at 1, 4-5; FIF 
Letter at 2, 8, 16-17; SIFMA Letter at 1, 3.
    \187\ See Dash Letter at 5; FIF Letter at 8 n. 9, 16-17.
    \188\ See Markit Letter at 3 n.6.
---------------------------------------------------------------------------

    On the other hand, one commenter asserted that, in a ``white-
labeling'' or leveraged outsourced technology

[[Page 58357]]

arrangement, where a broker that receives an order from an 
institutional customer outsources another broker's smart order routing 
or algorithmic trading technology, the broker that received the order 
should be evaluating the effectiveness of the outsourced technology and 
should fulfill the obligation of being able to provide clients' reports 
on request.\189\ Another commenter asserted that the Proposal is 
unclear as to whether a broker-dealer that provides algorithmic trading 
services would be required to provide an order handling report to a 
broker-dealer that utilizes those algorithmic trading services in the 
course of executing orders on behalf of institutional customers.\190\
---------------------------------------------------------------------------

    \189\ See Bloomberg Letter at 16.
    \190\ See STA Letter at 4-5; STA Letter II at 1.
---------------------------------------------------------------------------

    In response to these comments, as an initial matter, it is worth 
highlighting that Rule 606(b)(3) requires a broker-dealer, upon request 
of a customer that places not held NMS stocks order with the broker-
dealer, to disclose to such customer a report with respect to its--
i.e., the broker-dealer's--handling of such orders for that customer. 
As such, Rule 606(b)(3) is designed to require a broker-dealer to 
disclose the information required by Rule 606(b)(3) to the extent of 
its involvement in routing and executing its customers' orders. If the 
broker-dealer exercises discretion with regard to how an order is 
routed and ultimately executed, such as (but not limited to) by 
determining particular venue destinations for an order, choosing among 
different trading algorithms, adjusting or customizing algorithm 
parameters, or performing other similar tasks involving its own 
judgment as to how and where to route and execute orders, the broker-
dealer is required to provide the information required by Rule 
606(b)(3) with regard to the customer's order flow with the broker-
dealer as well as the order routing and execution information set forth 
in subparagraphs (b)(3)(i) through (iv) of the rule. If, by contrast, 
the broker-dealer simply forwards its customers' orders on to another 
broker-dealer and that second broker-dealer exercises all discretion in 
determining where and how to route and execute the orders, then the 
first broker-dealer is not required to provide disclosures under Rule 
606(b)(3) beyond those relevant to its activity in forwarding orders to 
the executing broker. In either case, the broker-dealer reports the 
required information under Rule 606(b)(3) with respect to its order 
handling for a customer.
    This language from the rule informs the scope of a broker-dealer's 
obligation in the types of scenarios that commenters raised. As noted 
by some commenters, broker-dealers sometimes license or outsource 
technology offerings, such as trading algorithms, from third-parties, 
including other broker-dealers, to use for routing and executing 
orders. In these so-called ``white-labeling'' scenarios, the broker-
dealer typically exercises discretion in determining what trading 
algorithm or other technology offering to utilize on behalf of its 
customer, as well as how to handle the customer's orders using that 
technology. For example, the broker-dealer may be able to adjust 
discretionary parameters that determine the aggressiveness of a 
particular algorithm,\191\ otherwise determine where or how an order is 
routed and executed using the algorithm or other technology, or 
determine when the algorithm is turned ``on'' or ``off.'' In this type 
of scenario, it is the broker-dealer utilizing the trading algorithm or 
other technology offering--and not the third-party provider of such 
algorithm or other technology--that handles the customer's order and 
that is obligated to provide the information required by Rule 
606(b)(3). The broker-dealer's obligation in this scenario extends to 
the routing and execution of child orders that, for example, the 
trading algorithm may have placed after being ``turned on'' by the 
broker-dealer.\192\
---------------------------------------------------------------------------

    \191\ See, e.g., Markit Letter at 20; FIF Letter at 6.
    \192\ See infra Section III.A.3.b.
---------------------------------------------------------------------------

    The Commission understands that broker-dealers typically have 
access or rights to the execution data for trades made using algorithms 
or other technology that they license or outsource. As such, the 
Commission believes that most broker-dealers should be well-positioned 
to provide the Rule 606(b)(3) information to their customers for orders 
(or child orders thereof) that they routed or executed using a trading 
algorithm or other type of technology offering. Ultimately, however, 
when relying on third-party technology in this manner, broker-dealers 
will need to ensure that they can provide the information required by 
Rule 606(b)(3), should it be requested by a customer. Further, 
consistent with the exclusion of broker-dealers from the definition of 
customer, broker-dealers are required to report the Rule 606(b)(3) 
information only to non-broker-dealers.
    In another type of arrangement raised by commenters, one broker-
dealer, sometimes referred to as an introducing broker-dealer, will 
route an order on behalf of its customer to another broker-dealer, 
sometimes referred to as an executing broker-dealer, and the executing 
broker-dealer will carry out the further routing and ultimate execution 
of the order, perhaps utilizing trading algorithms or other technology. 
In this type of scenario, the executing broker-dealer's customer is the 
introducing broker-dealer because it is the introducing broker-dealer 
that places the order with the executing broker-dealer. Since, as 
discussed above, a broker-dealer is required to report only to the 
customer that places the order with the broker-dealer, in the 
introducing-broker-dealer/executing-broker-dealer arrangement, the 
executing broker-dealer is not required to report the Rule 606(b)(3) 
information to the introducing broker-dealer's customer. Moreover, Rule 
606(b)(3) does not require the executing broker-dealer to report to the 
introducing broker-dealer in light of the broker-dealer exclusion from 
the definition of customer.
    As noted above, some commenters argued that a different result 
would be appropriate under the rule; specifically, they argued that 
broker-dealers should be required to provide the Rule 606(b)(3) reports 
for broker-dealer orders.\193\ The Commission intends, however, for 
Rule 606(b)(3) to be focused on the relationship between a customer 
(that is not a broker-dealer) and its broker-dealer, and the 
information that the customer receives from its broker-dealer with 
respect to how the broker-dealer handles the customer's not held NMS 
stock orders. Rule 606(b)(3) is designed to provide a customer with 
access to baseline information that would enable the customer to assess 
the nature and quality of services provided by its broker-dealer with 
respect to such orders, as many customers may not have the 
sophistication or leverage necessary to receive adequate information in 
the absence of a rule. The Commission does not believe that broker-
dealer to broker-dealer relationships carry the same level of risk of 
an imbalance of information or sophistication on one side of the 
relationship as compared to customer to broker-dealer relationships. 
Therefore, the Commission has determined not to depart from the current 
practice under Rule 606 by including broker-dealer orders in Rule 
606(b)(3).
---------------------------------------------------------------------------

    \193\ See supra note 186.
---------------------------------------------------------------------------

    For similar reasons, the Commission believes it is appropriate for 
the Rule 606(b)(3) requirements not to extend to orders handled by 
exchange-affiliated routing brokers, which are also excluded from Rule 
606(b)(3)'s coverage

[[Page 58358]]

by virtue of the broker-dealer exclusion from the definition of 
customer. Three commenters suggested that requiring the Rule 606(b)(3) 
disclosures for orders handled by exchange-affiliated routing brokers 
would provide market participants with a more complete picture as to 
how their orders are handled.\194\ But since only broker-dealers can be 
members of an exchange, by the time an order reaches an exchange-
affiliated routing broker, it first has traveled from the end customer 
to a broker-dealer, from a broker-dealer to the exchange (or perhaps 
from an end customer through a broker-dealer's systems via a market 
access arrangement and onto an exchange), and then from the exchange to 
the exchange's affiliated routing broker. Like an executing broker-
dealer, an exchange-affiliated routing broker has no direct 
relationship with the customer that sent the order in the first place. 
Thus, the Commission does not believe that it would be appropriate to 
require an exchange-affiliated routing broker to provide the Rule 
606(b)(3) information to the customer from whom the order originated. 
As noted above, the Commission's goal is for Rule 606(b)(3) to provide 
non-broker-dealer customers with access to baseline information that 
would enable them to assess the discretion exercised by their broker-
dealers and the nature and quality of services provided by their 
broker-dealers with respect to their not held NMS stock orders. The 
Commission believes that this goal will still be achieved without 
including orders routed by exchange-affiliated routing brokers.
---------------------------------------------------------------------------

    \194\ See SIFMA Letter at 4; Markit Letter at 24; FIF Letter at 
2, 8; EMSAC Rule 606 Recommendations, supra note 16.
---------------------------------------------------------------------------

    A broker-dealer is still required to provide the Rule 606(b)(3) 
report to its customer, upon request, with respect to its handling of 
orders for that customer (assuming the customer is not a broker-dealer) 
even if the broker-dealer's handling of the customer's orders amounts 
mainly to routing them to another broker-dealer (including perhaps one 
affiliated with an exchange) for further routing. In such a situation, 
the report is required to include the information regarding the 
customer's order flow with the introducing broker-dealer required by 
Rule 606(b)(3), as well as the information on order routing required by 
subparagraph (b)(3)(i) of the rule, as this information pertains to the 
introducing broker-dealer's order handling even if that order handling 
amounts mainly to routing to an executing broker-dealer. But, in this 
scenario, Rule 606(b)(3) would not require the broker-dealer to provide 
the information on order executions required by subparagraphs 
(b)(3)(ii) through (iv) in its report to its customer. Because Rule 
606(b)(3) requires a broker-dealer to provide the required information 
only with respect to ``its'' order handling, an introducing broker-
dealer's obligation under Rule 606(b)(3) does not extend to the order 
handling activities of another broker-dealer.
    Nevertheless, the Commission believes that competitive forces in 
the market may enable a customer whose orders are routed by its broker-
dealer to another broker-dealer to receive detailed order execution 
information, such as that required by Rule 606(b)(3)(ii) through (iv), 
for such orders. Customers could choose not to send not held NMS stock 
orders to broker-dealers that are unable to provide detailed order 
execution information, the prospect of which could cause such broker-
dealers to request the information from their executing broker-dealers 
that, in turn, may risk losing broker-dealers as customers unless they 
provide the information. Even if this type of information sharing does 
not occur, a customer will still be entitled to receive information 
from its broker-dealer under Rule 606(b)(3) that illustrates how the 
broker-dealer is handling the customer's orders. With that information, 
the customer should be in a better position to determine whether its 
broker-dealer is adequately serving its investing and trading needs, as 
well as whether it would be better served by utilizing the services of 
a broker-dealer that is able to provide the full suite of detailed 
order handling information set forth in Rule 606(b)(3).
b. Smaller Orders Derived From the Order Submitted to the Broker-Dealer 
(i.e., Child Orders)
i. Proposal
    The Commission proposed that, for purposes of the customer-specific 
order handling report required under proposed Rule 606(b)(3), the 
handling of an institutional order would include the handling of all 
smaller orders derived from the institutional order.\195\
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    \195\ See proposed Rule 606(b)(3). See Proposing Release, supra 
note 1, at 49448 for additional detail on the Commission's proposal.
---------------------------------------------------------------------------

ii. Final Rule and Response to Comments
    The Commission is adopting this requirement as proposed. Any child 
orders derived from an order that is covered by Rule 606(b)(3) are also 
covered by the rule. Accordingly, Rule 606(b)(3) states that, for 
purposes of the customer-specific order handling report required under 
the rule, the handling of an NMS stock order submitted by a customer to 
a broker-dealer on a not held basis includes the handling of all child 
orders derived from that order.\196\
---------------------------------------------------------------------------

    \196\ See Rule 606(b)(3).
---------------------------------------------------------------------------

    Thus, the broker-dealer is required to include any such child 
orders in the Rule 606(b)(3) customer-specific order handling report. 
For example, if a broker-dealer splits a customer's not held NMS stock 
parent order into several child orders to be executed across different 
venues, the rule adopted today would require that the broker-dealer 
provide the required information regarding the execution of those child 
orders in the customer's Rule 606(b)(3) order handling report.
    The Commission believes that such a result is consistent with the 
views of commenters. No commenter suggested that the Rule 606(b)(3) 
order handling report should not include child orders that were derived 
from a customer's parent order. To the contrary, several commenters 
suggested that it is essential that the broker-dealer order handling 
disclosures include the handling of all smaller (child) orders derived 
from the parent order.\197\ In addition, several commenters noted that 
institutional investors often break up orders in a security across 
several broker-dealers, so that the aggregate may exceed $200,000 where 
the individual child orders do not.\198\ The Commission believes that 
the rule adopted today addresses commenters' concerns regarding child 
orders by requiring the routing of any customer's not held NMS stock 
order and any child order derived therefrom, regardless of size or 
monetary value, to be included in the Rule 606(b)(3) order handling 
report (subject to the two de minimis exceptions) while at the same 
time achieving the Commission's stated goals.
---------------------------------------------------------------------------

    \197\ See, e.g., Capital Group Letter at 4; FSR Letter at 4; 
SSGA Letter at 1; Citadel Letter at 2; Bloomberg Letter at 11; Dash 
Letter at 3; HMA Letter at 5-6; FIF Letter at 3-4, 17; FIF Addendum 
at 2.
    \198\ See, e.g., Citadel Letter at 2; Bloomberg Letter at 11; 
Dash Letter at 3.
---------------------------------------------------------------------------

4. Timing and Frequency Requirements for Customer-Specific Order 
Handling Report
a. Proposal
    Proposed Rule 606(b)(3) required a broker-dealer to provide the 
customer-specific order handling report to the customer within seven 
business days of receiving the customer's request, and required that 
the report contain information on the broker-dealer's

[[Page 58359]]

handling of orders for that customer for the prior six months, broken 
down by calendar month.\199\ To allow time for broker-dealers to 
develop the ability to produce such reports, the Commission stated that 
it would not require broker-dealers to produce Rule 606(b)(3) order 
handling reports containing information to cover months before broker-
dealers are required to comply with Rule 606(b)(3), if adopted.\200\
---------------------------------------------------------------------------

    \199\ See proposed Rule 606(b)(3). See Proposing Release, supra 
note 1, at 49447-50 for additional detail on the Commission's 
proposal.
    \200\ See Proposing Release, supra note 1, at 49448.
---------------------------------------------------------------------------

b. Final Rule and Response to Comments
    The Commission is adopting as proposed Rule 606(b)(3)'s requirement 
that a broker-dealer provide the customer-specific order handling 
report to the customer within seven business days of receiving the 
customer's request, and that the report contain information on the 
broker-dealer's handling of orders for that customer for the prior six 
months, broken down by calendar month.\201\ The Commission received 
varied comments supporting certain aspects of the rule as proposed and 
other commenters suggesting different approaches. These comments and 
the Commission's responses on various aspects of the rule are discussed 
below.
---------------------------------------------------------------------------

    \201\ See Rule 606(b)(3).
---------------------------------------------------------------------------

    Seven Business Days for Broker-Dealer to Respond to Customer 
Request. Two commenters believed that seven business days is a 
reasonable amount of time for a broker-dealer to respond to a 
customer's request to produce a monthly report.\202\ One of those 
commenters also posited that, if the reports prove important to 
clients, they will likely be produced in shorter time-frames due to 
competitive forces.\203\ Another commenter stated that 20 days to 
respond to a customer data request would be appropriate until 
generating portions of the Rule 606(b)(3) reports and responding to 
customer requests is automated, and that upon automation and 
implementation of the program, the proposed seven days may be a 
reasonable period of time to respond.\204\ Another commenter stated 
that seven business days may not be enough time to respond to a 
customer request, particularly since broker-dealers do not know how 
many customers will request the reports, and suggested that the seven-
business day limit be removed.\205\ Another commenter stated that seven 
days is not achievable if the customer request is made within the first 
half of the month because broker-dealers typically do not receive the 
rebate/fee information from an execution venue until the end of the 
first or second week of the month, and suggested that customer-level 
reports should not be required to be ready until the month following 
receipt of the fee/rebate information.\206\ One commenter stated that, 
given that some broker-dealers offer fee pass-through arrangements 
(known as Cost-Plus), the commenter believed that the capabilities are 
in the industry to track net execution fee or rebate information.\207\
---------------------------------------------------------------------------

    \202\ See Capital Group Letter at 4; Markit Letter at 17.
    \203\ See Markit Letter at 17.
    \204\ See Bloomberg Letter at 15.
    \205\ See Fidelity Letter at 4-5.
    \206\ See FIF Letter at 17-18.
    \207\ See HMA Letter at 11.
---------------------------------------------------------------------------

    The Commission continues to believe, at this juncture, that it is 
appropriate to require a broker-dealer to provide the Rule 606(b)(3) 
report to a customer within seven business days of the customer's 
request. While Rule 606(b)(1) does not set forth a time limit for 
broker-dealers to respond to a customer's request for a report, the 
Rule 606(b)(1) disclosures are not as detailed as the disclosures set 
forth in Rule 606(b)(3). Furthermore, customers that submit not held 
NMS stock orders face a greater risk of information leakage than 
customers that submit held NMS stock orders. As a result, the 
Commission believes that requiring broker-dealers to respond within 
seven business days is designed to ensure that customers receive the 
Rule 606(b)(3) disclosures in a manner that is timely enough to enable 
them to assess the risk of information leakage from how their orders 
are routed while still providing the broker-dealer with adequate time 
to prepare the report.
    The Commission acknowledges, as noted in the Proposal, that broker-
dealers will need to configure their systems to capture the information 
necessary to produce the Rule 606(b)(3) 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.\208\ The Commission also notes that many broker-dealers' 
systems may already compile some of the order routing statistics 
required to be included in the Rule 606(b)(3) reports, thus mitigating 
to a degree the burden incurred by many broker-dealers in updating 
their systems and processes to be able to provide Rule 606(b)(3) 
reports to customers within seven business days. Further, the 
Commission has provided time between the effected date and the 
compliance date during which broker-dealers will be able to update 
their systems as necessary. Once such system updates are completed, the 
Commission expects broker-dealers to be able to generate the Rule 
606(b)(3) reports in a largely automated fashion. As such, the 
Commission believes that the seven business day turnaround time will 
not be difficult for most broker-dealers to meet, and a longer time 
period for broker-dealers to respond is not necessary especially in 
light of the expected high level of automation for generating these 
reports.
---------------------------------------------------------------------------

    \208\ See Proposing Release, supra note 1, at 49448. Broker-
dealers are required to provide the Rule 606(b)(3) reports for dates 
going forward from the compliance date of this rulemaking and are 
not required to provide the reports for dates prior to the 
compliance date.
---------------------------------------------------------------------------

    Even though one commenter expressed concern that a seven business 
day response window would not be achievable because broker-dealers 
typically do not receive rebate/fee information from execution venues 
until the end of the first or second week of the following month, the 
Commission continues to believe that the seven business day timeframe 
is important in requiring that all customers receive their order 
handling information in a timeframe that will allow them to act in a 
timely fashion in response to the information contained in the report. 
Relatedly, the Commission notes that the six-month period covered by 
Rule 606(b)(3) is a six calendar month period.\209\ Because there is no 
limit on the number of times that a customer may make a request for 
information under Rule 606(b)(3), the customer could subsequently make 
another request for information under Rule 606(b)(3) once the broker-
dealer has obtained the fee/rebate information for the immediately 
preceding month.\210\ Therefore, the Commission is not altering the 
seven business day time period for broker-dealers to respond to a 
customer request for the Rule 606(b)(3) disclosures.
---------------------------------------------------------------------------

    \209\ Thus, for example, if a customer requests a Rule 606(b)(3) 
report during the month of July, the customer would be entitled 
(subject to the de minimis exceptions) to a report that covers the 
not held NMS stock orders it submitted to the broker-dealer during 
January through June, unless the broker-dealer does not yet have fee 
and rebate information for the month of June at the time of the 
customer's request, in which case the report would be required to 
cover the not held NMS stock orders that the customer submitted to 
the broker-dealer during December of the prior calendar year through 
May of the current calendar year.
    \210\ In this scenario, the broker-dealer would be required to 
provide a Rule 606(b)(3) report covering the immediately preceding 
month if the customer's trading activity for the six month period 
including the immediately preceding month meets the customer-level 
de minimis threshold.

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

[[Page 58360]]

    Frequency of Responses to Requests for Rule 606(b)(3) Report. Two 
commenters believed that Rule 606(b)(3) does not need to specify the 
number of times that a broker-dealer is required to respond to a 
customer request for a report on order handling.\211\ One of these 
commenters stated that the competitive dynamics of customer service in 
the free market should control and that, if the frequency of requests 
becomes a problem, the Commission can address this at a later 
date.\212\ One commenter stated that broker-dealers should be required 
to provide the proposed data on a weekly basis if requested by the 
customer, and that the timeframe for providing aggregated data should 
be no longer than monthly.\213\
---------------------------------------------------------------------------

    \211\ See Bloomberg Letter at 16; Markit Letter at 18.
    \212\ See Bloomberg Letter at 16.
    \213\ See Capital Group Letter at 5.
---------------------------------------------------------------------------

    Proposed Rule 606(b)(3) did not specify the number of times a 
broker-dealer is required to respond to a customer request for a report 
on order handling, and the Commission is not adopting any such 
specification in final Rule 606(b)(3). Consistent with the Commission's 
guidance in the Proposing Release, Rule 606(b)(3) does not limit the 
number of times that a customer may place a request for an order 
handling report and does not preclude a customer from making a standing 
request to its broker-dealer, whereby the customer would automatically 
receive a recurring report on a periodic basis without the need to make 
repeated requests.\214\ Rule 606(b)(3) also does not require the 
broker-dealer to provide order handling information that is duplicative 
of information that the broker-dealer previously provided the customer 
pursuant to a prior request under the rule.\215\ 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, subject to the customer-level de minimis threshold being met for 
the six month period that includes the latest month.
---------------------------------------------------------------------------

    \214\ See id. at 49448.
    \215\ See id.
---------------------------------------------------------------------------

    Six-Month Period Covered by the Report. One commenter stated that 
six months is a reasonable timeframe for broker-dealers to make 
historical data available for the Rule 606(b)(3) report, and suggested 
that historical data be retained at the broker-dealer for two years to 
fill any gaps in data collection from counterparties.\216\ Another 
commenter suggested that the report cover the previous quarter, not six 
months.\217\ The Commission continues to believe that it is appropriate 
to require the Rule 606(b)(3) report to provide order handling data for 
a six-month period because it would provide customers with historical 
data to evaluate their broker-dealers' order routing practices to gauge 
the risk of information leakage and the potential for conflicts of 
interest. The Commission believes that a six-month period is reasonable 
to judge the performance of an execution venue, and the time period is 
long enough to offset any potential market moving event that may 
distort the data.\218\ In addition, while one commenter requested a 
record retention period of two years for the Rule 606(b)(3) data, the 
Commission believes that such a retention period is unwarranted because 
the purpose of the Rule 606(b)(3) report is to provide customers with 
baseline information on a current or near-current basis that better 
enables them to understand how a broker-dealer is exercising discretion 
when routing their NMS stock orders. The purpose of the Rule 606(b)(3) 
report is not to enable a historical perspective on how broker-dealers 
routed orders. Moreover, broker-dealer order routing practices may be 
altered frequently, in connection with, among other things, an ever-
evolving equity market structure, and so how a broker-dealer routed NMS 
stock orders more than six months prior to a request for a Rule 
606(b)(3) report may not be consistent with the broker-dealer's more 
current routing practices. At the same time, if a Rule 606(b)(3) report 
is requested by a broker-dealer's customer, the broker-dealer is 
required to provide all of the information set forth in the rule, as 
applicable. As noted above, a broker-dealer is required to fulfill the 
customer's request with the most recent six months-worth of complete 
order handling information that the broker-dealer has already obtained 
at the time of the customer's request, subject to the de minimis 
exception.
---------------------------------------------------------------------------

    \216\ See Capital Group Letter at 4-5.
    \217\ See Markit Letter at 16.
    \218\ See Rule 606 Predecessor Adopting Release, supra note 7, 
at 75430 n.81.
---------------------------------------------------------------------------

    Report Data Broken Down by Calendar Month. One commenter stated 
that broker-dealers should be required to provide the proposed data on 
a weekly basis if requested by the customer, and that this frequency of 
data would be most useful to firms, particularly if data is provided in 
eXtensible Markup Language (``XML'') format.\219\ This commenter also 
stated that the time frame for providing the data should be no longer 
than monthly. This commenter asserted that the Commission correctly 
noted in the Proposal that changes in fee structures at trading centers 
may affect a broker-dealer's routing decisions and that these fee 
changes mostly take place at the beginning of the month. According to 
this commenter, broker-dealers typically adjust mid-month to fee 
structure changes in order to meet targeted volume tiers that may have 
changed and having monthly data will enable a customer to monitor for 
such changes in order routing behavior.\220\
---------------------------------------------------------------------------

    \219\ See Capital Group Letter at 5.
    \220\ See id.
---------------------------------------------------------------------------

    The Commission continues to believe that it is appropriate for the 
data in the Rule 606(b)(3) report to be broken down by calendar month. 
Consistent with this calendar month breakdown, as noted above, the six 
month period covered by the Rule 606(b)(3) report is a six calendar 
month period. Grouping the report data by calendar month should enable 
customers to assess how changes in fee structures at trading centers, 
which typically occur on a monthly basis, may affect a broker-dealer's 
routing decisions. Further, the Commission continues to believe that 
requiring the report data to be grouped by calendar month will help 
enable customers to assess how a broker-dealer's order handling 
practices may change in response to other internal or external factors. 
Grouping the data by calendar month allows a small aggregation of data, 
since it is possible that certain trading days may not yield any data 
points. Therefore, allowing grouping by calendar month may enable 
customers to evaluate the performance of their broker-dealers based on 
more meaningful data, and enable customers and broker-dealers to 
further discuss in a more meaningful manner how orders are routed and 
executed. The Commission does not believe that the rule should require 
a finer time period, such as weekly, as suggested by one commenter. The 
adopted rule does not limit what a customer may request from its 
broker-dealer, and in certain situations, a customer may request and 
receive weekly reports from its broker-dealer. The Commission believes 
that to require by rule a weekly report could increase compliance costs 
that may not be commensurate with the expected benefits. As such, the 
Commission does not believe that it is necessary to change the calendar 
month time period.
    Annual Notice of Availability of Rule 606(b)(3) Report. Rule 
606(b)(2) requires

[[Page 58361]]

broker-dealers to notify customers in writing at least annually of the 
availability on request of the information specified in Rule 606(b)(1), 
and the Commission solicited comment as to whether the Commission 
should include a similar requirement for the new Rule 606(b)(3) 
disclosures. Four commenters stated that broker-dealers should not be 
required to provide an annual notice of the availability of the Rule 
606(b)(3) report to institutional customers,\221\ as institutional 
customers that do not request the report are unlikely to need it.\222\ 
One commenter stated that institutional customers are sophisticated 
market participants who can best judge the type of information they 
need.\223\ Accordingly, the Commission is not adopting an annual 
notification requirement with respect to the Rule 606(b)(3) reports.
---------------------------------------------------------------------------

    \221\ See FIF Letter at 17; Fidelity Letter at 5; Bloomberg 
Letter at 15; Markit Letter at 17.
    \222\ See Bloomberg Letter at 15; Fidelity Letter at 4.
    \223\ See Fidelity Letter at 4.
---------------------------------------------------------------------------

    Automatic Report to Customers. In the Proposing Release, the 
Commission noted that it considered an alternative to proposed Rule 
606(b)(3) that would not require that customers request customer-
specific standardized reports on order handling, but would instead 
require broker-dealers to provide them to customers automatically even 
in the absence of a customer request. The Commission also raised the 
notion of whether broker-dealers should be required to provide an 
internet portal where customers can view or download the reports.\224\
---------------------------------------------------------------------------

    \224\ See Proposing Release, at 49501-02.
---------------------------------------------------------------------------

    One commenter supported the Commission's proposed approach and 
stated that some institutional customers may request firm-specific 
customized reports and may not need the additional information in the 
order handling report.\225\ Another commenter did not believe that the 
Commission should mandate delivery of the Rule 606(b)(3) order handling 
reports via internet portal.\226\ Another commenter suggested that the 
process of sending reports to the customer should be automated such 
that it is emailed to the customer, either with a trade confirmation or 
on a periodic basis.\227\ Two commenters stated that broker-dealers 
could make customer's data available via the internet for broker-
dealers with customer-specific portals.\228\ Another commenter stated 
that customer specific information should be sent periodically to 
investors, rather than on an ad hoc user-requested basis.\229\
---------------------------------------------------------------------------

    \225\ See Fidelity Letter at 4.
    \226\ See Markit Letter at 18.
    \227\ See Kohen Letter.
    \228\ See Capital Group Letter at 4; FIF Letter at 18.
    \229\ See HMA Letter at 8-10.
---------------------------------------------------------------------------

    The Commission is adopting as proposed the aspect of Rule 606(b)(3) 
that requires a broker-dealer to provide the order handling report upon 
customer request, and is not adopting any requirement regarding 
automatic provision of the report in the absence of a customer request 
or via an internet portal. Commenters that did support such automated 
delivery mechanisms did not provide a persuasive rationale for the 
Commission at this time to impose the likely cost to broker-dealers of 
developing such mechanisms. Not all customers may feel the need to 
request Rule 606(b)(3) reports from their broker-dealer, and as such it 
would not be a productive use of resources for broker-dealers 
automatically to provide reports to such customers. Moreover, under the 
adopted rule, a customer that wishes to receive the report can request 
it from the customer's broker-dealer. Mandating an automatic push to 
all customers would not be efficient, and could provide additional 
costs to broker-dealers. The Commission believes that the adopted rule 
strikes an appropriate balance between broker-dealers and customers, 
and does not believe that the rule should require the disclosure of 
order information when it is not requested by the customer. Likewise, 
customers that do request Rule 606(b)(3) reports may not desire to 
receive them via an internet portal, rendering the provision of 
internet portal access to such customers unnecessary.
5. Format of Customer-Specific Order Handling Reports
a. Breakdown by Order Routing Strategy Category at Each Venue
i. Proposal
    The Commission proposed to require that the Rule 606(b)(3) order 
handling report be categorized by order routing strategy category for 
institutional orders for each venue.\230\ The Commission proposed that 
order routing strategies be categorized into three general strategy 
categories for purposes of the Rule 606(b)(3) report: (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 order; and (3) an ``aggressive order routing strategy,'' which 
emphasizes speed of execution of the entire order over the minimization 
of price impact.\231\
---------------------------------------------------------------------------

    \230\ See proposed Rule 606(b)(3).
    \231\ See proposed Rule 606(b)(3)(v). See Proposing Release, 
supra note 1, at 49450-52 for additional detail on the Commission's 
proposal.
---------------------------------------------------------------------------

ii. Final Rule and Response to Comments
    The Commission is not adopting the proposed requirement that the 
Rule 606(b)(3) disclosures be categorized by order routing strategy for 
each venue to which the broker-dealer routed the customer's orders. The 
Commission received a significant amount of comment on this proposed 
requirement, nearly all of which expressed concern about, and none of 
which supported, the requirement as proposed. Commenters generally 
believed that the proposed categorization of the Rule 606(b)(3) order 
handling information for each venue by passive, neutral, or aggressive 
routing strategies category would be unnecessarily subjective and 
complex.\232\ Several commenters stated that broker-dealers may 
categorize similar routing strategies differently, which could limit 
the utility and comparability of the reports.\233\ Multiple commenters 
stated that the proposed strategies could be impacted by investor-
specific customization.\234\ In addition, several commenters stated 
that the proposed routing strategy categorization would be unworkable 
in light of the fact that trading algorithms may use multi-layered 
methodologies that would fit into more than one of the proposed 
categories,\235\ and can be dynamic and adjust to market conditions in 
real-time.\236\ Commenters also asserted, broadly, that the proposed 
order routing strategy breakdown would be of little to no value to 
institutional investors.\237\
---------------------------------------------------------------------------

    \232\ See, e.g., SIFMA Letter at 4; FIF Letter at 4, 15-16; FIF 
Addendum at 3; ICI Letter at 8; MFA Letter at 5; STA Letter at 5, 7-
8; STA Letter II at 1; EMSAC Rule 606 Recommendations, supra note 
16, at 3, 5.
    \233\ See, e.g., SIFMA Letter at 4; FIF Letter at 4, 15-16; FIF 
Addendum at 3; MFA Letter at 5; Dash Letter at 6. One of these 
commenters agreed with the Commission's proposal to require broker-
dealers to document their assignment of institutional orders to a 
particular routing strategy category, and suggested that the 
documentation be publicly available. See Dash Letter at 6-7.
    \234\ See SIFMA Letter at 4; FIF Letter at 4; KCG Letter at 5-6; 
Markit Letter at 20.
    \235\ See FIF Letter at 4, 15.
    \236\ See ICI Letter at 8; Capital Group Letter at 6; FIF Letter 
at 4, 15; MFA Letter at 5.
    \237\ See Markit Letter at 20-22; STA Letter at 5; Fidelity 
Letter at 5, KCG Letter at 6. The Commission also received comment 
that suggested alternative methods to characterize order routing 
strategies or proposed breaking down the venue data by categories 
other than routing strategy, which the Commission is not adopting. 
See, e.g., MFA Letter at 5; Dash Letter at 6; HMA Letter at 10; HMA 
Letter II at 4; Better Markets Letter at 5; SIFMA Letter at 4-5; FIF 
Letter at 4; FIF Addendum at 3; ICI Letter at 8.

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[[Page 58362]]

    The Commission acknowledged in the Proposing Release that the 
proposed order routing strategy categorization had limitations similar 
to many of those raised by commenters, including the potential for 
inconsistency in how broker-dealers categorize an order routing 
strategy and reduced comparability of order handling reports across 
broker-dealers, mixed routing strategies that could reasonably fit into 
more than one category, and customers that provide specific or market 
condition-dependent order handling instructions to their broker-dealers 
that affect how a broker-dealer handles an institutional order.\238\ 
The Commission preliminarily believed that such limitations would occur 
mainly at the margins, and that grouping order routing strategies into 
the three proposed categories would still allow for meaningful 
comparison of order handling practices across broker-dealers, and would 
allow customers to better evaluate a broker-dealer's order handling 
practices for orders that are handled using similar strategies.\239\ In 
addition, a breakdown by routing strategy within each venue category 
was suggested by a group of commenters who submitted to the Commission, 
in advance of the Proposal, a proposed template for the customer-
specific institutional order handling report.\240\
---------------------------------------------------------------------------

    \238\ See Proposing Release, supra note 1, at 49451.
    \239\ See id.
    \240\ 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.
---------------------------------------------------------------------------

    The comments received on this topic indicate, however, that 
interested market participants widely believe that the proposed order 
routing strategy categorization would not provide a sufficient benefit 
that justifies adopting the categorization notwithstanding its 
limitations. Commenters appear to believe that these limitations are 
more pervasive and potentially more deleterious to the quality and 
usefulness of the Rule 606(b)(3) order handling reports than the 
Commission preliminarily believed. Indeed, the Commission acknowledges 
that several commenters believed that the proposed order routing 
strategy categorization would not provide information to customers that 
is useful for assessing their broker-dealers' order handling 
performance and, in fact, could impair the utility and comparability of 
the Rule 606(b)(3) order handling reports. Accordingly, the Commission 
is persuaded not to include in final Rule 606(b)(3) the proposed order 
routing strategy categorization and therefore has not included proposed 
subparagraph (b)(3)(v) in the adopted rule.\241\ Final Rule 606(b)(3) 
requires that the customer-specific order handling report categorize 
the data specified in subparagraphs (b)(3)(i) through (iv) for each 
venue to which the broker-dealer routed orders covered by the rule for 
the customer, without further categorization within each venue 
category.
---------------------------------------------------------------------------

    \241\ The Commission has not identified an appropriate 
alternative. The Commission believes that the commenters' 
suggestions such as categorizations based on ``scheduled'' versus 
``non-scheduled'' distinctions, broker-dealers' intent, order types, 
or the state of the market, would all face similar issues as the 
originally proposed categorization because, as expressed in the 
comment letters, order routing strategies are difficult to place 
into well-defined categories due to the complex nature of today's 
order execution algorithms and smart order routing systems. The 
Commission believes that requiring categorization of order routing 
strategies could lead to inaccurate and potentially misleading 
disclosures.
---------------------------------------------------------------------------

    As discussed infra,\242\ the Commission believes that the order 
handling data points specified in subparagraphs (b)(3)(i) through (iv) 
of the rule, separated according to each venue to which the broker-
dealer routed orders for the customer, will provide the customer with 
sufficient information to evaluate its broker-dealer's routing 
performance and compare it to that of other broker-dealers. This data 
would also allow a customer to ascertain at a high level what type of 
routing strategies a broker-dealer may have utilized for the customer's 
not held NMS stock order flow. For example, as discussed infra,\243\ 
subparagraphs (b)(3)(iii) and (iv) of Rule 606(b) require broker-
dealers to disclose specific information regarding orders that provided 
liquidity and orders that removed liquidity, respectively. Orders that 
provided liquidity may reasonably be associated with routing strategies 
that operate more passively, while orders that remove liquidity may be 
associated with routing strategies that operate more aggressively. Even 
if such associations cannot be made reliably, however, the Commission 
believes that Rule 606(b)(3) is more likely to provide appropriate and 
useful order handling information, and information that is more uniform 
across broker-dealers and therefore more likely to facilitate 
comparisons across broker-dealers, by requiring that the information 
specified in subparagraphs (b)(3)(i) through (iv) be separated for each 
venue to which the broker-dealer routed orders for the customer without 
further categorization within each venue category. The requirements of 
Rule 606(b)(3) provide a standardized baseline of customer-specific 
order handling disclosures, and customers remain free to negotiate for 
additional disclosures or categorizations, such as categorizations by 
routing strategy, with their broker-dealers if they so desire.
---------------------------------------------------------------------------

    \242\ See infra Section III.A.6.
    \243\ See id.
---------------------------------------------------------------------------

b. Segregation of Directed Orders and Non-Directed Orders
i. Proposal
    The Commission did not propose to require that the Rule 606(b)(3) 
customer-specific order handling report differentiate between orders 
that the customer directed the broker-dealer to route to a particular 
venue versus orders that the customer did not so direct.
ii. Final Rule and Response to Comments
    Several commenters suggested that directed orders and non-directed 
orders be segregated in the Rule 606(b)(3) order handling reports. As 
noted above, several commenters asserted that the disclosures in the 
Rule 606(b)(3) reports would be most useful to customers if they are 
focused on orders for which the broker-dealer exercised discretion in 
handling.\244\ In addition, commenters suggested that directed orders 
be clearly segregated in the reports from orders that were routed 
according to the broker-dealer's default routing behavior, otherwise 
the broker-dealer's normal routing behavior could be 
misrepresented.\245\ One commenter requested that directed orders be 
included, but as a separate category, in Rule 606 reports in order to 
expand the universe of covered orders.\246\
---------------------------------------------------------------------------

    \244\ See supra Section III.A.1.b.ii. See also Bloomberg Letter 
at; Markit Letter at 8; STA Letter at 6.
    \245\ See FIF Letter at 5; Better Markets Letter at 5-6.
    \246\ See HMA Letter at 3.
---------------------------------------------------------------------------

    The Commission is modifying Rule 606(b)(3) to require that the 
customer-specific order handling report for not held NMS stock orders 
be divided into separate sections for the customer's directed orders 
and non-directed orders, with each section containing the disclosures 
regarding the customer's order flow with the broker-dealer specified in 
Rule 606(b)(3), as well as the disclosures for each venue to which the 
broker-dealer routed orders specified in Rules 606(b)(3)(i)-(iv). The 
two types of orders are fundamentally different in that, with directed 
orders,

[[Page 58363]]

the customer directs the broker-dealer to route its orders to a 
particular venue, whereas the broker-dealer exercises discretion in 
determining where to route and execute the customer's non-directed 
orders. Segregating directed not held orders from non-directed not held 
orders in the customer-specific report would provide a customer with 
one report that reflects all of its not held NMS stock orders handled 
by the broker-dealer while separately providing disclosures for orders 
for which the broker-dealer exercises venue routing discretion.
    By providing the order handling information separately for non-
directed not held orders, the Rule 606(b)(3) report will provide a 
customer with a more precise reflection of how and where its broker-
dealer is routing the customer's not held NMS stock orders pursuant to 
the discretion afforded to the broker-dealer. A primary utility of the 
Rule 606(b)(3) reports is to enable customers to better understand how 
their broker-dealers exercise discretion in handling their not held 
orders, and this will be more easily achieved if the reported 
disclosures for directed and non-directed orders are separate. 
Otherwise, with directed not held orders and non-directed not held 
orders commingled in the report, a customer may not be able to 
accurately differentiate routing behavior for which its broker-dealer 
exercised discretion in determining where to route an order from 
routing behavior where the customer itself directed the routing 
destination. Separating the Rule 606(b)(3) order handling disclosures 
for non-directed not held orders from those for directed not held 
orders should help customers evaluate their broker-dealers order 
handling performance and how their broker-dealers are achieving best 
execution for their non-directed not held orders while managing the 
potential impact of information leakage and conflicts of interest.
    In addition, the Commission believes that customers will benefit 
from being able to analyze Rule 606(b)(3) routing disclosures that are 
specific to their directed not held orders for NMS stock. As discussed 
below, the Rule 606(b)(3) reports require the broker-dealer to 
disclose, among other things, information on order execution.\247\ This 
information would be relevant to a customer assessing its broker-
dealer's execution of its directed not held orders, including a 
customer interested in validating that its broker-dealer is routing its 
directed not held orders consistent with the customer's instructions.
---------------------------------------------------------------------------

    \247\ See infra Section III.A.6.
---------------------------------------------------------------------------

c. XML Format and Standardization
i. Proposal
    The Commission proposed to require that the customer-specific order 
handling report required under proposed Rule 606(b)(3) be made 
available using an XML schema and associated PDF renderer published on 
the Commission's website.\248\ To provide a standardized presentation 
for the report, the Commission also proposed a chart form for the 
report's required disclosures of information regarding orders that a 
broker-dealer executes internally or routes to other venues.\249\ 
Specifically, the Commission proposed to require that each report 
contain rows that would be categorized by venue and by order routing 
strategy category for each venue,\250\ with certain columns of 
information for each of the required rows.\251\ Thus, as proposed, each 
report would have been formatted so that a customer would be readily 
able to observe its order activity at a particular venue, as further 
subdivided by order routing strategy category for that venue.\252\
---------------------------------------------------------------------------

    \248\ 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. XML 
enables data to be defined, or ``tagged,'' using standard 
definitions. The tags establish a consistent structure of identity 
and context. This consistent structure can be automatically 
recognized and processed by a variety of software applications such 
as databases, financial reporting systems, and spreadsheets, and 
then made immediately available to the end-user to search, 
aggregate, compare, and analyze. In addition, the XML schema could 
be easily updated to reflect any changes to the open standard. XML 
and PDF are ``open standards,'' which is a term that is generally 
applied to technological specifications that are widely available to 
the public, royalty-free, at no cost.
    \249\ See Proposing Release, supra note 1, at 49450. The 
Commission also noted that, for purposes of the Rule 606(b)(3) order 
handling report, a venue would be any trading center to which an 
order is routed or where an order is executed. See Rule 600(b)(78); 
Proposing Release, supra note 1, at 49450.
    \250\ See proposed Rule 606(b)(3); see also Proposing Release, 
supra note 1, at 49450.
    \251\ See proposed Rule 606(b)(3)(i) through (iv); see also 
Proposing Release, supra note 1, at 49450.
    \252\ See Proposing Release, supra note 1, at 49450.
---------------------------------------------------------------------------

    The Commission also proposed new format requirements for the 
existing customer-specific order handling disclosures in Rule 
606(b)(1). Specifically, the Commission proposed to require that the 
customer-specific order routing report required by Rule 606(b)(1) be 
made available using an XML schema and associated PDF renderer 
published on the Commission's website.\253\
---------------------------------------------------------------------------

    \253\ See proposed Rule 606(b)(1). See Proposing Release, supra 
note 1, at 49448-51 for additional detail on the Commission's 
proposal.
---------------------------------------------------------------------------

ii. Final Rule and Response to Comments
    The Commission is adopting as proposed the requirement that the 
customer-specific order handling report required under Rule 606(b)(3) 
be made available using an XML schema and associated PDF renderer 
published on the Commission's website.\254\
---------------------------------------------------------------------------

    \254\ See Rule 606(b)(3).
---------------------------------------------------------------------------

    The Commission received several comments on the proposed reporting 
format,\255\ with a number of commenters supporting a machine-readable 
or standardized format \256\ or XML in particular,\257\ and other 
commenters criticizing the proposed use of XML and a PDF renderer and 
suggesting different formats such as JavaScript Object Notation 
(``JSON''), comma-separated values (``CSV''), spreadsheet, or flat 
text.\258\
---------------------------------------------------------------------------

    \255\ See Capital Group Letter at 4; Kohen Letter; HMA Letter at 
12; Better Markets Letter at 2; FIF Letter at 17; Markit Letter at 
17; CFA Letter at 11; FIA Letter at 2; Thomson Reuters Letter at 2.
    \256\ See, e.g., HMA Letter at 12; Markit Letter at 17.
    \257\ See, e.g., Capital Group Letter at 4; Better Markets 
Letter at 2; FIF Letter at 17; FIA Letter at 2.
    \258\ See HMA Letter at 12; Markit Letter at 17; Kohen Letter.
---------------------------------------------------------------------------

    The Commission believes that while XML predates JSON as a standard, 
XML has proven to be a flexible standard that continues to be 
incorporated into common desktop applications and is the basis for a 
variety of financial reporting languages in a way that JSON is not. 
Moreover, if the Commission did not specify a particular format and 
instead left it to the discretion of the filer, users of the data would 
lose their ability to compare the data easily and easily ensure their 
consistency between filers. XML's Schema is a widely used, stable 
metadata standard which is better suited for validation than JSON. 
Validations help ensure data consistency and comparability, which 
enhances overall data quality for both broker-dealers and customers. 
Market participants have the necessary tools and experience with 
analyzing a variety of financial data in the XML format. The use of XML 
has been adopted in a number of recent Commission rulemakings \259\ and 
the

[[Page 58364]]

Proposal to use an XML format here was supported by a number of 
commenters.\260\
---------------------------------------------------------------------------

    \259\ See, e.g., Securities Exchange Act Release Nos. 79095, 81 
FR 81870 (November 18, 2016) (adopting Investment Company Reporting 
Modernization); 74246, 80 FR 14437 (March 19, 2015) (adopting 
Security-Based Swap Data Repository Registration, Duties, and Core 
Principles); 72982 (September 4, 2014), 79 FR 57183 (September 24, 
2014) (adopting Asset-Backed Securities Disclosure and 
Registration).
    \260\ See, e.g., Capital Group Letter at 4; Better Markets 
Letter at 2; FIF Letter at 17; CFA Letter at 11.
---------------------------------------------------------------------------

    As for the suggestions to adopt a CSV, spreadsheet file, or flat-
text file format, the Commission does not believe that these formats 
would be as suitable as XML, since the hierarchical nature of the 
disclosures required by the amendments being adopted today would 
require more than a single set of uniformly structured rows, and these 
formats would not support representing such disclosures easily. 
Moreover, neither of those formats can incorporate robust validations 
to address issues such as completeness, required relationships, and 
correct formatting. If used, a CSV, spreadsheet, or flat text file 
format would likely have data quality issues of consistency and 
comparability that would make the data less usable and require repeated 
corrections by the broker-dealers. Accordingly, the Commission is 
adopting as proposed the requirement that the customer-specific order 
handling report be made available using an XML schema to be published 
on the Commission's website.
    While one commenter criticized the use of the PDF renderer, that 
commenter criticized its use because PDF files cannot be processed and 
analyzed.\261\ The Commission notes, however, that the rule, as 
amended, requires that the data be provided ``using the most recent 
versions of the XML schema and the associated PDF renderer'' (emphasis 
added). The PDF file and underlying data in an XML format both will be 
required. The requirement to use the Commission's XML schema is 
designed to ensure that the data is provided in an XML format that is 
structured and machine-readable, so that the data can be more easily 
processed and analyzed. As a result, all data that would appear in a 
PDF file would be required to have a corresponding file provided in XML 
that has been used to generate the PDF file using the renderer. The 
Commission received no other comments opposing the Proposal to require 
that the reports be provided in a human-readable format through the use 
of a PDF renderer, and one commenter supported requiring a human-
readable format.\262\ The Commission continues to believe that the 
reports should be provided in a human-readable format for those 
customers that prefer only to review individual reports and not 
necessarily aggregate or conduct large-scale data analysis on the data. 
The Commission believes that by requiring use of the associated PDF 
renderer published on the Commission's website, the XML data would be 
instantly presentable in a human-readable PDF format and consistently 
presented across reports. Accordingly, the Commission is adopting as 
proposed the requirements that the customer-specific order handling 
report be made available using an XML schema and associated PDF 
renderer published on the Commission's website.
---------------------------------------------------------------------------

    \261\ See Kohen Letter.
    \262\ See Markit Letter at 28.
---------------------------------------------------------------------------

    One commenter suggested that the Commission should add headers to 
rows and columns in the customer-specific report that explains what 
each category of information means,\263\ and another commenter stated 
that the fields in the report should be explicitly defined.\264\ For 
purposes here, the Commission assumes that the latter comment pertains 
to defining the terms used in Rule 606(b)(3)(i) through (iv). No 
commenters stated that any of the undefined terms in proposed Rule 
606(b)(3)(i) through (iv) were unclear or inconsistent or would 
otherwise impede comparability, and the Commission believes that adding 
headers and definitions may result in unnecessary confusion and 
complexity. Accordingly, the Commission is not adopting definitional 
headers for the customer-specific reports and is not adopting 
definitions for the terms used in proposed Rule 606(b)(3)(i) through 
(iv). The Commission is adopting as proposed the chart form for the 
required disclosures set forth in Rule 606(b)(3)(i) through (iv).\265\
---------------------------------------------------------------------------

    \263\ See CFA Letter at 10-11.
    \264\ See FIF Letter at 17.
    \265\ See Rule 606(b)(3).
---------------------------------------------------------------------------

    The Commission also is adopting as proposed the requirement that 
the customer-specific order handling report required under Rule 
606(b)(1) be made available using an XML schema and associated PDF 
renderer published on the Commission's website.\266\ The Commission 
believes that providing the customer-specific Rule 606(b)(1) reports in 
the proposed XML/PDF format will promote the consistency and 
comparability of the reports. The Commission received two comments 
specifically questioning the need for providing such reports in the 
proposed XML/PDF format, stating that customers rarely request these 
reports, and stating their view that the cost of implementing the 
proposed format would outweigh the benefits.\267\ As discussed above, 
the Commission is amending the categories of orders to which the 
existing disclosure requirements of Rule 606(b)(1) apply to include 
orders in NMS stock that are submitted on a not held basis and for 
which the broker-dealer is not required to provide the customer a 
report under Rule 606(b)(3).\268\ The Commission believes that 
customers that submit orders on a not held basis that are not entitled 
to receive the disclosures required by Rule 606(b)(3) may still analyze 
and compare the data they receive under Rule 606(b)(1) and engage in 
informed discussions with their broker-dealers about the broker-
dealer's order handling practices. The use of the XML/PDF format will 
enable those customers to more easily analyze and compare the 
individualized data provided.
---------------------------------------------------------------------------

    \266\ See Rule 606(b)(1).
    \267\ See Thomson Reuters Letter at 2; FIF Letter at 9, 12.
    \268\ See supra Section III.A.1.b.vi.
---------------------------------------------------------------------------

6. Rule 606(b)(3) Report Content
a. Information on the Customer's Order Flow With the Reporting Broker-
Dealer
i. Proposal
    The Commission proposed that the Rule 606(b)(3) order handling 
report include information on the order flow sent by the customer to 
the broker-dealer. Specifically, the Commission proposed to require 
disclosure of: (1) Total number of shares of 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 orders exposed by the broker-dealer through an 
actionable IOI; and (4) venue or venues to which orders were exposed by 
the broker-dealer through an actionable IOI.\269\
---------------------------------------------------------------------------

    \269\ See proposed Rule 606(b)(3). See Proposing Release, supra 
note 1, at 49452-54 for additional detail on the Commission's 
proposal.
---------------------------------------------------------------------------

ii. Final Rule and Response to Comments
    The Commission is adopting, with certain modifications, the 
requirement that the Rule 606(b)(3) order handling report include 
information on the customer's not held NMS stock order flow with the 
broker-dealer. The Commission believes that this information would be 
useful for customers to evaluate their not held order flow with a 
particular broker-dealer during the reporting period, the broker-
dealer's methods for achieving best execution for such order flow, and 
the potential for conflicts of interests and information leakage 
associated with

[[Page 58365]]

such methods. Specifically, the Commission is adopting as proposed the 
requirement that the Rule 606(b)(3) report disclose the total number of 
shares of not held NMS stock orders sent to the broker-dealer by the 
customer during the reporting period, as well as the requirement that 
the Rule 606(b)(3) report disclose the total number of shares executed 
by the broker-dealer as principal for its own account.\270\ One 
commenter expressed support for these requirements.\271\ The Commission 
continues to believe that the information would be useful to customers 
in understanding how much of their not held order flow was handled by a 
particular broker-dealer during the reporting period, which should help 
customers make comparisons across broker-dealers, as well as how often 
a particular broker-dealer trades against the customers' not held 
orders, which is relevant information to customers assessing their 
broker-dealers' compliance with best execution obligations and 
potential conflicts of interest that their broker-dealers face when 
trading as principal.
---------------------------------------------------------------------------

    \270\ See Rule 606(b)(3).
    \271\ See Markit Letter at 22.
---------------------------------------------------------------------------

    The Commission also is adopting the requirement that the Rule 
606(b)(3) report disclose the total number of not held NMS stock orders 
exposed by the broker-dealer through actionable IOIs. One commenter 
expressed support for this requirement.\272\ The Commission continues 
to believe that that identifying the total number of not held NMS stock 
orders exposed by a broker-dealer though actionable IOIs should give 
customers a more complete view of how their broker-dealers handle their 
not held orders and allow them to better evaluate how their broker-
dealer manages information leakage.
---------------------------------------------------------------------------

    \272\ See id. at 23.
---------------------------------------------------------------------------

    The Commission is adopting, with modifications discussed below, the 
requirement that broker-dealers disclose the venue(s) to which not held 
NMS stock orders were exposed by the broker-dealer through an 
actionable IOI. The Commission continues to believe that disclosure of 
the specific venue(s) to which a broker-dealer exposed such an order by 
an actionable IOI would be useful for the customer to further assess 
the extent, if any, of information leakage of their not held orders and 
potential conflicts of interest facing their broker-dealers. 
Specifically, the Commission believes that such information will enable 
customers to assess whether their broker-dealers are exposing their not 
held orders to select market participants with which the broker-dealer 
has affiliations or business relationships, or from which the broker-
dealer receives other incentives. In addition, the Commission believes 
that disclosure of this information will provide the customer with a 
more complete understanding of the broker-dealer's order handling 
activities for purposes of assessing the broker-dealer's execution 
quality generally.
    Commenters generally supported requiring a broker-dealer to 
identify the venue(s) that were sent actionable IOIs.\273\ One 
commenter expressed broad support for requiring a broker-dealer to 
identify for customers the total number of orders exposed, and the 
venue(s) to which orders were exposed, through actionable IOIs.\274\ 
This commenter also stated that the venue information is necessary for 
an institution to evaluate the exposure of its orders through 
actionable IOIs for information leakage and conflicts of interest.\275\
---------------------------------------------------------------------------

    \273\ See HMA Letter at 10; NYSE Letter at 1-2; Markit Letter at 
4, 11-12; FIF Letter at 7; Fidelity Letter at 4; STA Letter II at 3.
    \274\ See NYSE Letter at 1.
    \275\ See id. at 2.
---------------------------------------------------------------------------

    Some commenters suggested that the Commission should clarify that 
the reference in proposed Rule 606(b)(3) to the venue(s) to which not 
held NMS stock orders were exposed by the broker-dealer through an 
actionable IOI does not include IOIs that a broker-dealer may send to 
its institutional customers.\276\ They stated that including broker-
dealers' institutional customers as ``venues'' under the rule would be 
problematic from a competitive perspective, as broker-dealers would be 
required to disclose their customer lists, and many customers likely 
would not want their identities to be disclosed.\277\ Some of these 
commenters suggested that, to effectuate the suggested clarification, 
the Commission should require disclosure of actionable IOI information 
only with respect to actionable IOIs sent to ``market centers'' as 
defined in Rule 600(b)(38), which would not include broker-dealers' 
customers.\278\
---------------------------------------------------------------------------

    \276\ See Markit Letter at 4, 11-12; FIF Letter at 7; Fidelity 
Letter at 4; STA Letter II at 3.
    \277\ See Market Letter at 12; FIF Letter at 7; Fidelity Letter 
at 4; STA Letter II at 3.
    \278\ 17 CFR 242.600(b)(38). See FIF Letter at 7; FIF Addendum 
at 4 n.7; Fidelity Letter at 4; STA Letter II at 3.
---------------------------------------------------------------------------

    The Commission's reference to ``venues'' for purposes of Rule 
606(b)(3) is meant to refer to external liquidity providers to which 
the broker-dealer may send actionable IOIs. To provide the clarity 
requested by commenters, the Commission intends in this context for 
these external liquidity providers generally to include market 
participants that operate a business of providing liquidity by buying 
and selling securities for their own account and seek to profit from 
the spread between such trades, and that may reasonably be assumed by a 
broker-dealer to be willing to take the opposite side of a trade in 
connection with that business. The Commission believes that this 
category of market participants likely would include market centers as 
defined in Rule 600(b)(38), but may not be limited to such market 
centers. For example, as noted above, for purposes of Rule 606(b)(3), 
the Commission believes that the venues referenced by Rule 606(b)(3) 
generally would include an external liquidity provider that trades 
proprietarily. Rule 600(b)(38) defines market centers to include OTC 
market makers, among other things. In this context, an external 
liquidity provider that trades proprietarily, and to which a broker-
dealer sends an actionable IOI, may be an OTC market maker and thus a 
market center under Rule 600(b)(38). But even if such an external 
liquidity provider is not an OTC market maker and does not qualify as a 
market center under Rule 600(b)(38), the Commission generally would 
consider a venue to be covered by Rule 606(b)(3) if it operates a 
business of providing liquidity by buying and selling securities for 
its own account and seeks to profit from the spread from such trades, 
and may reasonably be assumed by a broker-dealer to be willing to take 
the opposite side of a trade in connection with that business.
    The Commission has considered commenters' concerns regarding the 
potential disclosure of customer identities if customers to which 
broker-dealers send actionable IOIs are ``venues'' under the rule. The 
Commission believes that it is appropriate to protect the 
confidentiality of broker-dealer customer information, which can be 
proprietary. At the same time, the Commission believes that it is 
important for a customer to receive detailed, standardized disclosures 
from its broker-dealer that enable the customer to better evaluate the 
broker-dealer's handling of its not held NMS stock orders. If a broker-
dealer exposes a customer's not held NMS stock order to one or more of 
its other customers via an actionable IOI, the customer should be 
entitled to that information as it may inform its assessment of its 
broker-dealer's performance in handling its orders. Accordingly, the 
Commission is adopting a modification to Rule

[[Page 58366]]

606(b)(3) that requires broker-dealers to disclose the fact that 
actionable IOIs were sent to other customers, but not the identity of 
such customers. The Commission believes that this approach strikes an 
appropriate balance between protecting the identities of broker-
dealers' customers and sufficient and meaningful disclosure to 
customers of the venues to which broker-dealers expose their not held 
NMS stock orders through actionable IOIs. Thus, in pertinent part, 
final Rule 606(b)(3) requires that the broker-dealer's customer-
specific order handling report include the venue(s) to which not held 
NMS stock orders were exposed by the broker-dealer through an 
actionable IOI provided that, where applicable, a broker-dealer must 
disclose that it exposed a customer's order through an actionable IOI 
to other customers but need not disclose the identity of such 
customers.\279\ In other words, where a broker-dealer exposes a 
customer's not held NMS stock order through an actionable IOI to a 
venue that is a person or entity that may place an order, such as 
another of the broker-dealer's customers, the broker-dealer's 
disclosure in the Rule 606(b)(3) report with respect to this exposure 
may be aggregated and anonymized, and simply state that the customer's 
order was exposed to other customers of the broker-dealer via an 
actionable IOI.
---------------------------------------------------------------------------

    \279\ See Rule 606(b)(3).
---------------------------------------------------------------------------

    One commenter suggested that IOIs should be reported separately 
from orders.\280\ This commenter stated that the execution quality and 
routing characteristics of IOIs are fundamentally different from normal 
parent and child orders, and must be reported separately for investors 
to properly analyze how orders are being handled; otherwise, according 
to this commenter, the IOIs could generate potentially misleading 
information.\281\ Consistent with this comment and what was proposed, 
actionable IOIs are required to be reported separately under Rule 
606(b)(3). Specifically, with respect to the order flow sent by the 
customer to the broker-dealer, Rule 606(b)(3) requires disclosure of, 
among other things: The total number of not held NMS stock orders 
exposed by the broker-dealer through an actionable IOI and the venue or 
venues to which such orders were exposed by the broker-dealer through 
an actionable IOI. These are the only disclosures for actionable IOIs 
under Rule 606(b)(3), and each such disclosure must be set forth 
separately in the Rule 606(b)(3) report. The other Rule 606(b)(3) 
disclosures pertain to customers' not held NMS stock orders (and any 
child orders derived therefrom). They are distinct from the actionable 
IOI disclosures, and they generally should not include actionable IOIs 
in the reported information.
---------------------------------------------------------------------------

    \280\ See HMA Letter at 10.
    \281\ See id.
---------------------------------------------------------------------------

    Finally, one commenter stated that Rule 606 should require 
disclosure of routing statistics in response to IOIs received by smart 
order routers.\282\ According to this commenter, many smart order 
routers accept IOIs and use them to make routing decisions, while few 
smart order routers send IOIs. This commenter suggested that the 
amendments to Rule 606 should require disclosure of routing statistics 
in response to IOIs received by SORs including the fill rates on orders 
sent to external liquidity providers or other venues, categorized by 
the receipt of a contra-side IOI or not.\283\
---------------------------------------------------------------------------

    \282\ See Markit Letter at 4, 11-12, 23, 34.
    \283\ See id. at 23.
---------------------------------------------------------------------------

    As the commenter acknowledged, Rule 606(b)(3) focuses on requiring 
the disclosure of IOIs sent by routing broker-dealers on behalf of 
orders received from their customers, not of IOIs received by broker-
dealers.\284\ The Commission, at this time, intends to maintain the 
focus of the rule's disclosure requirement for actionable IOIs on IOIs 
sent by the broker-dealer. The required disclosures are intended to be 
a baseline from which customers can, if they so choose, negotiate with 
their broker-dealers for further data. The Commission believes that 
such a baseline is provided, with respect to actionable IOIs, through 
requiring disclosure of the actionable IOIs sent by a broker-dealer on 
behalf of an order received from its customer. The Commission also 
believes that this information would provide an adequate basis for 
customers to assess the extent, if any, of information leakage of their 
orders and potential conflicts of interest facing their broker-dealers, 
as well as enable such customers to assess whether their broker-dealers 
are exposing their orders to select market participants with which the 
broker-dealer has affiliations or business relationships, or from which 
the broker-dealer receives other incentives. The Commission does not 
believe, at this juncture, that also including disclosures related to 
IOIs received by broker-dealers would provide significantly more useful 
information to customers in making those assessments with respect to 
their broker-dealers.
---------------------------------------------------------------------------

    \284\ See id. at 12.
---------------------------------------------------------------------------

    Accordingly, Rule 606(b)(3) requires, with respect to the not held 
NMS stock order flow sent by the customer to the broker-dealer, the 
total number of shares of orders sent to the broker-dealer by the 
customer during the relevant period; the total number of shares 
executed by the broker-dealer as principal for its own account; the 
total number of orders exposed by the broker-dealer through an 
actionable indication of interest; and the venue or venues to which 
orders were exposed by the broker-dealer through an actionable 
indication of interest, provided that the identity of such venue or 
venues may be anonymized if the venue is a person or entity that may 
place an order with the broker-dealer.\285\
---------------------------------------------------------------------------

    \285\ See Rule 606(b)(3).
---------------------------------------------------------------------------

b. Information For Each Venue to Which the Broker-Dealer Routed Orders 
For the Customer
i. Proposal
    The Commission proposed that the customer-specific order handling 
report required under proposed Rule 606(b)(3) include specific columns 
of information for each venue to which the broker-dealer routed orders 
for the customer, in the aggregate and broken down by passive, medium, 
and aggressive order routing strategies.\286\ The proposed rule 
identified four categories of such information: Information on order 
routing, information on order execution, information on orders that 
provided liquidity, and information on orders that removed 
liquidity.\287\
---------------------------------------------------------------------------

    \286\ See proposed Rule 606(b)(3). As discussed above, the 
Commission is not adopting the proposed order routing strategy 
categorization. See supra Section III.A.5.a.
    \287\ See proposed Rule 606(b)(3)(i) through (iv). See also 
Proposing Release, supra note 1, at 49453-58 for additional detail 
on the Commission's proposal.
---------------------------------------------------------------------------

    Information on Order Routing. With respect to information on order 
routing, the Commission proposed to require, within each venue and 
order routing strategy category, disclosure of: (1) Total shares 
routed; (2) total shares routed marked immediate or cancel; \288\ (3) 
total shares routed that were further routable; and (4) average order 
size routed.\289\
---------------------------------------------------------------------------

    \288\ See Proposing Release, supra note 1, at 49453.
    \289\ See proposed Rule 606(b)(3)(i). See also Proposing 
Release, supra note 1, at 49453-54.
---------------------------------------------------------------------------

    Information on Order Execution. With respect to information on 
order execution, the Commission proposed to require disclosure of: (1) 
Total shares executed; (2) fill rate; \290\ (3) average fill size; 
\291\ (4) average net execution fee or

[[Page 58367]]

rebate; \292\ (5) total number of shares executed at the midpoint; 
\293\ (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 order; (8) percentage of total shares executed 
that were priced on the side of the spread more favorable to the order; 
(9) total number of shares executed that were priced on the side of the 
spread less favorable to the order; and (10) percentage of total shares 
executed that were priced on the side of the spread less favorable to 
the order.\294\
---------------------------------------------------------------------------

    \290\ Fill rate would be calculated by the shares executed 
divided by the shares routed.
    \291\ Average fill size would be the average size, by number of 
shares, of each order executed on the venue.
    \292\ The fee and rebate would be measured in cents per 100 
shares, specified to four decimal places.
    \293\ The midpoint would be the price halfway between the 
national best bid and national best offer.
    \294\ See proposed Rule 606(b)(3)(ii). See also Proposing 
Release, supra note 1, at 49454-55.
---------------------------------------------------------------------------

    Information on Orders that Provided Liquidity. In addition to the 
order routing and execution data described above, the Commission 
proposed to require disclosure of information on orders that provided 
liquidity.\295\ Specifically, the Commission proposed 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).\296\ In connection with this new proposed requirement, the 
Commission proposed to define the term ``orders providing liquidity'' 
to mean ``orders that were executed against after resting at a trading 
center.'' \297\
---------------------------------------------------------------------------

    \295\ See proposed Rule 606(b)(3)(iii).
    \296\ See id. See also Proposing Release, supra note 1, at 
49456.
    \297\ See proposed Rule 600(b)(58).
---------------------------------------------------------------------------

    Information on Orders that Removed Liquidity. Similar to orders 
that provided liquidity, the Commission proposed to require the 
disclosure of information on orders that removed liquidity.\298\ 
Specifically, the Commission proposed 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).\299\ Relatedly, the Commission also proposed to define the 
term ``orders removing liquidity'' as ``orders that executed against 
resting trading interest at a trading center.'' \300\
---------------------------------------------------------------------------

    \298\ See proposed Rule 606(b)(3)(iv).
    \299\ See proposed Rule 606(b)(3)(iv)(A) through (C). See also 
Proposing Release, supra note 1, at 49458.
    \300\ See proposed Rule 600(b)(56).
---------------------------------------------------------------------------

ii. Final Rule and Response to Comments
    The Commission is adopting as proposed the requirement that the 
Rule 606(b)(3) customer-specific order handling report include specific 
columns of information for each venue to which the broker-dealer routed 
orders for the customer,\301\ and is adopting as proposed the specific 
pieces of information set forth in Rules 606(b)(3)(i) through (iv) that 
are required to be included in the reports.\302\ Specifically, the 
Commission is adopting as proposed the required data points for 
information on order routing specified in Rule 606(b)(3)(i), for 
information on order execution specified in Rule 606(b)(3)(ii), for 
information on orders that provided liquidity specified in Rule 
606(b)(3)(iii), and for information on orders that removed liquidity 
specified in Rule 606(b)(iv).\303\ The Commission also is adopting as 
proposed the definitions of the terms ``orders providing liquidity'' 
and ``orders removing liquidity.''
---------------------------------------------------------------------------

    \301\ See Rule 606(b)(3). As discussed above, the Commission is 
making two modifications to the format of the Rule 606(b)(3). First, 
the Commission is not adopting the proposed order routing strategy 
categorization. See supra Section III.A.5.a. Second, the Commission 
is requiring that the Rule 606(b)(3) report be divided into two 
separate sections--one for directed orders and the other for non-
directed orders. See Section III.A.5.b. The Commission also is 
revising the Rule 600(b) definitions of the terms ``directed order'' 
and ``non-directed order.'' See id.; see also supra Section 
III.A.1.b.vii.
    \302\ See Rule 606(b)(3).
    \303\ See id.
---------------------------------------------------------------------------

    Commenters broadly supported the Proposal to require broker-dealers 
to provide more detailed order handling information to their customers 
upon request, and expressed varied views on what specific or additional 
metrics would be most useful and should be included in the report. Some 
commenters suggested requiring additional execution quality-related 
metrics in Rule 606(b)(3),\304\ such as: A spread capture metric that 
measures the execution price relative to the NBBO or displayed 
quote,\305\ information concerning the realized spread and the 
effective spread and quoted spread percentages,\306\ price improvement 
statistics,\307\ average time between order entry and execution or 
cancellation for orders that remove liquidity,\308\ and median order 
size routed and median fill size.\309\ Other comments related to fee 
and rebate disclosures. Specifically, some commenters suggested 
revising the data points in Rule 606(b)(3) by requiring an estimate of 
execution fees and rebate information.\310\ One commenter asserted that 
the fee and rebate disclosures in proposed Rule 606(b)(3)(iv) lack 
actionable data, and recommended a completely revised version of the 
Rule 606(b)(3) report.\311\ Another commenter, by contrast, supported 
disclosure of the net execution fee or rebate and believed that broker-
dealers have the capability to track this information.\312\ Another 
commenter suggested that broker-dealers should disclose to 
institutional (and retail) customers the nature of payment for order 
flow and profit-sharing relationships, including whether or not they 
pass any of the rebates or order-flow payments to their customers, as 
well as additional information that the commenter asserted is designed 
to help investors understand the state of the market at the time of 
execution and whether the broker-dealer was using a venue in which 
there is a conflict of interest or economic routing inducement.\313\ 
One commenter believed that the Proposal does not address the economic 
pressures or transaction-based costs incurred by the broker-dealer 
prior to receiving the order, particularly in light of broker-dealer 
use of order management systems (``OMSs'') and fees associated with 
OMSs and connectivity, and suggested

[[Page 58368]]

that broker-dealers be required to disclose such fees to their 
customers.\314\ Finally, some commenters suggested requiring execution 
venues to provide standard liquidity indicators to broker-dealers,\315\ 
and one commenter broadly recommended that the Rule 606(b)(3) order 
handling disclosures build off the FIX Trading Community's FIX 
Execution Venue Reporting Recommended Best Practices in order to 
achieve standardization and objectivity in the disclosures.\316\
---------------------------------------------------------------------------

    \304\ See, e.g., HMA Letter at 4, 11; ICI Letter at 9-10; Markit 
Letter at 8-10, 24-26, Appendix A.
    \305\ See, e.g., HMA Letter at 11; ICI Letter at 9; BlackRock 
Letter at 2. https://fif.com/images/Retail_Execution_Quality_Statistics/FIF_Rule_605-606_WG_-_Retail_Execution_Quality_Stats_Wholesaler_Template.pdf).
    \306\ See, e.g., BlackRock Letter at 2; Markit Letter at 24.
    \307\ See, e.g., ICI Letter at 9; Markit Letter at 24.
    \308\ See, e.g., FSR Letter at 6; ICI Letter at 10.
    \309\ See Capital Group Letter at 6.
    \310\ See Fidelity Letter at 5; Markit Letter at 16 and n.37, 
25. One of these commenters also sought clarity as to what fee a 
broker should use if a broker executes a trade on its own ATS. See 
Fidelity Letter at 5. Rules 606(b)(3(ii) through (iv) requires the 
broker-dealer to disclose the average net execution fees or rebates. 
Thus, the Commission believes that a broker generally would need to 
disclose this information to the extent relevant to execution of a 
trade on its own ATS. If the broker incurs no fee or rebate for such 
an execution, then that is what should be disclosed.
    \311\ See Markit Letter at 8-10, Appendix A.
    \312\ See HMA Letter at 11.
    \313\ See Better Markets Letter at 7-8. This commenter also 
stated that, while broker-dealers are under ``best execution'' 
obligations, venues they route their orders to (which may themselves 
re-route to other venues) are not subject to the same obligations, 
and that the Commission should harmonize the duties of care. See id. 
The Commission notes that harmonization of duties of best execution 
and care across venues and broker-dealers is outside the scope of 
this rulemaking.
    \314\ See Bloomberg Letter at 2-7. This commenter also contended 
that the Proposal is predicated on positions regarding depth of book 
data and a broker-dealer's duty of best execution that are odds with 
an Initial Decision in a Commission Administrative Proceeding, and 
that the Commission should address the fees charged by exchanges for 
their market data products. See id. at 2-3, 7-11. The Commission 
separately has issued an order dated October 16, 2018. See 
Securities Exchange Act Release No. 84432 (October 16, 2018), 
available at https://www.sec.gov/litigation/opinions/2018/34-84432.pdf.
    \315\ See Fidelity Letter at 5; Thomson Reuters Letter at 2.
    \316\ See KCG Letter at 6-7; see also EMSAC Rule 606 
Recommendations, supra note 16, at 3. As the KCG Letter 
acknowledged, however, these FIX recommended best practices focus on 
institutional execution information and not order routing data. See 
id. at 7. As such, the Commission does not believe that they would 
be an appropriate basis for the order handling disclosures that are 
the focus of the Commission's amendments to Rule 606(b)(3).
---------------------------------------------------------------------------

    While commenters suggested different order handling metrics that 
could be useful to customers and provide more in-depth insight into how 
broker-dealers handle not held NMS stock orders, the Commission's 
intent in establishing the Rule 606(b)(3) disclosures is not to require 
broker-dealers to provide every specific piece of data that may be 
available for an order and potentially valuable to certain customers. 
Rather, the Commission's intent is to provide a baseline of 
standardized order handling information that (subject to two de minimis 
exceptions) all customers that submit not held NMS stock orders to 
broker-dealers are entitled to receive from their broker-dealers and 
that customers can use to evaluate their broker-dealers' order handling 
performance. Rules 606(b)(3)(i) through (iv) require broker-dealers to 
provide detailed information regarding order routing, order execution, 
orders that provided liquidity, and orders that removed liquidity. Each 
of those four categories of information is further divided into several 
subcategories of specific pieces of data that must be disclosed. The 
Commission continues to believe that these data points are sufficient 
to provide the Commission's intended baseline, standardized set of 
information that customers can use to evaluate how their broker-dealers 
handle their orders and, in particular, assess how their broker-dealers 
comply with best execution obligations and manage the potential for 
information leakage and conflicts of interest.
    The Commission does not believe that it is necessary for the 
achievement of this goal to require, at this time, that the Rule 
606(b)(3) order handling report include the additional order handling 
statistics suggested by commenters. There is a large spectrum of types 
of customers, and commenters suggested a wide range of order handling 
statistics. While certain additional data metrics may be more useful to 
certain types of market participants, the Commission does not view any 
particular data element suggested by commenters as likely to 
significantly enhance the degree to which the Rule 606(b)(3) report 
provides a standardized baseline of order handling information that is 
broadly useful to all customers that submit orders to their broker-
dealers.
    Moreover, incorporating additional metrics into the Rule 606(b)(3) 
report may increase the complexity of the report and the associated 
costs, and the Commission believes at this time that such costs and 
complexity would not be justified by the expected benefits to customers 
in evaluating the order handling performance of their broker-dealers. 
As summarized above, commenters suggested revised or additional 
disclosures related to execution quality and fee/rebate 
information.\317\ While incorporating the suggested execution quality 
and fee/rebate disclosures into the Rule 606(b)(3) reports may add 
extra utility to the reports for certain customers, in adopting Rule 
606(b)(3) the Commission must balance the cost of compliance against 
the usefulness of the information that is required to be disclosed 
under the rule. Requiring broker-dealers to make mandatory disclosures 
imposes a cost on broker-dealers, and each additional required data 
item potentially raises that compliance cost, as well as potentially 
increases the complexity of the report. Incorporating commenters' 
suggested disclosures into the Rule 606(b)(3) reports would, therefore, 
likely raise compliance costs and add to the complexity of the report. 
As but one example, requiring the broker-dealer to disclose the 
displayed quote at the time when the broker-dealer routed an order to 
an exchange could increase reporting complexity and costs in 
calculating the displayed quote and the synchronization of clocks 
between a broker-dealer and the venue.
---------------------------------------------------------------------------

    \317\ As is also summarized above, some commenters suggested 
requiring execution venues to provide standard liquidity indicators 
to broker-dealers. See supra note 315. The rule amendments being 
adopted today enhance the order handling information that broker-
dealers must provide to their customers, and do not address 
standardization of the information that execution venues provide to 
broker-dealers. As such, these comments are outside the scope of 
this rulemaking.
---------------------------------------------------------------------------

    In light of the fact that the Commission believes that the Rule 
606(b)(3) disclosures are sufficient to provide a baseline, 
standardized set of information that customers can use to evaluate how 
their broker-dealers handle their orders, the Commission believes that 
the compliance costs and added complexity associated with commenters' 
suggested additional disclosures would not be justified by the marginal 
utility that these disclosures may add to the report beyond that which 
is provided by the disclosures. Specifically, the additional metrics 
related to fees and rebates and economic incentives suggested by 
commenters could provide customers with additional information on how 
venue fees and rebates impact how their broker-dealers' handle their 
orders, particularly in light of the potential for conflicts of 
interest caused by fees and rebates; however, the Commission believes 
that the Rule 606(b)(3) disclosures already contain sufficient fee and 
rebate information for customers to adequately evaluate their broker-
dealers' potential conflict of interest. Thus, any added value in the 
report created by the suggested fee and rebate information would, in 
the Commission's view, not justify the additional complexity, as well 
as the additional costs, associated with including the information. 
Likewise, the additional execution quality metrics suggested by 
commenters could provide customers with more information regarding how 
their broker-dealers achieve best execution and attempt to prevent 
information leakage, but the Commission believes that the Rule 
606(b)(3) disclosures, as proposed, already provide a sufficient basis 
for customers to evaluate their broker-dealers' performance in this 
regard. Thus, any added value in the report created by the suggested 
execution quality disclosures would not, in the Commission's view, be 
justified by the additional costs and complexity associated with 
including the information.
    The Commission believes that adopting the Rule 606(b)(3) report 
content as proposed will help minimize the reporting complexity and 
costs, while creating a report that is universally useful across the 
spectrum of customer types, some of which may be more sophisticated 
than others in their ability to digest the reported

[[Page 58369]]

information. The Commission did not receive comments suggesting that 
the order handling statistics set forth in Rule 606(b)(3) as proposed 
would be too difficult or complex for broker-dealers to generate or for 
institutional customers in particular to use.
    This determination is not an indication that the Commission has 
formed a decision on the validity or usefulness of the various 
different order handling metrics that commenters suggested. Rather, in 
light of the fact that, as noted above, the Commission believes that 
Rule 606(b)(3), as proposed, is reasonably designed to provide a 
standardized baseline of order handling disclosures that (subject to 
two de minimis exceptions) all customers that submit not held NMS stock 
orders to their broker-dealers are entitled to receive, the Commission 
has determined to adopt Rule 606(b)(3) as proposed.
    As stated elsewhere herein, customers remain free to negotiate with 
their broker-dealers for additional disclosures regarding broker-
dealers' handling of their orders, and broker-dealers of course remain 
free to compete by providing more detailed information than is required 
under Rule 606(b)(3). As a result of the rules being adopted today, 
customers that choose to negotiate with their broker-dealers for 
additional disclosures will be doing so from a more standardized 
baseline of enhanced order routing disclosures, and in the case of 
customers that previously did not receive detailed order handling 
disclosures from their broker-dealers, from a strengthened and more 
informed negotiating position. In light of the Commission's belief that 
the disclosures required by Rule 606(b)(3), as proposed and as adopted, 
are reasonably designed to provide such a standardized baseline of 
order handling information for customers to use to assess their broker-
dealers' order handling performance, the Commission believes, at this 
juncture, that the disclosure of additional order handling statistics 
would be best left to competitive forces in the market and should not 
be mandated by Commission rule.
    Accordingly, the Commission is adopting as proposed the requirement 
that certain order routing information be disclosed within the proposed 
venue segmentation in the Rule 606(b)(3) order handling report. 
Specifically, Rule 606(b)(3) requires that the order handling 
information specified in subparagraphs (b)(3)(i) through (iv) of the 
rule be provided for each venue to which the broker-dealer routed 
orders for the customer.\318\ In addition, Rules 606(b)(3)(i) through 
(iv) specify the same required information on order routing, order 
execution, orders that provided liquidity, and orders that removed 
liquidity as was proposed. Further, Rule 606(b) is being amended to 
define the term ``orders providing liquidity'' to mean orders that were 
executed against after resting at a trading center,\319\ and the term 
``orders removing liquidity'' to mean orders that executed against 
resting trading interest at a trading center.\320\ The Commission 
received no comments regarding these defined terms, and is adopting 
them as proposed.
---------------------------------------------------------------------------

    \318\ See Rule 606(b)(3).
    \319\ See Rule 600(b)(54).
    \320\ See Rule 600(b)(55).
---------------------------------------------------------------------------

7. Rule 606(c) Quarterly Aggregated Public Report of Rule 606(b)(3) 
Information
a. Proposal
    The Commission proposed to require a broker-dealer that receives 
orders covered by Rule 606(b)(3) to make publicly available \321\ a 
report that aggregates the Rule 606(b)(3) order handling information 
for all such orders that it receives.\322\ As proposed, broker-dealers 
would be required to make the report publicly available for each 
calendar quarter, broken down by calendar month, within one month after 
the end of the quarter.\323\ The Commission proposed that this public 
aggregated order handling report be mandatory for all of the orders 
subject to Rule 606(b)(3) that a broker-dealer handles within a 
calendar quarter regardless of whether any of its customers request 
customer-specific order handling reports pursuant to Rule 
606(b)(3).\324\
---------------------------------------------------------------------------

    \321\ ``Make publicly available'' is defined in Rule 600 of 
Regulation NMS. See 17 CFR 242.600(b)(36).
    \322\ See proposed Rule 606(c).
    \323\ See id.
    \324\ See id.; see also Proposing Release, supra note 1, at 
49459.
---------------------------------------------------------------------------

    In addition, similar to the customer-specific order handling 
reports required under proposed Rule 606(b),\325\ the Commission 
proposed to require that the public aggregated order handling report be 
made available using an XML schema and associated PDF renderer 
published on the Commission's website.\326\ Further, the Commission 
proposed to require that broker-dealers keep such public aggregated 
order handling reports posted on a website that is free and readily 
accessible to the public for a period of three years from the initial 
date of posting on the website.\327\
---------------------------------------------------------------------------

    \325\ See supra Section III.A.3.
    \326\ See proposed Rule 606(c).
    \327\ See id. See Proposing Release, supra note 1, at 49458-59 
for additional detail on the Commission's proposal.
---------------------------------------------------------------------------

b. Final Rule and Response to Comments
    The Commission is not adopting proposed Rule 606(c), and thus the 
Commission is not adopting the proposed requirement that broker-dealers 
publicly report, on a quarterly basis, aggregated Rule 606(b)(3) order 
handling information. As a result, under the rule amendments being 
adopted today, for not held orders in NMS stock, broker-dealers are 
required only to provide the customer-specific order handling reports 
required by Rule 606(b)(3) (or Rule 606(b)(1), as applicable),\328\ and 
there is no public reporting component of the information set forth in 
Rule 606(b)(3).
---------------------------------------------------------------------------

    \328\ See supra Sections III.A.1.b.iv-v.
---------------------------------------------------------------------------

    Multiple commenters stated that directed orders should be excluded 
from the proposed Rule 606(c) public aggregated reports, or 
alternatively, that directed orders should be reported separately.\329\ 
Commenters asserted that including a customer's directed orders in the 
public aggregated report could cause the report to be misleading 
because routing behavior that was directed by the customer pursuant to 
a directed order would be misrepresented in the report as routing 
behavior determined by the broker-dealer itself pursuant to its 
independent routing logic.\330\ One commenter stated that even a 
directed versus non-directed order distinction in the public report 
would be insufficient because institutional clients provide 
instructions on orders without explicitly directing an order to a 
venue, such as by directing a large portion of their order flow to 
high-rebate venues or directing their brokers to avoid routing to a 
specific

[[Page 58370]]

venue or type of venue, and instead the commenter suggested a more 
nuanced distinction in the report between orders that solely reflect 
the broker-dealer's routing decisions and orders that are subject to 
specific client routing instructions.\331\ One commenter stated that 
the proposed Rule 606(c) aggregated order handling report would not 
serve its intended use and that a modified version should be available 
only to institutional customers upon request.\332\ This commenter 
expressed concern that the public aggregated report would be easy for 
market analysts to misinterpret, creating confusion in the market, and 
that it could present potential competitive concerns for broker-
dealers, such as with respect to the confidentiality of their business 
operations and book of business.\333\ Some commenters believed that 
public disclosure of aggregated order handling information could be 
useful to market participants.\334\
---------------------------------------------------------------------------

    \329\ See SIFMA Letter at 2, 5; FIF Letter at 5; Fidelity Letter 
at 6; STA Letter at 5-6; STA Letter II at 2; EMSAC Rule 606 
Recommendations, supra note 16, at 3. One commenter suggested that 
orders from individuals should be reported separately in the 
quarterly public reports under proposed Rule 606(c), but that 
suggestion was premised on the commenter's view that the proposal to 
define ``institutional order'' based on dollar amount would result 
in large orders from retail customers being considered institutional 
orders. See ICI Letter at 10. Similarly, another commenter stated 
that the quarterly public reports under proposed Rule 606(c) should 
exclude retail block-sized orders. See Fidelity Letter at 6. As 
discussed above, the Commission is adopting Rule 606(b) disclosure 
requirements based on whether an order is held or not held and is 
not adopting proposed Rule 606(c). As a result, retail block-sized 
orders will not be included in quarterly public reports unless these 
orders are subject to Rule 606(a)(1).
    \330\ See SIFMA Letter at 5; FIF Letter at 5; Fidelity Letter at 
6; ICI Letter at 3.
    \331\ See SIFMA Letter at 5.
    \332\ See Fidelity Letter at 6.
    \333\ See Fidelity Letter at 6 and n.14.
    \334\ See HMA Letter at 4; CFA Letter at 9; Markit Letter at 27; 
Better Markets Letter at 3-6.
---------------------------------------------------------------------------

    In light of the comments submitted and after further consideration, 
the Commission is not adopting Rule 606(c) or any requirement that a 
broker-dealer make publicly available an aggregated report with respect 
to its handling of customers' not held NMS stock orders.\335\ The 
Commission believes, upon further consideration, that the proposed 
quarterly public reports of aggregated Rule 606(b)(3) order handling 
information would be of limited utility. As discussed in greater detail 
below, the Commission believes that the proposed reports would not 
allow for fair ``apples-to-apples'' comparisons, and instead could 
generate misleading impressions of broker-dealer order handling 
practices. As a result, the aggregated Rule 606(b)(3) information in 
the proposed public report may not allow for meaningful insight into 
the quality of broker-dealers' order routing performance or comparisons 
of order handling performance across broker-dealers, and is unlikely to 
provide the same benefits as the aggregated Rule 606(a) public 
disclosures for held orders in NMS stock because of the disparate 
nature and trading behavior of customers that use not held orders in 
NMS stock.\336\
---------------------------------------------------------------------------

    \335\ The Commission also received comment that provided 
suggestions and modifications to proposed Rule 606(c), which the 
Commission is not adopting. See, e.g., Capital Group Letter at 4-5; 
Fidelity Letter at 6; Citadel Letter at 1; FIF Letter at 13; Markit 
Letter at 27, 29.
    \336\ For similar reasons, the Commission is not requiring 
broker-dealers to disclose additional information or a more detailed 
order handling report as part of regular public reporting as was 
suggested by some commenters. See, e.g., Better Markets Letter at 3-
6.
---------------------------------------------------------------------------

    As noted above, broker-dealers may have different types of 
customers that utilize not held orders in NMS stock. For example, one 
broker-dealer may serve as a broker-dealer for only quantitative 
trading firms, while another broker-dealer may serve only investment 
advisers. Each customer has a unique set of circumstances, goals, and 
order flow that dictates how a broker-dealer handles that customer's 
orders. For example, the trading objectives of a quantitative firm 
primarily trading principally are different from the trading objectives 
of another type of customer, such as a diversified mutual fund. In 
light of this, the Commission believes that there would be limited 
ability to understand the quality of broker-dealers' routing 
performance or meaningfully compare broker-dealer order handling 
performance based on the aggregated information for not held NMS stock 
orders in the proposed public reports without requiring additional 
disclosures regarding customers and potentially sensitive proprietary 
information.
    Indeed, broker-dealers' order routing behavior differs based on the 
customers they serve, and understanding the quality of their routing 
performance would likely require an understanding of the investment or 
trading needs of their underlying customers, which would not be 
obtainable from the aggregated information in the public reports. 
Moreover, some customers give complete discretion to a broker-dealer in 
handling their orders while other customers may place limits on or 
provide instructions regarding how a broker-dealer can handle their 
orders. In fact, orders from certain customers frequently limit broker-
dealer discretion in some manner. For example, cost-sensitive customers 
may place restrictions on the venues a broker-dealer may use to execute 
their orders, which could have a significant impact on how the broker-
dealer routes those orders and the resulting execution metrics. In 
particular, some customers choose cost-plus fee arrangements and 
specify a desire to maximize rebates or low pricing venues to the 
extent practicable. Or, customers may instruct broker-dealers to use 
certain algorithms or strategies that preference certain routing 
options or behavior. A taking algorithm acts differently than a posting 
algorithm, and there may also be routing strategies or configurations 
available with both taking and posting algorithms. Further, the 
Commission believes based on its experience that quantitative firms, 
for example, represent a large segment of the institutional marketplace 
and a significant portion of them use largely passive trading 
strategies, which can result in a demand for advantageous pricing 
arrangements, including cost-plus arrangements with their broker-
dealers. This, in turn, can result in selecting rebate maximization 
strategies. Such strategies are often meaningfully different than the 
posting strategies used by long-only mutual funds, for example. The 
Commission believes based on its experience that aggregating the order 
handling information of cost-sensitive customers or customers that have 
specified certain algorithms or trading strategies for the broker-
dealer to utilize with customers that have given the broker-dealer 
complete routing discretion creates dilutive effects in the aggregated 
information that wash out the routing nuances that are relevant to each 
type of customer and important to understanding a broker-dealer's 
routing decisions when granted full discretion.
    The proposed aggregated public disclosures for not held NMS stock 
orders could therefore be unclear, and potentially misleading, due to 
the nature or requests of a broker-dealer's specific customers. A 
report may reflect apparently substandard order handling practices even 
though the broker-dealer is performing competently or is satisfying 
specific customer requests. Even a customer interested in comparing the 
performance of its specific orders to other orders handled by its own 
broker-dealer would likely be unable to meaningfully analyze the 
aggregate order handling report because the customer likely would not 
know the nature of, practices and requests of the broker-dealer's other 
customers. Due to the limited utility of the public reports as 
proposed, the Commission further believes that the burden of compiling 
and publishing aggregate order handling information for not held NMS 
stock orders does not at this time justify the expected benefits.
    In addition, 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 believes that quarterly public disclosures as proposed 
may risk the exposure of sensitive proprietary information on the 
broker-dealers' order handling techniques. The Commission noted in the 
Proposing Release that it

[[Page 58371]]

believed that any such risk would be minimal, but in combination with 
the potentially limited utility of the public reports as proposed, the 
Commission believes it is not appropriate to impose any such risk, no 
matter how small. In addition, the risk may be more pronounced for 
certain segments of customers than it is for others. In particular, new 
or small broker-dealers with only a few customers may end up disclosing 
confidential order routing information if such information is required 
to be included in public reports. This could significantly disadvantage 
new or small broker-dealers.
    Furthermore, the Commission believes that not held order handling 
is not analogous to held order handling and that the benefits that 
accrue from the public disclosure of aggregated held order handling 
reports are not likely to accrue from the public disclosure of 
aggregated not held order handling reports. Currently, Rule 606(a) 
requires public aggregated reporting of certain order handling 
information.\337\ As noted in the Proposing Release, some market 
participants have stated that the public disclosure of meaningful data 
in Rule 606 reports can assist broker-dealers in evaluating their own 
performance relative to other firms.\338\ The Commission also has 
previously noted its belief that these public aggregated disclosures 
spur competition among broker-dealers to provide enhanced order routing 
services and better execution quality.\339\
---------------------------------------------------------------------------

    \337\ See Rule 606(a).
    \338\ See Proposing Release, supra note 1, at 49461.
    \339\ See id.
---------------------------------------------------------------------------

    The Commission does not believe the same benefits would accrue to 
customers that utilize not held orders due to the fundamental 
differences between held order flow and not held order flow. Held 
orders are typically non-directed orders with no specific order 
handling instructions for the broker-dealer. Moreover, held order flow 
generally is handled similarly by broker-dealers--held orders are 
generally small orders that are internalized or sent to OTC market 
makers if marketable or fully executed on a single trading center if 
not marketable.\340\ By contrast, not held order flow is diverse and 
fundamentally different from held order flow in that customers may 
provide specific order handling instructions to their broker-dealers or 
limit the order handling discretion of their broker-dealers in some 
manner. As discussed above, broker-dealers' handling of customer not 
held orders is impacted by specific customer needs such as cost 
sensitivity, the preferencing or disfavoring of specific market venues, 
or other requests that limit broker-dealer discretion. The disparate 
behavior of customers when using not held orders limits the ability of 
both customers and broker-dealers to utilize the aggregated Rule 
606(b)(3) order handling information in the public reports to better 
understand broker-dealers' routing behavior or perform meaningful 
comparisons of order routing performance across broker-dealers.
---------------------------------------------------------------------------

    \340\ See Proposing Release, supra note 1, at 49460. 
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. See Proposing Release, 
supra note 1, at 49439 n. 64.
---------------------------------------------------------------------------

B. Public Order Routing Report Under Rule 606(a)

    Prior to today, Rule 606(a) required, among other things, that 
broker-dealers that route customer orders--which do not include orders 
for NMS stock above $200,000 in market value or orders for options 
contracts above $50,000 in value \341\--provide a quarterly public 
report of certain information regarding non-directed orders in NMS 
securities that is organized by listing market and that sets forth 
material aspects of their relationships with the ten venues to which 
they routed the largest number of total non-directed orders and with 
any venue to which they routed 5% or more of such orders (collectively, 
``Specified Venues'').\342\ In the Commission's view, customers have 
benefited from the Rule 606(a) reporting requirements for customer 
orders, as the Rule 606(a) reports spurred competition among broker-
dealers to provide enhanced order routing services and better execution 
quality, which in turn motivated trading centers to deliver more 
efficient and innovative execution services as they competed for order 
flow.
---------------------------------------------------------------------------

    \341\ See Rule 600(b)(18).
    \342\ See Rule 606(a).
---------------------------------------------------------------------------

    But as noted above and detailed in the Proposing Release, changes 
to market structure and order routing practices have led the Commission 
to analyze the current requirements for public order routing disclosure 
under Rule 606(a).\343\ 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 order flow from retail customers. As a 
result of this market evolution, the utility of the Rule 606(a) public 
reports and the degree to which they help achieve the rule's intended 
benefits may be diminished. It is, therefore, important for the 
Commission to enhance the Rule 606(a) public order handling reports in 
a manner designed to update them consistent with market developments.
---------------------------------------------------------------------------

    \343\ See supra Section I; see also Proposing Release, supra 
note 1, at 49461.
---------------------------------------------------------------------------

    Accordingly, the Commission believes that it is appropriate to make 
limited updates to the Rule 606(a) requirements regarding broker-
dealers' public disclosure of their order routing practices, and in 
conjunction with Rule 606(b)(3)'s applicability to NMS stock orders of 
any size that are submitted on a not held basis, amend Rule 606(a) such 
that it applies to NMS stock orders of any size that are submitted on a 
held basis. Commenters were broadly supportive of enhanced Rule 606(a) 
order routing disclosures.\344\ The Commission believes that the 
amendments being adopted today to Rule 606(a), discussed in detail 
below, should enhance broker-dealers' public order handling disclosures 
by bringing them more up-to-date with current market and order routing 
practices, and by focusing them on the types of NMS stock orders for 
which the public disclosures are most relevant and would be most 
useful. As a result, customers--and retail investors in particular--
that submit orders to their broker-dealers should be better able to 
assess the quality of order handling services provided by their broker-
dealers and whether their broker-dealers are effectively managing 
potential conflicts of interest.
---------------------------------------------------------------------------

    \344\ See, e.g., KCG Letter at 1-3; Ameritrade Letter at 3; 
SIFMA Letter at 1; Better Markets Letter at 1, 8-9; HMA Letter at 3; 
FSR Letter at 1; Citadel Letter at 1; and CFA Letter at 1.
---------------------------------------------------------------------------

1. Orders Covered By Rule 606(a) Public Disclosures
a. Proposal
    As discussed above,\345\ the proposed definition of ``institutional 
order'' dovetailed with the current definition of ``customer order.'' 
This would allow the Commission to maintain Rule 606(a)(1)'s 
applicability to orders in NMS stocks with a market value less than 
$200,000 and NMS securities that are options contracts, and propose 
enhancements to the existing disclosure requirements under Rule 
606(a)(1) for such orders, without altering the substance of the 
current definition of ``customer order'' in Rule 600(b). However, the 
Commission proposed to rename the current ``customer order'' definition 
as ``retail order'' without changing the substance of the definition

[[Page 58372]]

itself, such that an order for NMS stock would be categorized as either 
an ``institutional order'' or a ``retail order'' under Rule 600(b) and 
for the purposes of Rule 606 depending on its dollar value, and an 
order for an NMS security that is an option contract for less than 
$50,000 in market value would be categorized as a ``retail order.'' 
\346\
---------------------------------------------------------------------------

    \345\ See supra Sections III.A.1.a.
    \346\ See Proposing Release, supra note 1, at 49434, 49465-66 
for additional detail on the Commission's proposal.
---------------------------------------------------------------------------

b. Final Rule and Response to Comments
    As discussed above,\347\ the Commission is not adopting a 
definition of ``institutional order'' or an order dollar value-based 
approach to delineate the NMS stock orders covered by new Rule 
606(b)(3). Consequently, the Commission is not renaming the term 
``customer order'' as ``retail order'' in Rule 600(b), and the 
Commission is amending Rule 606(a)(1) without any order dollar value 
limitation on the rule's coverage of NMS stock orders.\348\ As amended, 
Rule 606(a)(1) applies to NMS stock orders of any size that are 
submitted on a held basis. Rule 606(a)(1) also continues to apply to 
any order (whether held or not held) for an NMS security that is an 
option contract with a market value less than $50,000, as the 
Commission did not propose, and is not adopting, any modifications to 
Rule 606's coverage of option orders.\349\
---------------------------------------------------------------------------

    \347\ See supra Section III.A.1.b.
    \348\ Moreover, in light of the fact that the Commission is not 
adopting the proposed amendment to rename ``customer order'' as 
``retail order'' in Rule 600(b), and instead is maintaining 
``customer order'' as currently defined, there is no longer any 
need, as proposed, to revise existing cross-references to ``customer 
order'' in Rules 600(b)(19), 600(b)(23), 600(b)(48), 605, 606, and 
607. See Proposing Release, supra note 1, at 49466.
    \349\ See supra notes 37 and 135.
---------------------------------------------------------------------------

    Specifically, Rule 606(a)(1), as amended, states that every broker-
dealer must make publicly available for each calendar quarter a report 
on its routing of non-directed orders in NMS stocks that are submitted 
on a held basis and in non-directed orders that are customer orders in 
NMS securities that are option contracts during that quarter broker 
down by calendar month. As noted above,\350\ the Commission is adopting 
a modified definition of the term ``non-directed order'' that no longer 
includes a dollar-value limitation on NMS stock orders,\351\ but 
continues to exclude orders from a broker-dealer. Because Rule 
606(a)(1) explicitly references ``non-directed orders'' in NMS stock, 
the rule no longer covers only NMS stock orders with a market value 
less than $200,000; rather, the rule now applies to NMS stock orders of 
any size that are submitted on a held basis. With respect to orders for 
NMS securities that are option contracts, however, Rule 606(a)(1) 
explicitly references ``non-directed orders'' that are ``customer 
orders.'' By virtue of this reference to ``customer orders,'' Rule 
606(a)(1) continues to apply to an order for an NMS security that is an 
option contract only if the order has a market value less than $50,000. 
In both cases--held orders for NMS stock and orders for NMS securities 
that are option contracts--Rule 606(a)(1) applies only if the order is 
not from a broker-dealer.
---------------------------------------------------------------------------

    \350\ See supra Section III.A.1.b.vii.
    \351\ Consistent with the modifications discussed in Section 
III.A.1.b.vii, supra, Rule 606(a)(1)(i) also is revised to no longer 
refer to the defined term ``customer order.''
---------------------------------------------------------------------------

    Rule 606(a)(1)'s application to held NMS stock orders of any size 
works in unison with the customer-specific disclosures contained in 
Rule 606(b)(1) and Rule 606(b)(3) to ensure that all NMS stock orders 
are covered by order handling disclosure rules and to avoid overlap 
between such rules.\352\ If Rule 606(a)(1)'s coverage were not amended 
in conjunction with Rules 606(b)(1) and (3), there would be overlap 
between the these rules--e.g., Rule 606(a)(1) would apply to NMS stock 
orders of less than $200,000 in market value, and Rule 606(b)(3) also 
would apply to such orders to the extent that they were not held. As 
discussed above, numerous commenters criticized the proposed order 
dollar value-based distinction between the orders covered by Rule 
606(a)(1) versus Rule 606(b)(3), and the Commission believes that it 
would be more appropriate to differentiate the NMS stock orders covered 
by each rule according to whether an order is held or not held.
---------------------------------------------------------------------------

    \352\ See supra Section III.A.1.b.
---------------------------------------------------------------------------

    For the same reasons as discussed above,\353\ the Commission 
believes that this method of differentiation is appropriate because 
broker-dealers generally handle not held orders differently from held 
orders due to the discretion they are afforded with not held orders but 
not with held orders. As a result, the information pertinent to 
understanding broker-dealers' order handling practices for not held 
orders is not the same as for held orders. Unlike with not held orders, 
the Commission's concern regarding how broker-dealers handle held 
orders is less about the difficulties posed by more automated, 
dispersed and complex order routing and execution practices. Rather, 
the Commission's main concern with held NMS stock orders is the impact 
of intensified competition for customer order flow--particularly retail 
investor order flow--that has arisen concomitant with the rise in the 
number of trading centers and the introduction of new fee models for 
execution services.\354\ Financial inducements to attract order flow 
from broker-dealers that handle retail investor orders have become more 
prevalent and for some broker-dealers such inducements may be a 
significant source of revenue.\355\ These financial inducements create 
new, and in many cases significant, potential conflicts of interest for 
broker-dealers with respect to how they handle held orders from 
customers--and retail customers in particular. The Commission believes 
that enhanced public disclosures should focus on providing more 
detailed information regarding these financial inducements, as opposed 
to the different information geared towards not held orders from 
customers that is set forth in Rule 606(b)(3).
---------------------------------------------------------------------------

    \353\ See id.
    \354\ See supra Section I; see also Proposing Release, supra 
note 1, at 49434.
    \355\ See id.
---------------------------------------------------------------------------

    In practice, the coverage of Rule 606(a)(1) as amended is likely to 
be largely similar to the rule's coverage under its pre-existing 
application to NMS stock orders of less than $200,000 in market value. 
The Commission expects that the majority of customer (i.e., non-broker-
dealer) NMS stock orders having a market value of at least $200,000 
will be not held orders and therefore not be covered under Rule 
606(a)(1).\356\ Retail investors' orders are typically submitted on a 
held basis and are typically smaller in size.\357\ So the smaller NMS 
stock orders that were covered by the pre-existing rule likely also 
were held orders and therefore will be covered by Rule 606(a)(1) as 
amended. The difference is that, under the rule as amended, any non-
broker-dealer NMS stock orders that are for at least $200,000 in value 
and submitted on a held basis will now be covered by Rule 606(a)(1) and 
thus subject to public aggregated required order routing disclosures 
for the first time.
---------------------------------------------------------------------------

    \356\ See supra Section III.A.1.b.vi (citing Eric Kelley and 
Paul Tetlock, How Wise Are Crowds? Insights from Retail Orders and 
Stock Returns, 68 Journal of Finance 1229-1265 (2013) and Brad M. 
Barber and Terrence Odean, Trading Is Hazardous to Your Wealth: The 
Common Stock Investment Performance of Individual Investors, 55 
Journal of Finance 773 (2000)).
    \357\ Accordingly, the Commission believes that the number of 
higher value held orders for NMS stock that will be included in the 
Rule 606(a)(1) public reporting regime will be limited.
---------------------------------------------------------------------------

    Under the Proposal, a non-broker-dealer NMS stock order with a 
market value of at least $200,000 would have been defined as an 
institutional order--regardless of whether it was a held or

[[Page 58373]]

not held order--and subject to the new customer-specific disclosures 
set forth in proposed Rule 606(b)(3) and the new public aggregated 
order handling report set forth in proposed Rule 606(c). The adopted 
approach to NMS stock order handling disclosure is based on whether an 
NMS stock order is submitted on a held or not held basis. In addition 
to being appropriate for non-broker-dealer NMS stock held orders with a 
market value of less than $200,000, the Commission believes that the 
Rule 606(a)(1) public disclosures are appropriate for non-broker-dealer 
NMS stock held orders with a market value of $200,000 or more because, 
regardless of the order's dollar value or the nature of the customer 
that submitted the order, broker-dealers must attempt to execute held 
orders immediately. Thus, the Commission's concerns noted above for 
held NMS stock orders are implicated regardless of the order's dollar 
value or the nature of the customer that submitted the order. The Rule 
606(a)(1) public disclosures are designed to address these concerns in 
particular by focusing on providing enhanced transparency for financial 
inducements faced by broker-dealers when determining where to route 
held NMS stock order flow. Moreover, to the extent that it is a retail 
customer that submits a larger held NMS stock order for $200,000 or 
more, commenters appeared to agree that such orders would be 
appropriately covered by Rule 606(a)(1).\358\ The Commission believes 
that this enhancement over the current reporting regime will benefit 
customers that submit held NMS stock orders, including large-sized 
ones. They will be better able to assess the nature and quality of the 
order handling services being provided by their broker-dealers, 
including the potential for broker-dealer conflicts of interest. They 
will also benefit to the extent that broker-dealers are spurred to 
compete further by providing enhanced order routing services and better 
execution quality, which in turn could motivate trading centers to 
deliver more efficient and innovative execution services as they 
compete for order flow.
---------------------------------------------------------------------------

    \358\ See, e.g., Fidelity Letter at 2-3; Wells Fargo Letter at 
5; KCG Letter at 4; Thomson Reuters Letter at 1; FSR Letter at 3-4; 
Citadel Letter at 2-3; Ameritrade Letter at 2.
---------------------------------------------------------------------------

2. Marketable Limit Orders and Non-Marketable Limit Orders
a. Proposal
    The Commission proposed to amend Rule 606(a)(1)(i) and (ii) to 
require the public order routing report to split limit orders and 
separately disclose them as marketable and non-marketable.\359\ In 
connection with this new requirement, the Commission also proposed to 
amend Rule 600(b) of Regulation NMS to include a definition of the term 
``non-marketable limit order,'' which the Commission proposed to define 
to mean any limit order other than a marketable limit order.\360\
---------------------------------------------------------------------------

    \359\ See Proposing Release, supra note 1, at 49462.
    \360\ See proposed Rule 600(b)(51). See Proposing Release, supra 
note 1, at 49462 for additional detail on the Commission's proposal.
---------------------------------------------------------------------------

b. Final Rule and Response to Comments
    The Commission is adopting as proposed the amendments to Rule 
606(a)(1)(i) and (ii) to require the disclosure of order routing 
information for marketable limit orders separately from non-marketable 
limit orders.\361\ The Commission also is adopting as proposed the 
definition of the term ``non-marketable limit order'' to mean any limit 
order other than a marketable limit order.\362\ While one commenter 
believed that the separation is unlikely to be valuable to retail 
customers and that the separation will not promote additional 
competition amongst broker-dealers,\363\ most commenters who addressed 
this issue supported distinguishing between non-marketable and 
marketable limit orders in the Rule 606(a) disclosures and believed 
that this separation would provide customers with valuable and more 
useful information.\364\
---------------------------------------------------------------------------

    \361\ See Rule 606(a)(1)(i)-(ii). As noted above, the Commission 
also has revised Rule 606(a)(1)(i) to remove the reference to the 
term ``customer order.'' See supra note 351.
    \362\ See Rule 600(b)(50).
    \363\ See FIF Letter at 9.
    \364\ See, e.g., EMSAC Rule 606 Recommendations, supra note 16, 
at 3; CFA Letter at 4-5, 9; Fidelity Letter at 8-9; Ameritrade 
Letter at 3.
---------------------------------------------------------------------------

    As noted in the Proposing Release,\365\ historically, trading 
centers have offered payment for order flow or other financial 
inducements to broker-dealers based upon whether their order flow is 
marketable or non-marketable. As a result, whether an 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 investor orders to OTC market makers with whom they have 
payment for order flow or other arrangements.\366\ Non-marketable 
investor 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.\367\
---------------------------------------------------------------------------

    \365\ See Proposing Release, supra note 1, at 49440.
    \366\ See id.
    \367\ See id.
---------------------------------------------------------------------------

    In light of the different incentives broker-dealers encounter when 
handling marketable limit orders versus non-marketable limit orders, 
and the resulting differences in how and where broker-dealers route 
marketable limit orders versus non-marketable limit orders, the 
Commission believes that requiring that the Rule 606(a) reports 
disclose order routing information separately for marketable limit 
orders and non-marketable limit orders will significantly enhance their 
utility. The Commission continues to believe that classifying limit 
orders into marketable and non-marketable categories will provide 
greater transparency into broker-dealers' different routing practices 
for these two categories of limit orders, which will allow customers 
and other market participants to more fully assess broker-dealers' 
routing decisions for each type of order and the potential impact on 
execution quality, including whether broker-dealers are effectively 
managing their potential conflicts of interest. Providing greater 
public transparency as to broker-dealers' distinct routing practices 
for marketable limit orders and non-marketable limit orders also may 
increase competition among broker-dealers and minimize the potential 
conflicts of interest between maximizing revenue and the duty of best 
execution.\368\
---------------------------------------------------------------------------

    \368\ See Transaction Fee Pilot Proposing Release, supra note 2, 
at 13310; see also 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, 71 Journal of Finance 2193, 
2195 (2016) (``Battalio, Corwin, and Jennings Paper'') (finding that 
fill rates for displayed limit orders are lower on exchanges with 
higher take fees).
---------------------------------------------------------------------------

3. Payment for Order Flow Disclosures--Rules 606(a)(1)(iii) and (iv)
a. Proposal
    The Commission proposed to amend Rule 606(a)(1) to require more 
detailed disclosures regarding a broker-dealer's relationships with the 
venues to which it routes orders.\369\ Specifically, the Commission 
proposed to amend Rule 606(a)(1) to include in a new Rule 
606(a)(1)(iii) a requirement 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)

[[Page 58374]]

non-marketable limit orders; and (4) other orders.\370\
---------------------------------------------------------------------------

    \369\ See Proposing Release, supra note 1, at 49463.
    \370\ See proposed Rule 606(a)(1)(iii).
---------------------------------------------------------------------------

    The Commission also proposed to amend the existing payment for 
order flow disclosures and re-locate them to new Rule 606(a)(1)(iv), 
which would require that the discussion of the material aspects of the 
broker-dealer's relationship with a Specified Venue include 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 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.\371\
---------------------------------------------------------------------------

    \371\ See proposed Rule 606(a)(1)(iv). See Proposing Release, 
supra note 1, at 49462-63 for additional detail on the Commission's 
proposal.
---------------------------------------------------------------------------

b. Final Rule and Response to Comments
i. Rule 606(a)(1)(iii)
    The Commission is adopting Rule 606(a)(1)(iii) as proposed, and 
therefore is requiring that, for each Specified Venue, the broker-
dealer 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.\372\ 
Since these requirements are part of Rule 606(a)(1), they apply to a 
non-directed NMS stock order of any size that is submitted on a held 
basis as well as a non-directed order (whether held or not held) for an 
NMS security that is an option contract with a market value less than 
$50,000.\373\ The Commission continues to believe that identifying 
specific information regarding payments or rebates received by the 
broker-dealer and fees paid by the broker-dealer for each category of 
order type by Specified Venue will provide customers and investors 
broadly with useful information to more completely evaluate the order 
handling services provided by broker-dealers. Specifically, the 
Commission continues to believe that disclosure of the information 
required by Rule 606(a)(1)(iii) will allow customers to better 
understand a broker-dealer's management of conflicts of interest when 
routing orders to a particular Specified Venue.
---------------------------------------------------------------------------

    \372\ See Rule 606(a)(1)(iii).
    \373\ See Rule 606(a)(1); see also supra Section III.B.1.b.
---------------------------------------------------------------------------

    One commenter supported requiring the disclosure of the net 
aggregate amount of any payment for order flow or rebates received from 
or transaction fees paid to each venue based on order type on a dollar 
amount and per share basis.\374\ Two other commenters stated that an 
aggregate measure would not be meaningful and would vary based on the 
amount of order flow handled by the broker.\375\ One of these 
commenters suggested that a combination of average payment for order 
flow with a description of the terms of any payment for order flow and 
any profit sharing arrangements would be more meaningful,\376\ and the 
other commenter argued that a more meaningful disclosure is the amount 
of payment received on a per share/contract basis.\377\
---------------------------------------------------------------------------

    \374\ See CFA Letter at 9.
    \375\ See Schwab Letter at 2; Ameritrade Letter at 3-4. One of 
these commenters noted that the Commission previously considered and 
rejected imposing a requirement for brokers to disclose the 
aggregate amount of payment for order flow from each venue. See 
Ameritrade Letter at 3-4 (citing Rule 606 Predecessor Adopting 
Release, supra note 7, at 75427).
    \376\ See Schwab Letter at 2.
    \377\ See Ameritrade Letter at 3-4.
---------------------------------------------------------------------------

    The Commission agrees with commenters that the disclosure of 
payment for order flow on a per share basis will provide meaningful 
information to customers regarding the importance of a specific venue 
to their broker-dealer. The disclosure of the aggregate amount of 
payment for order flow to a broker-dealer from a specific venue will 
give customers an even greater understanding of the overall importance 
of a specific venue to their broker-dealer. The additional cost to a 
broker of providing this payment for order flow information in 
aggregate form, if that broker-dealer is already providing this 
information on a per share basis, will be minimal. The Commission 
believes that an aggregate measure of a broker-dealer's financial 
arrangements with Specified Venues will provide additional information 
to investors and customers regarding the incentives and disincentives 
underpinning a broker-dealer's routing strategy for customer orders. In 
turn, this should help give investors and customers a more complete 
understanding and comprehensive view of the potential conflicts of 
interest faced by a broker-dealer when routing orders and how the 
broker-dealer manages those conflicts. The aggregate measure will, by 
its nature, vary with the amount of the order flow handled by the 
broker-dealer, but the Commission does not believe that this renders 
the measure meaningless. To the contrary, an aggregate measure will 
provide customers and investors with transparency beyond that available 
prior to these amendments regarding the volume of orders that a broker-
dealer handles subject to payment for order flow, profit sharing, or 
other arrangements. This could be useful information to investors and 
customers trying to assess what size or type of broker-dealer would 
best suit their investment needs and goals.
    Moreover, the Commission adopted Predecessor Rule 606 primarily to 
address the serious problems that can arise from market 
fragmentation.\378\ As noted above,\379\ since Predecessor Rule 606 was 
adopted in 2000, the equity markets have become significantly more 
fragmented, dispersed, and complex, particularly in light of the onset 
of electronic, automated trading. In addition, financial inducements to 
attract order flow from broker-dealers that handle retail investor 
orders have become more prevalent and for some broker-dealers such 
inducements may be a significant source of revenue.\380\ The Commission 
understands that most broker-dealers that handle a significant amount 
of retail investor orders receive payment for order flow in connection 
with the routing of such orders or are affiliated with an OTC market 
maker that executes the orders.\381\ Thus, while one commenter pointed 
out that the Commission declined to require an aggregate measure of a 
broker-dealer's payment for order flow in Predecessor Rule 
606(a)(1),\382\ the Commission believes that the market landscape has 
changed significantly since the adoption of Predecessor Rule 606 such 
that an aggregate measure is now warranted. With increased market 
fragmentation and pervasive payment for order flow and other financial 
arrangements between broker-dealers and execution venues, the 
Commission believes that its prior concerns expressed in the Rule 606 
Predecessor Adopting Release about requiring an aggregate measure--

[[Page 58375]]

namely, potential difficulty, subjectivity and costliness in generating 
the measure due to variance in payment for order flow arrangements, and 
a potentially inaccurate portrayal of the relative financial incentives 
created by payment for order flow arrangements versus profit sharing 
arrangements \383\--today are outweighed by the need to provide 
investors and customers with a more complete understanding of the 
degree to which broker-dealers are bound to such arrangements.
---------------------------------------------------------------------------

    \378\ See Rule 606 Predecessor Adopting Release, supra note 7, 
at 75415.
    \379\ See supra Section I; see also Proposing Release, supra 
note 1, at 49436.
    \380\ See Proposing Release, supra note 1, at 49441.
    \381\ See id.
    \382\ See supra note 375.
    \383\ See Rule 606 Predecessor Adopting Release, supra note 7, 
at 75427.
---------------------------------------------------------------------------

    Additional commenters suggested other changes or limitations to 
proposed Rule 606(a)(1)(iii).\384\ Specifically, one commenter 
suggested removing fee and payment information from Rule 606(a)(1)(iii) 
and instead providing it in a narrative section of the report, which 
would include the net fees paid and net payments received in cents per 
share for each execution destination.\385\ One commenter suggested a 
more ``general disclosure'' that is more easily digestible around net 
payment for order flow, as the commenter did not believe that the 
proposed disclosures would contribute favorably to transparency for 
retail customers due to the voluminous amounts of information that they 
would produce according to the commenter.\386\ Another commenter 
suggested that payment for order flow be characterized as ``negotiated 
volume tiers,'' ``standard volume tiers,'' and ``value based'' to 
represent arrangements that are negotiated with the venue that reflect 
the perceived value of the order flow to that venue.\387\
---------------------------------------------------------------------------

    \384\ See, e.g., FIF Letter at 3, 5 and 11; FIF Addendum at 5; 
STA Letter at 3; Markit Letter at 31.
    \385\ See FIF Letter at 3, 5 and 11; FIF Addendum at 5.
    \386\ See STA Letter at 3. This commenter also suggested a 
twelve month period of time to review the new rule and determine 
whether or not there are sufficient benefits, as measured by the 
levels of retail inquiries, compared to costs of maintaining the 
reporting regime. See id. Order flow payment information will be 
contained in quarterly public reports under Rule 606(a)(1)(iii) and 
not produced based on customer inquiry.
    \387\ See Markit Letter at 31.
---------------------------------------------------------------------------

    As noted above, prior to today's rule amendments, Rule 606(a)(1) 
required a broker-dealer to 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 or any 
profit-sharing relationship. The Commission believes that the 
disclosures set forth in Rule 606(a)(1)(iii) as adopted are reasonably 
designed to provide an additional level of quantification and detail 
regarding a broker-dealer's relationship with Specified Venues that 
would help customers better assess the degree to which a broker-dealer 
faces conflicts of interests in connection with its customer order 
routing decisions, and how the broker-dealer manages those conflicts of 
interest. At the same time, the Commission does not believe that the 
information required by Rule 606(a)(1)(iii) would be overly complicated 
or burdensome for customers--and retail customers in particular--to 
consume. For example, Rule 606(a)(1) currently requires, in general, 
disclosure of any amounts per share or per order that the broker-dealer 
receives pursuant to any payment for order flow arrangement, any 
transaction rebates, and the extent to which the broker-dealer would 
share in profits derived from the execution of non-directed orders 
under any profit sharing relationship with a Specified Venue.
    While some commenters suggested that the rule require different 
methods of quantification or that the broker-dealer disclose different 
metrics related to its financial arrangements with Specific Venues, at 
this juncture, the Commission believes that the required disclosures 
set forth in Rule 606(a)(1)(iii) are reasonably designed to provide a 
significant enhancement in the usefulness of the information that 
customers receive from broker-dealers' with respect to order routing, 
and should help provide customers with a more complete understanding of 
the conflicts of interest faced by broker-dealers and how those 
conflicts are managed.
ii. Rule 606(a)(1)(iv)
    The Commission also is adopting Rule 606(a)(1)(iv) as proposed, and 
therefore is requiring that the broker-dealer report the material 
aspects of its relationship with each Specified Venue, 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 routing decision including, among other things, incentives for 
meeting or disincentives for not meeting an agreed upon order flow 
threshold, volume-based tiered payment schedules, and minimum order 
flow agreements.\388\ The Commission has acknowledged that payment for 
order flow arrangements are intensively fact-based in nature and may 
vary across broker-dealers.\389\ At the same time, in light of market 
structure changes since the Rule 606 Predecessor Adopting Release, 
among other things, the Commission continues to believe 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 order routing decisions and would provide more complete 
information for customers to better understand and evaluate a broker-
dealer's order routing decision.\390\
---------------------------------------------------------------------------

    \388\ See Rule 606(a)(1)(iv).
    \389\ See Proposing Release, supra note 1, at 49464.
    \390\ See id. at 49463-64.
---------------------------------------------------------------------------

    The Commission is requiring that a broker-dealer disclose any 
incentives that a Specified Venue provides to the broker-dealer for 
equaling or exceeding a volume threshold by offering additional 
payments or a higher rate of payment, or conversely, any disincentives 
that a Specified Venue provides to the broker-dealer for failing to 
meet an agreed upon minimum order flow threshold, such as a lower 
payment or charging a fee.\391\ 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.\392\ The Commission 
believes that such incentives and disincentives influence a broker-
dealer's decision to either meet or route additional order flow to 
exceed the threshold, and should be disclosed to inform customers of 
their broker-dealer's potential conflicts of interest. The broker-
dealer must describe any such incentives or disincentives in its 
report, such as (but not limited to) any payment amounts or rates that 
are based on target order volume flow thresholds, as these are terms of 
the broker-dealer's relationship with the Specified Venue that may 
influence its routing decision; it is not sufficient for the broker-
dealer just to disclose the fact that an incentive or disincentive 
exists.
---------------------------------------------------------------------------

    \391\ See Rule 606(a)(1)(iv)(A) through (B).
    \392\ See Proposing Release, supra note 1, at 49463-64.
---------------------------------------------------------------------------

    Further, the Commission is requiring broker-dealers to disclose any 
volume-based tiered payment schedules with a Specified Venue.\393\ 
Venues that offer these payment schedules typically offer incrementally 
higher rebates or lower fees to broker-dealers for additional order 
flow volume.\394\ The Commission believes that these payment schedules 
can encourage a broker-dealer to route additional order flow to such 
venue in

[[Page 58376]]

an effort to reap a financial benefit and should be disclosed.
---------------------------------------------------------------------------

    \393\ See Rule 606(a)(1)(iv)(C).
    \394\ See Proposing Release, supra note 1, at 49463-64.
---------------------------------------------------------------------------

    Additionally, the Commission is requiring broker-dealers to 
disclose agreements regarding the minimum amount of order flow that a 
broker-dealer would be required to send to a Specified Venue.\395\ 
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.\396\ The Commission believes that such 
disclosures would help customers evaluate whether their broker-dealers 
face conflicts of interest when determining where to route their 
orders.
---------------------------------------------------------------------------

    \395\ See Rule 606(a)(1)(iv)(D).
    \396\ See Proposing Release, supra note 1, at 49463-64.
---------------------------------------------------------------------------

    Finally, the Commission acknowledges that as market structure 
evolves, new types of arrangements not specifically listed may arise. 
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 order 
routing decision that are required to be disclosed. Rule 606(a)(1)(iv) 
requires a discussion of the material aspects of the broker-dealer's 
relationship with each Specified Venue, including a description of any 
terms of such payment for order flow or profit-sharing arrangements 
that may influence a broker-dealer's order routing decision for the 
orders covered by Rule 606(a)(1),\397\ which orders, as discussed 
above, include any non-directed NMS stock order of any size that is 
submitted on a held basis as well as any non-directed order (whether 
held or not held) for an NMS security that is an option contract with a 
market value less than $50,000.\398\
---------------------------------------------------------------------------

    \397\ For example, if a broker-dealer receives a discount on 
executions in other securities or some other advantage for directing 
order flow in a specific security to a Specified Venue, or if a 
broker-dealer receives equity rights in a Specified Venue in 
exchange for directing order flow there, then all terms of that 
arrangement must be disclosed including any securities covered by 
the arrangement with any and all terms of the arrangement specific 
to each security. If a broker-dealer receives variable payments or 
discounts based on order types and the amount of such orders sent to 
a Specified Venue, e.g., marketable orders, non-marketable orders, 
or auction orders, then all terms of that arrangement must be 
disclosed. In addition, because such arrangements would influence a 
broker-dealer's order routing decision, the amended rule requires 
disclosure of the details of any arrangement between a broker-dealer 
and a Specified Venue where the level of execution quality is 
negotiated for an increase or decrease in payment for order flow.
    \398\ See Rule 606(a)(1); see also supra Section III.B.1.b.
---------------------------------------------------------------------------

    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 believes that disclosure of such 
information will 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 their orders are routed. The Commission further believes that 
providing customers a comprehensive description of such quantifiable 
terms of a broker-dealer's relationship with a Specified Venue will 
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.
    Some commenters supported the disclosure of any agreement that may 
influence a broker-dealer's routing decisions, including oral 
agreements or arrangements.\399\ One commenter explicitly supported the 
disclosure of payment for order-flow and profit-sharing arrangements 
between broker-dealers and specified venues, including whether or not 
the broker-dealer passes on any of the rebates or order-flow payments 
to the same customers whose orders generated such payments.\400\ One 
commenter suggested further requiring broker-dealers to describe in 
more meaningful terms any payment for order flow arrangements and 
profit-sharing relationships with certain venues that may influence 
their order routing decisions.\401\ This commenter supported the 
proposed enhanced disclosures but expressed concern that they only 
require broker-dealers to provide a discussion of the material aspects 
of their relationship with the top venues to which they route.\402\ One 
commenter, however, believed that the proposed description of terms for 
payment for order flow arrangements would result in the disclosure of a 
large and unnecessary amount of information.\403\ Another commenter 
believed that enhanced disclosures may result more in confusion than 
clarity and that the information contained in the current disclosures 
is generally adequate.\404\
---------------------------------------------------------------------------

    \399\ See, e.g., HMA Letter at 11; Markit Letter at 31.
    \400\ See Better Markets Letter at 4-6.
    \401\ See CFA Letter at 9.
    \402\ See CFA Letter at 5.
    \403\ See Fidelity Letter at 9. The commenter requested clarity 
regarding whether this requirement means that broker-dealers must 
duplicate exchange's rule filings containing volume tiered pricing. 
See id. The Commission does not believe that such filings must be 
``duplicated'' in an order routing report. However, the terms of 
payments from an exchange must be included in the discussion of the 
arrangement of terms with the Specified Venue.
    \404\ See FIF Letter at 11.
---------------------------------------------------------------------------

    Rule 606(a)(1) requires a discussion of the material aspects of a 
broker-dealer's relationship with a Specified Venue regarding payment 
for order-flow or profit-sharing. The expansion contained in new Rule 
606(a)(1)(iv) is intended to capture all such arrangements with 
Specified Venues as all such arrangements--whether written or oral--may 
be relevant to the customer. The Commission acknowledges that some 
commenters supported additional disclosure in Rule 606(a)(1)(iv), while 
two commenters--representing the brokers who will be providing this 
information as opposed to retail customers themselves--believed that 
Rule 606(a)(i)(iv), as proposed, would disclose too much information to 
retail customers. The Commission believes that Rule 606(a)(1)(iv) 
strikes an appropriate balance by, on one hand, providing customers 
with disclosures that will better enable them to assess their broker-
dealers' payment for order flow arrangements and profit-sharing 
relationships, and the potential for resulting conflicts of interest, 
while on the other hand providing information that will not be overly 
voluminous or difficult to comprehend. The Commission believes the 
information contained in the reports should be straightforward to 
customers familiar with the operation of the markets, and will thus 
generally conform to EMSAC's recommendations regarding clarity and 
comprehension of the reports. To the extent a customer does not 
understand these disclosures, the Commission expects that the customer 
would ask its broker-dealer for greater explanation of the arrangement.
4. Format of Public Order Routing Report
a. Proposal
    The Commission proposed to require that the publicly available 
quarterly order routing report required by Rule 606(a)(1) be made 
available using an XML schema and associated PDF renderer published on 
the Commission's website.\405\ The Commission also proposed to amend 
Rule 606(a)(1) to require every broker-dealer to keep the Rule 
606(a)(1) reports posted on a website that is free and readily 
accessible to the public for a period of

[[Page 58377]]

three years from the initial date of posting on the website.\406\ These 
proposed requirements were based on considerations similar to those 
supporting the parallel format and website retention proposals for 
order routing reports under proposed Rule 606(c).\407\
---------------------------------------------------------------------------

    \405\ See proposed Rule 606(a)(1).
    \406\ See id.
    \407\ See Proposing Release, supra note 1, at 49465-66 for 
additional detail on the Commission's proposal.
---------------------------------------------------------------------------

b. Final Rule and Response to Comments
i. XML/PDF Format
    The Commission is adopting as proposed the requirement that the 
public order handling reports required under Rule 606(a)(1) be made 
available using an XML schema and associated PDF renderer published on 
the Commission's website. Of the comments received on the proposed 
reporting format, most supported a machine-readable or standardized 
format \408\ or XML in particular.\409\ The use of XML has been adopted 
in a number of recent Commission rulemakings \410\ and the Proposal to 
use an XML format here was supported by most commenters.\411\ The 
Commission believes that it is appropriate, and would be useful to the 
broadest segment of market participants, to adopt the requirement that 
the customer-specific and publicly available quarterly customer order 
routing reports be made available using an XML schema to be published 
on the Commission's website.
---------------------------------------------------------------------------

    \408\ See, e.g., HMA Letter at 12; Markit Letter at 17.
    \409\ See, e.g., Capital Group Letter at 4; Better Markets 
Letter at 2; CFA Letter at 11; FIA Letter at 2.
    \410\ See, e.g., Securities Exchange Act Release Nos. 79095, 81 
FR 81870 (November 18, 2016) (adopting Investment Company Reporting 
Modernization); 74246, 80 FR 14437 (March 19, 2015) (adopting 
Security-Based Swap Data Repository Registration, Duties, and Core 
Principles); 72982 (September 4, 2014), 79 FR 57183 (September 24, 
2014) (adopting Asset-Backed Securities Disclosure and 
Registration).
    \411\ See, e.g., Capital Group Letter at 4; Better Markets 
Letter at 2; FIF Letter at 17; CFA Letter at 11; FIA Letter at 2. 
For a detailed discussion of comments relating to the XML format, 
see supra Section III.A.5.c.ii.
---------------------------------------------------------------------------

    The Commission continues to believe that providing the Rule 
606(a)(1) quarterly public reports in the proposed format will promote 
consistency and comparability of the reports. In contrast to 
commenters' views noted above, the Commission believes that providing 
these reports in the commonly used PDF/XML format will create benefits 
of consistency and comparability of the reports for customers that 
justify the costs. Accordingly, the Commission believes that it is 
appropriate to adopt the amendment to Rule 606(a)(1) to require that 
the quarterly public order routing report be made available using an 
XML schema and associated PDF renderer published on the Commission's 
website.\412\
---------------------------------------------------------------------------

    \412\ As discussed above, several commenters suggested 
alternatives to the general use of an XML schema and associated PDF 
renderer for the report, and other commenters called generally for 
the inclusion of standardized headers for the report. See supra 
Section III.A.5.c. The Commission is adopting the proposed use of 
the XML schema and associated PDF renderer without header 
information for the same reasons detailed above.
---------------------------------------------------------------------------

ii. Retention of Rule 606(a)(1) Reports
    The Commission is adopting as proposed the amendment to Rule 
606(a)(1) to require every broker-dealer to keep the reports required 
by Rule 606(a)(1) posted on a website that is free and readily 
accessible to the public for a period of three years from the initial 
date of posting on the website.\413\ The Commission received comments 
addressing the proposed retention period of three years,\414\ with one 
commenter supporting it,\415\ and other commenters calling for 
different retention periods.\416\ The Commission believes that it is 
appropriate to require that the publicly available quarterly order 
routing reports under Rule 606(a)(1) be maintained for a period of 
three years from the date of initial posting in light of the 
consistency of this requirement with the requirement under Rule 17a-
4(b) that broker-dealers preserve certain documents for a period of not 
less than three years.\417\ While one commenter noted that Rule 17a-
4(b) only requires that the documents be preserved in an ``easily 
accessible place'' for the first two years,\418\ the Commission 
believes that due to the public nature of the reports, the utility and 
purpose of the reports, and the low burden of maintaining data on a 
website for an additional year, the reports should be retained on a 
public website for the full three years as proposed. Accordingly, the 
Commission is adopting as proposed the requirement that the Rule 
606(a)(1) publicly available quarterly order handling report be kept 
posted on a website that is free and readily accessible to the public 
for a period of three years from the initial date of posting on the 
website.
---------------------------------------------------------------------------

    \413\ See Rule 606(a)(1).
    \414\ See Citadel Letter at 1; FIF Letter at 13; Markit Letter 
at 29.
    \415\ See Citadel Letter at 1.
    \416\ See FIF Letter at 13; Markit Letter at 29.
    \417\ See 17 CFR 242.17a-4(b).
    \418\ See FIF Letter at 13.
---------------------------------------------------------------------------

    In a related issue, in question 116 of the Proposing Release, the 
Commission asked whether it should require broker-dealers to make 
publicly available the prior three years' worth of quarterly reports 
from the effective date of the rule.\419\ One commenter opposed this 
suggestion, commenting that it would be an extremely large undertaking, 
and noting that circumstances may have changed over the last two to 
three years that would make comparison of the data difficult and 
possibly misleading.\420\ The Commission believes that it should not 
adopt a requirement to make publicly available the prior three years' 
worth of publicly available quarterly order routing reports from the 
effective date of the rule, as this requirement may be too burdensome 
and result in data that is not easily comparable across broker-dealers. 
Nevertheless, while broker-dealers are not required by rule to post on 
their website past Rule 606(a)(1) reports that were created prior to 
the amended rule's effectiveness, the Commission believes that making 
historical Rule 606(a) data available to customers and the public could 
be useful to customers or market participants seeking to analyze past 
routing behavior of broker-dealers. As such, the Commission notes that 
broker-dealers are neither prevented nor discouraged from voluntarily 
and publicly disclosing such historical data. The Commission believes 
that some broker-dealers may engage in such voluntary disclosure in an 
effort to compete more effectively for order flow by providing even 
greater transparency than what is required under the rule.
---------------------------------------------------------------------------

    \419\ See Proposing Release, supra note 1, at 49466.
    \420\ See FIF Letter at 13.
---------------------------------------------------------------------------

    The Commission also received comments addressing whether broker-
dealers should be required to make the reports available on their own 
websites or on a centralized website.\421\ Three commenters supported 
centralizing reporting, specifically recommending that either FINRA or 
the Commission host the data.\422\ One commenter stated that it did not 
necessarily think that the Commission or FINRA should be forced to 
cover the expense of maintaining a centralized website as long as the 
data can be found publicly.\423\
---------------------------------------------------------------------------

    \421\ See Proposing Release, supra note 1, at 49461, 49466; HMA 
Letter at 4; FIA Letter at 1; FIF Letter at 13; CFA Letter at 11; 
HMA II Letter at 4, 7-8.
    \422\ See HMA Letter at 4, 7-8; FIF Letter at 13; CFA Letter at 
11.
    \423\ See Markit Letter at 29.
---------------------------------------------------------------------------

    One of the chief goals of the rule amendments being adopted today 
is to enable customers to more readily and meaningfully assess broker-
dealers' order handling practices. The

[[Page 58378]]

Commission acknowledges that locating each broker-dealer's Rule 
606(a)(1) report in a centralized repository could help facilitate that 
goal. At the same time, there are potentially significant cost and time 
delays associated with developing a centralized repository and the 
related mechanisms for allowing individual broker-dealers to upload and 
manage their reports in a safe and secure manner. The Commission 
believes that the obstacles associated with developing a centralized 
repository pose a greater risk of hindering customers' ability to 
assess broker-dealer order routing performance than is posed by the 
necessity of accessing each broker-dealer's Rule 606(a) report on the 
particular broker-dealer's website in the absence of a centralized 
repository. Accordingly, the Commission is not adopting an additional 
requirement that the Rule 606(a) quarterly public order handling 
reports be maintained in a centralized public repository.
5. Division of Rule 606(a) Report's Section on NMS Stocks by S&P 500 
Index and Other NMS Stocks
a. Proposal
    The Commission proposed to amend Rule 606(a)(1) to remove the 
requirement that Rule 606(a)(1) reports 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 or any other national securities exchange.\424\ 
By proposing to remove this requirement, the Commission intended to 
require broker-dealers to disclose the required order routing 
information for NMS stocks as a group rather than divided by listing 
market.
---------------------------------------------------------------------------

    \424\ See proposed Rule 606(a)(1). See Proposing Release, supra 
note 1, at 49465 for additional detail on the Commission's proposal.
---------------------------------------------------------------------------

b. Final Rule and Response to Comments
    The Commission is adopting as proposed the amendment to remove the 
requirement that Rule 606(a)(1) reports 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 or any other national securities exchange. The 
Commission notes that the language is stale, as NASDAQ is now 
registered as a national securities exchange and the American Stock 
Exchange is now known as NYSE American LLC.\425\ Further, the 
Commission continues to believe that separating the Rule 606(a) order 
routing reports by primary listing market is not particularly useful to 
customers for the reasons noted in the Proposal.\426\ When the 
Commission adopted what became Rule 606 (then Rule 11Ac1-6) in 2000, 
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 
was a quote-driven dealer market and not yet a national securities 
exchange. Today, with the adoption of Regulation NMS and considerable 
advancements in computerized trading technology, the trading landscape 
is highly automated, dominated by electronic trading, and more widely 
dispersed across different trading venues. As a result, the primary 
listing markets no longer factor as prominently as they once did in the 
execution of the securities that they list. In addition, the commenters 
who addressed the issue supported the removal of the division of the 
Rule 606(a) reports by listing market.\427\ Accordingly, the Commission 
believes that the division of the Rule 606(a) reports by listing market 
is no longer warranted or appropriate, as such division is no longer 
particularly useful to customers interested in analyzing their broker-
dealers' routing practices.\428\
---------------------------------------------------------------------------

    \425\ See Rule 606 Predecessor Adopting Release, supra note 7. 
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). In March 2017, NYSE MKT LLC was renamed 
``NYSE American LLC.'' See Securities Exchange Act Release No. 80283 
(March 21, 2017), 82 FR 15244 (March 27, 2017) (SR-NYSEMKT-2017-14).
    \426\ 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), available 
at http://www.sec.gov/spotlight/emsac/memo-rule-611-regulation-nms.pdf.
    \427\ See Markit Letter at 32; Fidelity Letter at 9; FIF Letter 
at 12.
    \428\ See FIF Letter at 3.
---------------------------------------------------------------------------

    The Commission requested comment in the Proposing Release regarding 
whether the Rule 606(a) public order routing reports should instead be 
categorized according to whether a particular security is included in 
the Standards & Poor's 500 (``S&P 500'') index.\429\ Multiple 
commenters believed that categorization by S&P 500 index would be 
useful,\430\ while one commenter believed that segmenting by S&P 500 
stocks and other stocks may be too complex.\431\ One commenter stated 
that subscription to the S&P 500 index would present a cost to broker-
dealers and the commenter would only recommend such S&P 500 index 
categorization if broker-dealers would not incur an additional 
cost.\432\ In addition, the EMSAC recommended, among other things, that 
Rule 606 reports be divided by securities included in the S&P 500 Index 
and other NMS stocks.\433\
---------------------------------------------------------------------------

    \429\ See Proposing Release, supra note 1, at 49466.
    \430\ See Markit Letter at 32; Fidelity Letter at 9; Schwab 
Letter at 3.
    \431\ See FIF Letter at 12.
    \432\ See Markit Letter at 32.
    \433\ See EMSAC Rule 606 Recommendations, supra note 16.
---------------------------------------------------------------------------

    While the Commission believes that the handling of NMS stocks no 
longer varies materially based on their primary listing market, the 
Commission believes that the handling of NMS stocks may vary based on 
their market capitalization value and trading volume. Thus, customers 
that place held orders in NMS stock could benefit from a delineation 
based on S&P 500 index in the Rule 606(a)(1) report. Inclusion in the 
S&P 500 is based on a variety of factors that may be of utility to 
customers when reviewing their disclosures, including that S&P 500 
constituents must be U.S. companies and must meet market 
capitalization, public float, financial viability, liquidity, and price 
requirements.\434\ As a result, the Commission is requiring that the 
Rule 606(a)(1) report be categorized by whether the security is 
included S&P 500 index as of the first day of the quarter or is another 
NMS stock.\435\ The Commission also notes that the list of securities 
included in the S&P 500 index is readily available on the internet on 
many free websites, and thus there should be minimal cost to broker-
dealers to remain abreast of the composition of the index.\436\ The

[[Page 58379]]

Commission further notes that many data dissemination services obtain 
this information from the S&P and redistribute this information as part 
of data packages consumed by broker-dealers as a part of the broker-
dealers normal course of business.\437\ Thus, the Commission believes 
that there will be few or no additional data costs to broker-dealers 
resulting from this requirement. The Commission believes that this 
amendment would help further modernize the Rule 606(a)(1) report and 
provide customers that place held NMS stock orders--and retail 
investors in particular--with more relevant information about how their 
orders are routed.
---------------------------------------------------------------------------

    \434\ See S&P 500 Fact Sheet, available at https://us.spindices.com/indices/equity/sp-500.
    \435\ See Rule 606(a)(1). The Commission understands that 
securities may move in and out of the S&P 500 during a quarter, but 
that such movement is not common. The Commission further believes 
requiring the reporting based on the composition as of the first day 
of the quarter will be easily administrable and will allow broker-
dealers to know what securities they will need to track throughout 
the quarter for inclusion in this reporting category.
    \436\ The Commission further notes that changes to the 
composition of the S&P 500 are publicly announced. See, e.g., Press 
Release, S&P Dow Jones Indices, Huntington Ingalls Industries Set to 
Join S&P 500; Scientific Games to Join S&P MidCap 400 and Ultra 
Clean Holdings to Join S&P SmallCap 600 (December 28, 2017), 
available at https://us.spindices.com/documents/index-news-and-announcements/20171228-spdji-bard-huntington-games-ultra-press-release.pdf.
    \437\ The Commission understands that broker-dealers have access 
to the constituent list for the S&P 500 through data feeds available 
from widely used data dissemination services, such as Bloomberg, 
Thomson Reuters, and Morningstar. The Commission understands that 
most broker-dealers already pay for data feeds that contain this 
composition information.
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6. Calendar Month Breakdown
a. Proposal
    The Commission proposed to amend Rule 606(a)(1) to require that the 
public order routing reports required by the rule be broken down by 
calendar month.\438\ Rule 606(a)(1) currently requires that broker-
dealers make order routing reports publicly available for each calendar 
quarter, and that such reports contain aggregate quarterly information 
on order routing.
---------------------------------------------------------------------------

    \438\ See proposed Rule 606(a)(1). See Proposing Release, supra 
note 1, at 49465 for additional detail on the Commission's proposal.
---------------------------------------------------------------------------

b. Final Rule and Response to Comments
    The Commission is adopting as proposed the amendment to Rule 
606(a)(1) to require that the publicly available quarterly order 
routing reports be broken down by calendar month.\439\ Several 
commenters supported the proposed break-down by calendar month or 
proposed requiring that the reports be made available on a monthly 
basis.\440\ Another commenter believed that a quarterly breakdown is 
adequate, and that monthly reports would not add value but rather could 
confuse investors.\441\
---------------------------------------------------------------------------

    \439\ See Rule 606(a)(1).
    \440\ See, e.g., Markit Letter at 29; Fidelity Letter at 9.
    \441\ See FIF Letter at 13.
---------------------------------------------------------------------------

    The Commission believes that disclosing the information contained 
in the Rule 606(a)(1) reports by calendar month will 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. In particular, a calendar-month breakdown 
will provide customers and market participants generally with greater 
insight into any month-to-month changes in routing behavior by broker-
dealers in response to monthly changes in trading center fee 
structures.\442\ As indicated by the support expressed by commenters 
for a calendar-month breakdown, the Commission believes that such 
insight could be valuable to customers attempting to assess the quality 
of broker-dealer order routing services and the extent to which broker-
dealers engage in rebate-seeking or fee-avoiding behavior when routing 
customer orders. The Commission does not believe that presenting the 
information as a monthly breakdown would be more confusing than the 
current presentation of the information in the aggregate for the entire 
quarter covered by the report.
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    \442\ The Commission understands that trading centers generally 
bill in monthly increments and modify their fee structures to 
reflect such monthly billing. See Proposing Release, supra note 1 at 
49465, and see, e.g., Securities Exchange Act Release No. 83025 
(April 10, 2018), 83 FR 16410 (April 16, 2018) (SR-NASDAQ-2018-25).
---------------------------------------------------------------------------

7. Execution Metrics
    As discussed above, the Commission is adopting targeted, limited 
enhancements to the public order routing disclosures required under 
Rules 606(a)(1) that are designed to shed additional light on broker-
dealers' routing practices and the extent to which broker-dealers 
encounter and manage potential conflicts of interest stemming from 
payment-for-order flow arrangements, profit-sharing relationships, 
trading venue fees and rebates, or other factors. As the Commission 
previously noted, commenters were broadly supportive of these enhanced 
order routing disclosures.\443\ However, the EMSAC and several 
commenters suggested further enhancements to these disclosures--many 
specifically to include more or different execution quality 
statistics.\444\
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    \443\ See, e.g., KCG Letter at 1-3; STA Letter I at 2-4; 
Ameritrade Letter at 3; Better Markets Letter at 1, 8-9; HMA Letter 
at 2-4; FSR Letter at 1; Citadel Letter at 1; CFA Letter at 1.
    \444\ See EMSAC Rule 606 Recommendations, supra note 16, at 
3Markit Letter at 8-10, 25, 30; Fidelity Letter at 6-; Better 
Markets Letter at 3-8; Angel Letter at 3-7CFA Letter at 10; Schwab 
Letter at 2; HMA Letter at 7, 10-12; Ameritrade Letter at 3.
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    As noted above, the Commission purposely did not propose 
significant enhancements or modifications to the Rule 606(a) public 
reports and did not include enhanced requirements regarding execution 
statistics. Rather, the Commission proposed targeted, limited 
enhancements in Rule 606(a) that focus on financial inducements 
connected to broker-dealers' order routing. The Commission believes 
that these enhancements are appropriately designed to enable 
customers--and retail customers in particular--to better assess their 
broker-dealers' order routing performance and, in particular, potential 
conflicts of interest that their broker-dealers face when routing their 
orders and how their broker-dealers manage those potential conflicts.
    Accordingly, the Commission continues to believe that the limited 
modifications to Rule 606(a) as proposed are reasonably designed to 
further the goal of enhancing transparency regarding broker-dealers' 
order routing practices and customers' ability to assess the quality of 
those practices. The Commission does not believe that it is necessary 
for the achievement of this goal to require, at this time, that the 
Rule 606(a) public order handling reports include the additional, 
specific execution quality statistics suggested by some commenters. The 
additional disclosures suggested by the commenters would raise 
compliance costs and add to the complexity of the report. In adopting 
the amendments to the report, the Commission is seeking a balance 
between updating the current reports to provide useful additional 
information to customers and the cost of compliance by broker-dealers. 
The Commission believes that the required disclosures, including the 
new disclosures adopted today, contain sufficient information for 
customers to make an informed decision to evaluate their broker-
dealers' order routing performance. In order to reach this balance 
between cost and benefit, the Commission is not adopting the additional 
disclosures recommended by commenters at this time.
    The Commission notes, as stated above, that this determination is 
not an indication that the Commission has formed a decision on the 
validity or usefulness of the various different execution quality 
statistics that commenters suggested. Rather, in light of the 
Commission's belief that Rule 606(a), as proposed, provides an 
appropriate level of insight into the widespread financial arrangements 
between broker-dealers and execution venues that may affect broker-
dealers' order routing decisions, the Commission believes that it is an 
appropriate and a balanced approach at this juncture to adopt Rule 
606(a) as proposed. The

[[Page 58380]]

Commission believes that adopting the Rule 606(a) report content as 
proposed will help minimize the reporting complexity and costs, and 
help create a report that is more universally useful across the 
spectrum of customers.
C. Amendment to Disclosure of Order Execution Information
    The Commission proposed to amend Rule 605(a)(2) to require market 
centers to keep reports required pursuant to Rule 605(a)(1) posted on a 
website that is free and readily accessible to the public for a period 
of three years from the initial date of posting on the website.\445\ 
One commenter supported the Proposal,\446\ while another commenter 
suggested a two-year time period and further suggested that comparing 
what it characterized as ``out-of-date'' information may lead to 
misleading analysis due to circumstances changing over time.\447\
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    \445\ See Proposing Release, supra note 1, at 49466.
    \446\ See Citadel Letter.
    \447\ See FIF Letter.
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    The Commission is adopting, without any change, the proposed 
amendment to Rule 605(a)(2) to require market centers to keep reports 
required pursuant to Rule 605(a)(1) posted on a website that is free 
and readily accessible to the public for a period of three years from 
the initial date of posting on the website.\448\ While one commenter 
suggested a two-year posting period instead of a three-year period, the 
three-year period is consistent with the identical posting requirement 
for the Rule 606(a)(1) reports that the Commission is adopting today 
and, for the same reasons as expressed with regard to the Rule 606(a) 
report, the Commission believes that the three-year posting requirement 
is appropriate. In particular, the Commission notes, again, that a 
three-year retention period is consistent with the requirement under 
Rule 17a-4(b) that broker-dealers preserve certain documents for a 
period of not less than three years.\449\ Furthermore, while all 
historical reports would be ``out-of-date'' information, the Commission 
believes that the reports will be useful and not lead to misleading 
analyses because the Commission expects customers and the public to use 
the historical information to compare information from the same time 
period. The public information also will provide a historical record of 
a market center's order execution information. As also noted above, 
even though market centers are not required by rule to post on their 
website past Rule 605(a) reports that were created prior to the amended 
rule's effectiveness, the Commission believes that making historical 
data available to customers and the public could be useful to customers 
or market participants seeking to analyze such data, and market centers 
are neither prevented nor discouraged from voluntarily and publicly 
disclosing such historical data.
---------------------------------------------------------------------------

    \448\ See Rule 605(a)(2).
    \449\ See 17 CFR 242.17a-4(b)
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

    Certain provisions that the Commission is adopting today contain 
``collection of information requirements'' within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\450\ The Commission 
published a notice requesting comment on the collection of information 
requirements in the Proposing Release \451\ and submitted relevant 
information to the Office of Management and Budget for review in 
accordance with the PRA.\452\ 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 a 
manner that does not alter the collection of information burden 
estimate. Compliance with these collections of information requirements 
is mandatory. 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.
---------------------------------------------------------------------------

    \450\ 44 U.S.C. 3501 et seq.
    \451\ See Proposing Release, supra note 1, at 49477.
    \452\ 44 U.S.C. 3507; 5 CFR 1320.11.
---------------------------------------------------------------------------

    The hours and costs associated with complying with the rule 
amendments being adopted today constitute reporting and cost burdens 
imposed by the collection of information for Rule 606. As described in 
more detail below, certain estimates have been modified, as necessary, 
to conform to the adopted amendments and to reflect the most recent 
data available to the Commission.
    The Commission requested comment on the collection of information 
requirements in the Proposing Release. As noted above, the Commission 
received comment on the Proposing Release. Views of commenters relevant 
to the Commission's analysis of burdens, costs, and benefits of the 
rule amendments being adopted today are discussed below.

A. Summary of Collection of Information

    The amendments to Rule 606, as adopted, contain ``collection of 
information requirements'' within the meaning of the PRA for broker-
dealers that receive and handle certain orders in NMS stocks. As 
detailed in Section III, supra, in adopting the amendments, the 
Commission has made certain changes to the amendments as originally 
proposed.
1. Customer-Specific Disclosures Under Rule 606(b)(3)
    Rule 606(b)(3) of Regulation NMS, as adopted, requires a broker-
dealer, on request of a customer that places with the broker-dealer, 
directly or indirectly, NMS stock orders of any size that are submitted 
on a not held basis (subject to two de minimis exceptions) to 
electronically disclose to such customer within seven business days of 
receiving the request, a report on the broker-dealer's handling of such 
orders for that customer for the prior six months, broken down by 
calendar month. 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 orders handled by the broker-dealer, 
as described below, categorized by venue and separated by directed and 
non-directed orders.\453\
---------------------------------------------------------------------------

    \453\ See supra Sections III.A.6.a.ii, III.A.6.b.ii.
---------------------------------------------------------------------------

2. Amendment to Current Public and Customer-Specific Disclosures
    Rule 606(a) of Regulation NMS, as amended: (1) Breaks down the 
existing limit order disclosures into separate categories of marketable 
limit orders and non-marketable limit orders; \454\ (2) requires 
certain disclosures for each Specified Venue; \455\ (3) requires 
certain disclosures by broker-dealers relating to terms of payment for 
order flow arrangements and profit-sharing relationships; \456\ (4) 
requires that such reports be broken down by calendar month; \457\ (5) 
requires that such reports be kept posted on a website that is free and 
readily accessible to the public for a period of three years from the 
initial date of posting on the website; \458\ and (6) replaces the 
requirement that the Rule 606(a)(1) report be divided into three 
separate categories by listing market with a requirement that the 
report be divided into two categories: Securities included in the S&P 
500

[[Page 58381]]

Index as of the first day of the quarter; and other NMS stocks.\459\ 
These disclosures are available for non-directed orders in NMS stocks 
submitted on a held basis having any market value. For orders in NMS 
securities that are option contracts, these disclosures are available 
whether the order is submitted on a held or not held basis, but only 
for customer orders, i.e., orders having a market value of less than 
$50,000.\460\
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    \454\ See supra Section III.B.2.
    \455\ See supra Section III.B.3.
    \456\ See id.
    \457\ See supra Section III.B.6.
    \458\ See supra Section III.B.4.
    \459\ See supra Section III.B.5.
    \460\ See supra Section III.B.1.
---------------------------------------------------------------------------

    Rule 606(b)(1), as amended, does not modify any of the current 
customer-specific disclosure requirements but only requires those 
disclosures for certain categories of orders. Broker-dealers must now 
provide the information only for: (i) Orders in NMS stocks that are 
submitted on a held basis; (ii) orders in NMS stocks that are submitted 
on a not held basis and are exempt from the disclosure requirements of 
Rule 606(b)(3); or (iii) orders in NMS securities that are option 
contracts.
    The 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 website.
3. Amendment to Current Disclosures Under Rule 605
    Rule 605(a)(2), as amended, requires market centers to keep reports 
required pursuant to the Rule 605(a)(1) posted on a website that is 
free and readily accessible to the public for a period of three years 
from the initial date of posting on the website.

B. Use of Information

    The order handling disclosures required under the adopted 
amendments to Rule 606 will provide more detailed information to 
customers that will enable them to evaluate how their orders were 
handled by their broker-dealers, assess potential conflicts of interest 
facing their broker-dealers in providing order handling services, and 
have the ability to engage in informed discussions with their broker-
dealers about the broker-dealer's order handling practices. The adopted 
order handling disclosures can inform future decisions on whether to 
retain a broker-dealer's services or engage the 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-Specific Disclosures Under Rule 606(b)(3)
    Rule 606(b)(3), as adopted, provides detailed order routing and 
execution information to a customer regarding its specific NMS stock 
orders of any size that are submitted on a not held basis (subject to 
two de minimis exceptions) during the reporting period. Generally, the 
five groups of information contained in the order handling report will 
enable customers to understand where and how their not held NMS stock 
orders were routed or exposed, as well as where their orders were 
executed during the reporting period. Customers may use the information 
contained in the order handling report to assess any considerations a 
broker-dealer may have faced when routing its not held NMS stock orders 
to various venues and whether those considerations may have affected 
how a broker-dealer handled its orders, as well as to assess whether a 
broker-dealer's order routing practices may have led to risks of 
information leakage.\461\
---------------------------------------------------------------------------

    \461\ See Proposing Release, supra note 1, at 49468.
---------------------------------------------------------------------------

    The requirement that broker-dealers produce one report for directed 
orders and one report for non-directed orders will provide a customer 
with a more precise reflection of how and where its broker-dealer is 
routing the customer's not held NMS stock orders pursuant to the 
discretion it is afforded.\462\ As noted above, customers may use the 
order handling disclosures to inform future decisions on whether to 
retain a broker-dealer's services or engage the services of a new 
broker-dealer.
---------------------------------------------------------------------------

    \462\ See supra Section III.A.5.b.
---------------------------------------------------------------------------

2. Amendment to Current Public and Customer-Specific Disclosures
    Rule 606(a), as amended, requires broker-dealers to break down the 
limit order disclosure in the public order routing reports into 
separate categories of marketable limit orders and non-marketable limit 
orders.\463\ The adopted requirement of Rule 606(a) 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, may allow customers to determine 
how broker-dealers route different types of orders relative to any 
economic benefit or consequence to the broker-dealer. The requirement 
in adopted Rule 606(a)(1) that the quarterly reports be broken down by 
calendar month may allow customers to determine whether and how their 
broker-dealers' 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 adopted requirement that such 
reports be kept posted on a website for three years may allow customers 
and others, such as researchers, to analyze historical routing behavior 
of particular broker-dealers. The adopted requirement that broker-
dealers categorize the quarterly public Rule 606(a)(1) disclosure by 
securities included in the S&P 500 Index and other NMS stocks should 
provide customers and the public with more detailed information on 
securities that have more similar liquidity and trading 
characteristics, and should provide a clearer way for customers to 
review order routing information for securities included in the S&P 500 
Index, which attract significant trading interest.\464\ In addition, 
the adopted 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, may allow customers to understand how their broker-
dealers route their orders and whether and how such routing is 
influenced by payment for order flow and/or a profit-sharing 
relationship.
---------------------------------------------------------------------------

    \463\ The Commission discussed the general use of this 
collection in the Proposing Release. See Proposing Release, supra 
note 1, at 49468-69.
    \464\ See supra Section III.B.5.
---------------------------------------------------------------------------

    As noted above, the amendments to Rule 606(b)(1) do not create new 
data collection obligations but require the disclosures for certain 
categories of orders.
3. Amendment to Current Disclosures Under Rule 605
    The adopted requirement that reports required under Rule 605 be 
kept posted on a website that is free and readily accessible to the 
public for a period of three years from the initial date of posting on 
the website may allow customers and others to analyze historical order 
execution quality at various market centers, such as researchers that 
could provide analysis to better inform investors. The three years of 
data may 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.

[[Page 58382]]

C. Respondents

    The respondents to the amendments being adopted today are broker-
dealers that handle held orders and not held orders received from 
customers and market centers that create reports pursuant to Rule 605.
1. Initial Estimate
    In the proposing release the Commission estimated, as of December 
2015, that there were approximately 4,156 total registered broker-
dealers. Of these, the Commission estimated that 266 were broker-
dealers that route retail orders. The Commission estimated that 200 
broker-dealers were involved in the practice of routing institutional 
orders, all of whom also routed retail orders. The Commission estimated 
that there were 380 market centers to which Rule 605 applies.\465\
---------------------------------------------------------------------------

    \465\ See Proposing Release, supra note 1, at 49469.
---------------------------------------------------------------------------

2. Estimate for Adopted Rule [Amendments to 605 and 606]
    The Commission estimates that of the approximately 4,024 total 
registered broker-dealers,\466\ 292 are broker-dealers that handle 
orders in NMS stocks on a held basis that would be subject to the 
public disclosure requirements of Rule 606(a) or the current customer-
specific disclosure requirements of Rule 606(b)(1).\467\ The Commission 
estimates that 200 broker-dealers would be subject to the new customer-
specific disclosure requirements of Rule 606(b)(3) and not meet the 
requirements for a firm-level de minimis exception under Rule 
606(b)(4), i.e., broker-dealers that are involved in the practice of 
routing NMS stock orders of any size that are submitted on a not held 
basis, where such order flow constitutes greater than 5% of their total 
NMS stock order flow.\468\ The Commission estimates that there are 381 
market centers to which Rule 605 applies.\469\
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    \466\ The Commission is basing its estimate on data compiled 
from responses to Form BD.
    \467\ The Commission estimates that both clearing and 
introducing brokers handle such orders.
    \468\ For the purposes of estimating burden under the PRA, the 
Commission believes that all broker-dealers that handle or route 
orders in NMS stocks will have a mix of customers that are and are 
not subject to the customer-level de minimis exception described in 
Rule 606(b)(5). See supra Section III.A.1.b.iv. Accordingly, the 
Commission estimates that all 200 broker-dealers that handle orders 
subject to the customer-specific disclosures required by Rule 
606(b)(3) and all 292 broker-dealers that route orders subject to 
the public disclosures required by Rule 606(a) and the existing 
customer-specific disclosures required by Rule 606(b)(1) will have 
to modify their systems to comply with those respective rules. If a 
broker-dealer handles orders subject to the new customer-specific 
disclosure requirements of Rule 606(b)(3) but qualifies for both de 
minimis exceptions required by Rules 606(b)(4) and (b)(5), then it 
is not a respondent to the collection of information required by 
Rule 606(b)(3) but would still be counted among the respondents to 
the collection of information required by Rule 606(b)(1).
    \469\ The Commission derived this estimate based on the 
following: 214 OTC market makers (not including market makers 
claiming an exemption from the reporting requirements of the Rule), 
plus 21 exchanges, 1 securities association, 104 exchange market 
makers, and 41 ATSs.
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D. Total Initial and Annual Reporting and Recordkeeping Burdens

1. Customer-Specific Disclosures Under Rule 606(b)(3)
a. Initial Reporting and Recordkeeping Burden
i. Baseline Burden
    Of the 200 broker-dealers involved in routing orders subject to the 
customer-specific disclosures described in Rule 606(b)(3), the 
Commission initially estimated that 25 broker-dealers that handle 
orders do not currently have systems that obtain all of the information 
required by the proposed amendments.\470\ The Commission estimated that 
these 25 broker-dealers would be able to perform the required 
enhancements in-house, but could also use a third-party service 
provider.\471\ Based on discussions with industry sources, the 
Commission preliminarily estimated that the average one-time, initial 
burden for broker-dealers that handle orders subject to the customer-
specific disclosures described in Rule 606(b)(3) that do not currently 
create and retain the proposed order handling information to program 
systems in-house to implement the requirements of the proposed Rule 
would be 200 hours and $60,420 per broker-dealer.\472\ The Commission 
preliminarily estimated the average one-time, initial burden for 
broker-dealers that handle orders subject to the customer-specific 
disclosures described in Rule 606(b)(3) 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 be 50 hours \473\ and 
$35,000.\474\ The Commission preliminarily estimated that of the 25 
broker-dealers that handle orders subject to the customer-specific 
disclosures described in Rule 606(b)(3) that do not currently have 
systems in place to capture the information required by the rule, 10 
such broker-dealers would perform the necessary programming upgrades 
in-house, and 15 would engage a third-party to perform the programming 
upgrades. Additionally, of the 25 broker-dealers that handle orders 
subject to the customer-specific disclosures described in Rule 
606(b)(3) that do not currently have systems in place to capture the 
information required by the proposed rule, the Commission estimated 
that 10 such broker-dealers would 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 handle orders subject to the customer-specific 
disclosures required by Rule 606(b)(3) that 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 was estimated as 2,750 hours \475\ and $675,000.\476\
---------------------------------------------------------------------------

    \470\ This estimate was based on discussions with various 
industry participants. See Proposing Release, supra note 1, at 
49470.
    \471\ See id.
    \472\ See id. The Commission derived its preliminary monetized 
burden estimates based on per hour labor figures from SIFMA's 
Management & Professional Earnings in the Securities Industry 2013.
    \473\ The monetized hourly burden was estimated at $15,125 per 
broker-dealer. See id.
    \474\ See id.
    \475\ The total monetized hourly burden was estimated at 
$831,075. See id.
    \476\ ($35,000 per broker-dealer that will engage a third-party 
x 15 such broker-dealers) + ($15,000 per broker-dealer that will 
need to purchase hardware and software upgrades x 10 such broker-
dealers) = $675,000. See id.
---------------------------------------------------------------------------

    The Commission preliminarily estimated the average burden for a 
broker-dealer that 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.\477\ The Commission estimated that 
125 broker-dealers would format systems to produce the reports in-
house. A broker-dealer that handles such orders that 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 estimated 50 
broker-dealers that handle such orders would use a third-party vendor 
to ensure data required by the rule is captured in the reports. The 
Commission estimated the average burden for a broker-dealer that uses a 
third-party service provider to work with such service provider to 
ensure proper reports are produced

[[Page 58383]]

would be 20 hours \478\ and $5,000.\479\ The Commission preliminarily 
believed 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 that 
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 was estimated as 6,000 hours \480\ and $250,000.\481\ 
Therefore, the estimated total initial burden for all broker-dealers to 
comply with Rule 606(b)(3) was estimated at 8,750 hours \482\ and 
$925,000.\483\
---------------------------------------------------------------------------

    \477\ The monetized hourly burden was estimated at $12,084 per 
broker-dealer. See id.
    \478\ The monetized hourly burden was estimated at $5,726 per 
broker-dealer. See id.
    \479\ See id.
    \480\ The total monetized hourly burden was estimated at 
$1,796,800. See id.
    \481\ $5,000 per broker-dealer that works with a third-party 
vendor to ensure proper reports are produced x 50 such broker-
dealers = $250,000. See id.
    \482\ The total initial monetized hourly burden was estimated at 
$2,627,875. See Proposing Release, supra note 1, at 49471.
    \483\ See id.
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ii. Burden of Adopted Rule
    The Commission is revising its initial burden and cost estimates 
associated with producing the customer-specific reports on order 
handling required by Rule 606(b)(3) \484\ in response to comments 
received. One commenter criticizes the Commission's estimate of costs 
involved in producing the data for the reports, which it characterizes 
as ``8 hours,'' and provides its own estimate of 240 hours per broker-
dealer to produce the data for the reports. The commenter does not make 
clear whether this comment addresses the new customer-specific order 
handling disclosures required by Rule 606(b)(3) or the amendments to 
the public order routing disclosures required by Rule 606(a)(1). The 
commenter also states that ``[i]n order to produce the data for the 
public reports, brokers will all have to modify their OMS system or 
have their OMS vendor make changes'' (emphasis added).\485\
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    \484\ Rule 606(b)(3), as proposed, applied to broker-dealers 
that handle ``institutional orders,'' as defined in the Proposing 
Release. Rule 606(b)(3), as adopted, applies to NMS stock orders of 
any size that are submitted on a not held basis (subject to the two 
de minimis exceptions).
    \485\ See Markit Letter at 33.
---------------------------------------------------------------------------

    To the extent these comments are addressed to the initial hourly 
burden for broker-dealers to produce the customer-specific order 
handling disclosures required by Rule 606(b)(3),\486\ the Commission 
understands them to raise two areas of criticism: The hourly burden 
estimate for producing the data for the reports and the monetized value 
of that burden. With respect to the hourly burden, the Commission 
estimated 200 hours--not 8 hours--for a broker-dealer that handles 
orders subject to the customer-specific disclosures required by Rule 
606(b)(3) to update its systems in-house to capture the information and 
format the reports required by the rule.\487\ However, upon 
consideration of the comments, and in particular the statements that 
the implementation would require ``at least [ ] four weeks of developer 
time,'' \488\ and result in a ``total cost of 240 hours per broker,'' 
\489\ the Commission is revising its initial hourly burden estimate for 
a broker-dealer that handles orders subject to the customer-specific 
disclosures required by Rule 606(b)(3) to both update its data capture 
systems in-house and format the report required by the rule to 260 
hours.\490\ The Commission continues to estimate that the initial 
burden for broker-dealers that handle orders subject to the customer-
specific disclosures required by Rule 606(b)(3) to engage a third-party 
to implement the requirements of the rule to be 50 hours \491\ and 
$35,000.\492\
---------------------------------------------------------------------------

    \486\ To the extent that these comments are addressed to the 
burden for the amended disclosures described by Rule 606(a)(1), the 
Commission addresses them below. See infra Section IV.D.4.a.ii.
    \487\ See Proposing Release, supra note 1, at 49470.
    \488\ See Markit Letter at 33. The Commission is revising its 
initial estimate of 100 Sr. Programmer hours to 160 Sr. Programmer 
hours = 40-hour work week x 4 (``four weeks of developer time'').
    \489\ See id.
    \490\ The Commission estimates the monetized burden for this 
requirement to be $84,100. (Sr. Programmer for 160 hours at $324 per 
hour) + (Sr. Database Administrator for 40 hours at $334 per hour) + 
(Sr. Business Analyst for 40 hours at $269 per hour) + (Attorney for 
20 hours at $407 per hour) = 260 hours and $84,100. The Commission 
derived this estimate based on per hour figures from SIFMA's 
Management & Professional Earnings in the Securities Industry 2013 
adjusted for inflation based on Bureau of Labor Statistics data on 
CPI-U between January 2013 and December 2017 (a factor of 1.0705). 
For example, the 2017 inflation-adjusted effective hourly wage rate 
for attorneys is estimated at $407 ($380 x 1.0705).
    \491\ See supra note 473. The Commission is updating the 
monetized hourly burden estimate to $16,200 to reflect the latest 
available labor earnings data. (Sr. Business Analyst for 15 hours at 
$269 per hour) + (Compliance Manager for 20 hours at $303 per hour) 
+ (Attorney for 15 hours at $407 per hour) = 50 hours and $16,200. 
The Commission derived this estimate based on per hour figures from 
SIFMA's Management & Professional Earnings in the Securities 
Industry 2013 adjusted to December 2017 values. See supra note 490.
    \492\ See Proposing Release, supra note 1, at 49470.
---------------------------------------------------------------------------

    The commenter also implicitly criticizes the Commission's estimate 
that only 25 of the 200 total broker-dealers that handle orders subject 
to the customer-specific disclosures required by Rule 606(b)(3) would 
need to update their data capture systems by stating that ``brokers 
will all have to modify their OMS system or have their OMS vendor make 
changes'' (emphasis added).\493\ Upon consideration of this comment, 
the Commission is revising its previous estimate that there are some 
broker-dealers that already capture order handling information required 
by the rule \494\ and instead estimating that all 200 broker-dealers 
that handle orders subject to the customer-specific disclosures 
required by Rule 606(b)(3) will need to update their systems to capture 
the information required by the rule.
---------------------------------------------------------------------------

    \493\ See Markit Letter at 33.
    \494\ The Commission preliminarily believed that many broker-
dealers that handle orders subject to the customer-specific 
disclosures described in proposed Rule 606(b)(3) already create and 
retain the order handling information required by Rule 606(b)(3). 
Accordingly, the Commission provided two burden estimates, one for 
broker-dealers that handle orders whose systems do not currently 
support creating and retaining the information required by Rule 
606(b)(3) that would upgrade their systems either in-house or via a 
third-party service provider, and another for broker-dealers that 
handle 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. See Proposing 
Release, supra note 1, at 49469-70.
---------------------------------------------------------------------------

    The Commission continues to believe that some broker-dealers will 
implement the changes in-house, while others will engage a third party 
vendor, which is supported by the commenter's statement that broker-
dealers will have to ``modify their OMS system or have their OMS vendor 
make changes.'' \495\ The Commission believes that it is reasonable to 
estimate that one third of the 200 broker-dealers that handle orders 
subject to the customer-specific disclosures required by Rule 
606(b)(3)--67 broker-dealers--will implement the changes in-house, 
while the remaining number--133 broker-dealers--will engage a third-
party vendor to do so.\496\ The Commission continues to estimate that 
the broker-dealers that will implement the changes in-house will also 
need to purchase hardware and software upgrades at a cost of $15,000 to 
fulfill the requirements of the rule.\497\
---------------------------------------------------------------------------

    \495\ See id.
    \496\ The Commission's initial estimate in the Proposing Release 
of 65 broker-dealers that would implement these changes in-house and 
135 broker that would engage a third-party vendor was intended to 
reflect a ratio of one-third and two-thirds of the total 200 broker-
dealers with reporting obligations under Rule 606(b)(3).
    \497\ See Proposing Release, supra note 1, at 49470.
---------------------------------------------------------------------------

    The Commission is estimating the total initial burden for broker-
dealers that will program their systems in-house to capture the data 
and produce a report to comply with the rule as 17,420

[[Page 58384]]

hours \498\ and $1,005,000.\499\ The Commission is estimating the total 
initial burden for broker-dealers that will engage a third-party vendor 
to program their systems to capture the data and produce a report to 
comply with the rule as 6,650 hours \500\ and $4,655,000.\501\
---------------------------------------------------------------------------

    \498\ 17,420 hours = 260 hours x 67 broker-dealers that handle 
such orders and would perform the necessary programming upgrades in-
house. The monetized hourly burden is $5,634,700 = $84,100 x 67 such 
broker-dealers. See supra note 490.
    \499\ $15,000 per broker-dealer that will need to purchase 
hardware and software upgrades x 67 such broker-dealers) = 
$1,005,000. See supra note 496.
    \500\ 6,650 hours = 50 hours x 133 broker-dealers that handle 
such orders and would engage a third-party vendor to perform the 
necessary programming upgrades. The monetized hourly burden is 
$2,154,600 = $16,200 x 133 such broker-dealers. See supra note 491.
    \501\ $35,000 per broker-dealer that will need to engage a 
third-party vendor x 133 such broker-dealers) = $4,655,000. See 
supra note 492.
---------------------------------------------------------------------------

    The commenter states that the Commission did not include an 
estimate for ``monitoring systems for ensuring that strategy 
definitions are reasonably defined.'' \502\ While the Commission 
estimated an annual, ongoing burden for a broker-dealer to maintain the 
assignment of its order routing strategies,\503\ the Commission is not 
adopting the proposed requirement to segment order handling information 
by order routing strategy.\504\
---------------------------------------------------------------------------

    \502\ See Markit Letter at 34.
    \503\ See Proposing Release, supra note 1, at 49473-74.
    \504\ See supra Section III.A.5.a.ii.
---------------------------------------------------------------------------

    The commenter also suggests that the Commission's estimate for 
producing the order handling disclosures ``does not include the 
complexities of the IOI reporting.'' \505\ The Commission considered 
all the proposed data elements for the order handling disclosure, 
including those related to actionable IOIs, in estimating the initial 
burden of complying with the rule. The Commission also considered that, 
as discussed in Section III.A.2, an actionable IOI is the functional 
equivalent of an order or quotation, and that actionable IOIs do not 
include conditional orders in estimating the burden of complying with 
the rule. Moreover, as noted above, because actionable IOIs convey 
similar information as an order, the Commission believed, and continues 
to believe, that including actionable IOIs in the order routing reports 
would not add much complexity to the reporting practices. The commenter 
does not address how the inclusion of actionable IOIs in Rule 606(b)(3) 
would affect the calculation of the cost. Specifically, as noted above, 
the Commission is adopting a modification to Rule 606(b)(3) that 
requires broker-dealers to disclose the fact that actionable IOIs were 
sent to customers but not the identity of such customers. Compared to 
proposed Rule 606(b)(3), Rule 606(b)(3) as adopted could reduce the 
potential initial paperwork burden for broker-dealers, because they do 
not have to disclose the identity of customers receiving actionable 
IOIs. The Commission's revised estimate includes and fully reflects 
consideration of all modifications from the proposed rule text to Rule 
606(b)(3) as adopted.
---------------------------------------------------------------------------

    \505\ See Markit Letter at 34.
---------------------------------------------------------------------------

    The revised initial burden estimate takes into account the 
requirement that the disclosures apply to NMS stock orders of any size 
that are submitted on a not held basis (subject to two de minimis 
exceptions) instead of to ``institutional orders'' as defined by a 
dollar-value threshold in the Proposing Release.\506\ A broker-dealer 
would have to program its systems to filter their order data by a 
condition--either a dollar-value threshold or a held/not-held indicator 
(subject to the two de minimis exceptions)--and the work of filtering 
data by a condition generally is expected to carry the same burden, 
independent of the filtering condition.
---------------------------------------------------------------------------

    \506\ See supra Section III.A.1.
---------------------------------------------------------------------------

    The Commission also believes that this initial hourly burden 
estimate remains unchanged by the adoption today of a requirement that 
the customer-specific order handling disclosures described by Rule 
606(b)(3) be segmented by directed and non-directed orders.\507\ The 
Commission believes that the systems of all 200 broker-dealers involved 
in the practice of routing orders subject to the customer-specific 
disclosures required by Rule 606(b)(3) already capture data related to 
whether an order is directed or not directed, so this requirement 
imposes no additional burden associated with data capture. With respect 
to formatting the report, the Commission believes that the work of 
segmenting data by a condition generally carries the same burden, 
independent of the segmenting condition. Since the burden of segmenting 
the data by order routing strategy, a requirement which is being 
eliminated, is similar to the burden of the new requirement to segment 
the data by directed and non-directed orders, the net burden remains 
unchanged. Accordingly, the adoption of this requirement does not 
change the initial hourly burden estimate for capturing the required 
data or formatting the reports.
---------------------------------------------------------------------------

    \507\ See supra Section III.A.5.b.
---------------------------------------------------------------------------

    Further, this initial hourly burden estimate is unchanged by the 
Commission's decision today not to adopt proposed requirements to 
categorize order routing information by order routing strategy,\508\ 
since the burden of categorizing and capturing that information was 
separately estimated in the Proposing Release.\509\
---------------------------------------------------------------------------

    \508\ See supra Section III.A.5.a.ii.
    \509\ See Proposing Release, supra note 1, at 49467-68.
---------------------------------------------------------------------------

    Therefore, the total initial burden for all 200 broker-dealers that 
handle orders subject to the customer-specific order handling 
disclosures required by Rule 606(b)(3) to implement a system that 
captures the data required by the rule and format that data into a 
report is estimated to be 24,070 hours and $5,660,000.\510\
---------------------------------------------------------------------------

    \510\ See supra notes 498 and 500 (17,420 hours + 6,650 hours = 
24,070 hours). The total estimated initial monetized hourly burden 
is $7,789,300 ($5,634,700 + $2,154,600). The total cost burden of 
$5,660,000 = $4,655,000 + $1,005,000. See supra notes 499 and 501. 
The commenter asserts without further elaboration that ``the total 
cost for the industry would be over $16 million.'' See Markit Letter 
at 34. To the extent that the commenter is referring to Rule 
606(b)(3) disclosures, for all the reasons discussed above, the 
Commission believes that it has reasonably estimated the total 
industry cost as $13,449,300 ($7,789,300 monetized hourly burden + 
$5,660,000 cost burden).
---------------------------------------------------------------------------

b. Annual Reporting and Recordkeeping Burden
i. Baseline Burden
    The Commission preliminarily estimated that 135 of the 200 broker-
dealers that handle orders subject to the customer-specific disclosures 
required by Rule 606(b)(3) would respond to customer requests in-
house.\511\ The Commission estimated that an average response to a Rule 
606(b)(3) request for a broker-dealer that responds to such requests 
in-house would take approximately 2 hours per response.\512\ The 
Commission estimated that an average broker-dealer will receive 
approximately 200 requests annually.\513\ Therefore, on average, a 
broker-dealer that responds to 606(b)(3) requests in-house would incur 
an estimated annual burden of 400 hours to prepare, disseminate, and 
retain responses to customers required by Rule 606(b)(3).\514\ The 
Commission preliminarily estimated that 135 broker-dealers that handle 
orders subject to the customer-specific disclosures required by Rule 
606(b)(3) that would respond to requests

[[Page 58385]]

in-house, and that the total annual burden for such broker-dealers to 
comply with the customer response requirement in proposed Rule 
606(b)(3) would be 54,000.\515\
---------------------------------------------------------------------------

    \511\ See Proposing Release, supra note 1, at 49471.
    \512\ See id.
    \513\ This estimate was based on discussions with various 
industry participants. See id.
    \514\ See id.
    \515\ 2 hours per response x 200 responses annually per broker-
dealer that handles such orders who will respond to requests in-
house x 135 such broker-dealers = 54,000 hours. See id.
---------------------------------------------------------------------------

    The Commission preliminarily estimated that 65 broker-dealers that 
handle orders subject to the customer-specific disclosures required by 
Rule 606(b)(3) would use a third-party service provider to respond to 
requests. For these broker-dealers, the Commission preliminarily 
estimated an annual burden of 1 hour and $100 per response.\516\ With 
an estimated 200 requests pursuant to Rule 606(b)(3) per year, the 
Commission preliminarily estimated that on average, the annual burden 
for a broker-dealer that uses a third-party service provider to respond 
to requests pursuant to Rule 606(b)(3) would be 200 hours and 
$20,000.\517\ With an estimated 65 broker-dealers that handle such 
orders that would respond to Rule 606(b)(3) requests using a third-
party-service provider, the Commission preliminarily estimated the 
total annual burden for such 65 broker-dealers would be 13,000 hours 
\518\ and $1,300,000.\519\
---------------------------------------------------------------------------

    \516\ See id. This burden estimate relates solely to the work a 
broker-dealer or its third-party data provider would perform to run 
an individual report on such orders for a particular customer and is 
therefore not affected by the following changes from the rule as 
proposed, which relate to capturing the required data and formatting 
a report template: (1) The application of Rule 606(b)(3) to NMS 
stock orders of any size that are submitted on a not held basis, 
subject to two de minimis exceptions, instead of to ``institutional 
orders'' as defined by a dollar-value threshold in the Proposing 
Release.; (2) the adopted requirement to segment the Rule 606(b)(3) 
order handling disclosures by directed and non-directed orders; and 
(3) the elimination of the proposed requirement to segment the Rule 
606(b)(3) order handling disclosures by order routing strategy.
    \517\ See id.
    \518\ 1 hour per response x 200 responses annually per broker-
dealer that will use a third-party service provider x 65 such 
broker-dealers = 13,000 hours. See id.
    \519\ $100 per request x 200 requests annually x 65 broker-
dealers that will use a third-party service provider = $1,300,000. 
See id.
---------------------------------------------------------------------------

    Therefore, the Commission preliminarily estimated the total annual 
burden for all 200 broker-dealers that handle orders subject to the 
customer-specific disclosures required by Rule 606(b)(3) to comply with 
the customer response requirement in proposed Rule 606(b)(3) would be 
67,000 hours \520\ and $1,300,000.\521\
---------------------------------------------------------------------------

    \520\ See supra notes 515 and 518.
    \521\ See supra notes 519.
---------------------------------------------------------------------------

ii. Burden of Adopted Rule
    The Commission estimates the total annual burden for the 200 
broker-dealers that handle orders subject to the customer-specific 
disclosures required by Rule 606(b)(3) to comply with Rule 606(b)(3) to 
be 67,000 hours and $1,300,000, as it did in the Proposing Release, but 
is updating the monetized hourly burdens to reflect the latest 
available labor earnings data.
    The Commission believes that for the 135 broker-dealers that handle 
orders subject to the customer-specific disclosures required by Rule 
606(b)(3) that would respond in-house to customer requests pursuant to 
Rule 606(b)(3), as adopted, the annual hourly burden to comply would be 
54,000 hours.\522\ The Commission believes that for the 65 broker-
dealers that handle such orders and would use a third-party service 
provider to respond to requests pursuant to Rule 606(b)(3), as adopted, 
the total annual burden to comply would be 13,000 hours \523\ and 
$1,300,000.\524\
---------------------------------------------------------------------------

    \522\ See supra note 515. The Commission is updating the 
monetized hourly burden estimate to reflect the latest available 
labor earnings data. The monetized hourly burden for the 125 broker-
dealers that handle such orders and would respond in-house to 
customer requests under Rule 606(b)(3) is $10,989,000: (Programmer 
Analyst for 1 hour at $236 per hour) + (Jr. Business Analyst for 1 
hour at $171 per hour) = $407 x 125 such broker-dealers x 200 
requests annually. The Commission derived this estimate based on per 
hour figures from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013 adjusted to December 2017 values. See supra 
note 490.
    \523\ See supra note 518. The Commission is updating the 
monetized hourly burden estimate to reflect the latest available 
labor earnings data. The monetized hourly burden for the 65 broker-
dealers that handle such orders and would engage a third-party to 
respond to customer requests under Rule 606(b)(3) is $3,939,000: 
(Compliance Manager for 1 hour at $303 per hour) = $303 x 65 such 
broker-dealers x 200 requests annually. The Commission derived this 
estimate based on per hour figures from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013 adjusted to 
December 2017 values. See supra note 490.
    \524\ See supra note 519.
---------------------------------------------------------------------------

    Therefore, the Commission estimates the total annual burden for all 
200 broker-dealers that handle orders subject to the customer-specific 
disclosures required by Rule 606(b)(3) to comply with the customer 
response requirement of Rule 606(b)(3), as adopted, to be 67,000 hours 
\525\ and $1,300,000.\526\
---------------------------------------------------------------------------

    \525\ See supra notes 522 and 523 (54,000 hours + 13,000 hours = 
67,000 hours). The total estimated annual monetized hourly burden is 
$14,928,000 ($10,989,000 + $3,939,000).
    \526\ See supra note 521.
---------------------------------------------------------------------------

2. Proposed Public Aggregated Report on Orders Subject to the Customer-
Specific Disclosures Under Rule 606(b) Not Adopted
    As discussed above, the Commission is not adopting the proposed 
requirement that broker-dealers that handle orders subject to the 
customer-specific disclosures required by Rule 606(b)(3) issue a 
quarterly public aggregated disclosure on order handling.\527\ The 
Commission preliminarily estimated an initial and annual burden created 
by this proposed requirement,\528\ but as this requirement is not being 
adopted, there is no longer an associated cost and hourly burden.
---------------------------------------------------------------------------

    \527\ See supra Section III.A.7.b.
    \528\ See Proposing Release, supra note 1, at 49471-72.
---------------------------------------------------------------------------

3. Proposed Requirement To Document Methodologies for Categorizing 
Order Routing Strategies Not Adopted
    As discussed above, the Commission is not adopting the proposed 
requirement that broker-dealers break down information in the 
disclosures required by Rule 606(b) by order routing strategies.\529\ 
The Commission preliminarily estimated an initial and annual burden 
created by this proposed requirement,\530\ but as this requirement is 
not being adopted, there is no longer an associated cost and hourly 
burden.
---------------------------------------------------------------------------

    \529\ See supra Section III.A.5.a.ii.
    \530\ See Proposing Release, supra note 1, at 49472-74.
---------------------------------------------------------------------------

4. Amendment to Current Public and Customer-Specific Disclosures
a. Initial Reporting and Recordkeeping Burden
i. Baseline Burden
    The Commission preliminarily estimated that there are 266 broker-
dealers to which the proposed disclosures in Rule 606(a)(1) and (b)(1) 
would apply.\531\ The Commission estimated that the initial burden for 
a broker-dealer that routes orders subject to the disclosures required 
by Rule 606(a)(1) 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 would be 76 hours 
\532\ and the total initial burden for

[[Page 58386]]

the 25 broker-dealers that the Commission estimated do not currently 
capture information required by the proposed rule that would perform 
the necessary system updates in-house would be 1,900 hours.\533\
---------------------------------------------------------------------------

    \531\ See id.
    \532\ The monetized hourly burden was estimated at $22,648 per 
broker-dealer. See id. Due to an arithmetic error, the individual 
hourly burden for each broker-dealer was originally calculated as 80 
hours instead of 76 hours, leading to a total burden calculation of 
2,000 hours (80 hours x 25 broker-dealers) instead of 1,900 hours 
(76 hours x 25 broker-dealers). The monetized hourly burden was 
correctly calculated using a 76-hour figure.
    \533\ The total monetized hourly burden was estimated at 
$831,075. See Proposing Release, supra note 1, at 49474.
---------------------------------------------------------------------------

    The Commission estimated that the initial burden for a broker-
dealer that routes orders subject to the disclosures required by Rule 
606(a)(1) to engage a third-party to program the necessary system 
updates to comply with proposed Rule would be 20 hours and $10,000 
\534\ and estimated the total initial burden for the 25 broker-dealers 
that the Commission estimated do not currently capture information 
required by the proposed rule that would engage a third-party service 
provider to perform the necessary system updates to both capture the 
required data and create the reports would be 500 hours \535\ and 
$250,000.\536\ The Commission noted that this estimate contemplated 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 website, as required by both proposed Rule 606(a) and 
606(b)(1), and that the total initial burden estimate for all 50 
broker-dealers that the Commission estimated would need to update their 
systems and create a new report would be 2,400 hours \537\ and 
$250,000.\538\
---------------------------------------------------------------------------

    \534\ See id.
    \535\ The total monetized hourly burden was estimated at 
$149,625. See Proposing Release, supra note 1, at 49474-75.
    \536\ See id.
    \537\ The total monetized hourly burden was estimated at 
$715,825. See Proposing Release, supra note 1, at 49475.
    \538\ See id.
---------------------------------------------------------------------------

    For the remaining 216 broker-dealers that the Commission estimated 
already capture the data required by the proposed modifications to Rule 
606(a)(1), the Commission estimated that 108 of such broker-dealers 
already engage a third-party service provider to provide reports 
pursuant to existing Rule 606(a)(1) and such broker-dealers would 
continue to use third-party service providers to format reports to 
comply with proposed Rule 606(a)(1).\539\ The Commission estimated that 
the remaining 108 broker-dealers that already capture information 
required by the proposed rule would prepare and format a report to 
comply with the proposed rule in-house.\540\ The Commission estimated 
that for a broker-dealer that already captures such data, the burden to 
format that data into its existing reports on its own would be 20 
hours.\541\ Therefore, the Commission estimated the total initial 
burden for broker-dealers to format already captured data into a report 
in-house to comply with proposed Rule 606(a)(1) to be 2,160.\542\
---------------------------------------------------------------------------

    \539\ See id.
    \540\ See id.
    \541\ The monetized hourly burden was estimated at $4,975 per 
broker-dealer. See id.
    \542\ The total monetized hourly burden was estimated at 
$537,300. See id.
---------------------------------------------------------------------------

    The Commission estimated that the initial burden for the 108 
broker-dealers that engage a third-party service provider to format 
reports to comply with proposed Rule 606(a)(1) would be 8 hours \543\ 
and $2,000 \544\ and that the estimated total initial burden for these 
broker-dealers to comply with proposed Rule 606(a) would be 864 \545\ 
hours and $216,000.\546\ Thus, the Commission estimated that the burden 
for the 216 broker-dealers for whom the Commission estimated already 
capture the data required by proposed Rule 606(a) to format their 
reports to incorporate such data would be 3,024 hours \547\ and 
$216,000.\548\ These estimates included 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 website, 
as required by both proposed Rule 606(a) and 606(b)(1).\549\
---------------------------------------------------------------------------

    \543\ The monetized hourly burden was estimated at $2,555 per 
broker-dealer. See id.
    \544\ See id.
    \545\ The total monetized hourly burden was estimated at 
$275,940. See id.
    \546\ See id.
    \547\ The total monetized hourly burden was estimated at 
$813,240. See id.
    \548\ See id.
    \549\ See id.
---------------------------------------------------------------------------

    Finally, the Commission estimated that the initial burden for a 
broker-dealer that routes orders subject to the disclosures required by 
Rule 606(a)(1) to review, assess, and disclose its payment for order 
flow arrangements and profit-sharing relationships would be 10 hours 
and that all 266 broker-dealers that route such orders would describe 
such agreements and arrangements themselves.\550\ Therefore, the 
Commission estimated the total initial burden for all broker-dealers 
that route such orders to review, assess, and disclose their payment 
for order flow arrangements and profit-sharing relationships to be 
2,660 hours \551\ and $466,000.\552\
---------------------------------------------------------------------------

    \550\ See Proposing Release, supra note 1, at 49475-76.
    \551\ The total monetized hourly burden was estimated at 
$839,230. See Proposing Release, supra note 1, at 49476.
    \552\ See Proposing Release, supra note 1, at 49475.
---------------------------------------------------------------------------

    Therefore, the Commission estimated that the total initial burden 
to comply with the proposed modifications to Rule 606(a)(1) for all 266 
broker-dealers would be 8,084 hours and $2,408,730.\553\
---------------------------------------------------------------------------

    \553\ See Proposing Release, supra note 1, at 49474-76.
---------------------------------------------------------------------------

ii. Burden of Amended Rule
    As discussed above, based on more recent data on respondents,\554\ 
the Commission now estimates that 292 broker-dealers are engaged in the 
practice of routing orders subject to the disclosures required by Rule 
606(a)(1). Additionally, the Commission is revising its burden and cost 
estimates associated with the initial burdens of producing the reports 
on such order routing. As discussed above,\555\ a commenter criticized 
the Commission's estimate of both the hourly burden and the monetized 
burden associated with producing the disclosures, but did not 
explicitly state to which category of disclosures--Rule 606(a)(1) or 
Rule 606(b)(3)--the comments applied.\556\ The Commission is revising 
its burden estimates for disclosures required under Rule 606(a)(1) and 
Rule 606(b)(3) primarily to reflect that all broker-dealers, rather 
than the fractional number the Commission estimated in the 
Proposal,\557\ will have to modify their systems to comply with the 
rule.\558\
---------------------------------------------------------------------------

    \554\ See supra Section IV.C.2.
    \555\ See supra Section IV.D.1.a.ii.
    \556\ See Markit Letter at 33.
    \557\ See Proposing Release, supra note 1, at 49474-75.
    \558\ See Markit Letter at 33 (``[i]n order to produce the data 
for the public reports, brokers will all have to modify their OMS 
system or have their OMS vendor make changes'' (emphasis added)).
---------------------------------------------------------------------------

    The commenter acknowledges that broker-dealers may either update 
their systems in-house or engage a third-party vendor to make the 
changes.\559\ The Commission believes that it is reasonable to estimate 
that one third of the 292 broker-dealers that route orders subject to 
the disclosures required by Rule 606(a)(1)--97 broker-dealers--will 
implement the changes in-house, while the remaining number--195 broker-
dealers--will engage a third-party vendor to do so.\560\
---------------------------------------------------------------------------

    \559\ See Markit Letter at 33 (broker-dealers will have to 
``modify their OMS system or have their OMS vendor make changes'').
    \560\ As discussed above, the Commission is revising its burden 
estimates for Rule 606(a)(1) to reflect that all broker-dealers that 
route orders subject to the rule, rather than the fractional number 
the Commission estimated in the proposal, will have to modify their 
systems to comply with the rule. When the Commission estimated in 
the proposal this fractional number of broker-dealers, it estimated 
that half this number would implement the requirements of the rule 
in-house and the other half would engage a third-party service 
provider to do so. See Proposing Release, supra note 1, at 49474-75. 
Now that the Commission is estimating all 292 broker-dealers will 
have to modify their systems to comply with the rule, rather than a 
fractional amount, it believes that, consistent with the proportions 
relating to Rule 606(b)(3) system implementation discussed above, 
one-third of broker-dealers will implement the changes in-house and 
two-thirds will engage a third-party service provider, because in-
house implementation costs are generally higher than outsourcing, 
and a proportion of broker-dealers greater than one-half will want 
to realize the cost savings. See supra note 496. Accordingly, the 
Commission is revising the proportion of in-house and third-party 
system implementation relating to Rule 606(a)(1) to one-third and 
two-thirds of all 292 broker-dealers, respectively, consistent with 
its estimates for Rule 606(b)(3) system implementation.

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[[Page 58387]]

    The commenter criticizes the Commission's hourly burden estimate 
for producing the Rule 606(a)(1) disclosures as too low and suggests an 
estimate of 240 hours to produce the reports.\561\ Additionally, the 
commenter suggests that the Commission's estimate may not have 
considered the costs associated specifically with implementation of 
systems to allow marketability of orders to be determined \562\ to 
comply with the requirement that the Rule 606(a)(1) disclosures segment 
reporting on limit orders into marketable and non-marketable.\563\
---------------------------------------------------------------------------

    \561\ See Markit Letter at 33.
    \562\ See Markit Letter at 33-34.
    \563\ See supra Section III.B.2.
---------------------------------------------------------------------------

    Upon consideration of the comments, and in particular the statement 
that the implementation would require ``at least [ ] four weeks of 
developer time,'' \564\ and result in a ``total cost of 240 hours per 
broker,'' \565\ the Commission is revising its initial hourly burden 
estimate for a broker-dealer that routes orders subject to the 
requirements of Rule 606(a)(1) to both update its data capture systems 
in-house and format the report required by the rule to 240 hours.\566\ 
The Commission believes the initial hourly burden for broker-dealers 
that route such orders to engage a third-party to implement the 
requirements of the rule to be 20 hours \567\ but is revising the 
associated costs to $32,000 to reflect the complexities associated with 
implementing the marketability requirement raised by the commenter.
---------------------------------------------------------------------------

    \564\ See Markit Letter at 33. The Commission is revising its 
initial estimate of 20 Sr. Programmer hours to 160 Sr. Programmer 
hours = 40-hour work week x 4 (``four weeks of developer time'').
    \565\ See id.
    \566\ The Commission estimates the monetized burden for this 
requirement to be $76,800. (Sr. Programmer for 160 hours at $324 per 
hour) + (Sr. Database Administrator for 20 hours at $334 per hour) + 
(Sr. Business Analyst for 20 hours at $269 per hour) + (Attorney for 
4 hours at $407 per hour) + (Sr. Operations Manager for 20 hours at 
$358 per hour) + (Systems Analyst for 16 hours at $257 per hour) = 
240 hours and $76,800. The Commission derived this estimate based on 
per hour figures from SIFMA's Management & Professional Earnings in 
the Securities Industry 2013 adjusted to December 2017 values. See 
supra note 490.
    \567\ See supra note 534. The Commission is updating the 
monetized hourly burden estimate to $6,410 to reflect the latest 
available labor earnings data. (Sr. Business Analyst for 5 hours at 
$269 per hour) + (Compliance Manager for 10 hours at $303 per hour) 
+ (Attorney for 5 hours at $407 per hour) = 20 hours and $6,410. The 
Commission derived this estimate based on per hour figures from 
SIFMA's Management & Professional Earnings in the Securities 
Industry 2013 adjusted to December 2017 values. See supra note 490.
---------------------------------------------------------------------------

    The Commission is estimating the total initial burden for broker-
dealers that will program their systems in-house to capture the data 
and produce a report to comply with the rule as 23,280 hours.\568\ The 
Commission is estimating the total initial burden for broker-dealers 
that will engage a third-party vendor to program their systems to 
capture the data and produce a report to comply with the rule as 3,900 
hours \569\ and $6,240,000.\570\
---------------------------------------------------------------------------

    \568\ 23,280 hours = 240 hours x 97 broker-dealers that route 
such orders and would perform the necessary programming upgrades in-
house. The monetized hourly burden is $7,449,600 = $76,800 x 97 such 
broker-dealers. See supra note 566.
    \569\ 3,900 hours = 20 hours x 195 broker-dealers that route 
such orders and would engage a third-party vendor to perform the 
necessary programming upgrades. The monetized hourly burden is 
$1,249,950 = $6,410 x 195 such broker-dealers. See supra note 567.
    \570\ $32,000 per broker-dealer that will need to engage a 
third-party vendor x 195 such broker-dealers) = $6,240,000.
---------------------------------------------------------------------------

    Therefore, the Commission estimates that the total initial burden 
for all 292 broker-dealers to comply with Rule 606(a)(1), as amended, 
and format their reports to incorporate such data \571\ is 27,180 hours 
and $6,240,000.\572\
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    \571\ As discussed above, the Commission is adopting a new 
requirement to divide the reports required by Rule 606(a) by two 
categories: ``S&P 500 Index'' and ``Other NMS Stocks.'' See supra 
Section III.B.5. The Commission believes that broker-dealer systems 
already capture information on the securities listed in the S&P 500 
Index, so this requirement imposes no additional burden associated 
with data capture. With respect to formatting the report, the 
Commission believes that the work of segmenting data by a condition 
or removing such segmentation generally carries the same burden, 
independent of the segmenting condition. Since the Commission 
believes that the burden of removing segmentation by listing market, 
a requirement which is being eliminated, is similar to the burden of 
the new requirement to segment the data by S&P 500 membership, the 
net burden remains unchanged. Therefore, this requirement does not 
change the initial or ongoing hourly burden as estimated in the 
proposing release.
    \572\ See supra notes 568, 569, and 570 (23,280 hours + 3,900 
hours = 27,180 hours). The total estimated initial monetized hourly 
burden is $8,699,550 ($7,449,600 + $1,249,950). The commenter 
asserts without further elaboration that ``the total cost for the 
industry would be over $16 million.'' See Markit Letter at 34. To 
the extent that the commenter is referring to Rule 606(a) and 
606(b)(1) disclosures, for all the reasons discussed above, the 
Commission believes that it has reasonably estimated the total 
industry cost as $14,939,550 ($8,699,550 monetized hourly burden + 
$6,240,000 cost burden).
---------------------------------------------------------------------------

    The Commission includes in this estimate the initial burden 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 
website, as required by Rule 606(a) and (b)(1), as amended.
    Finally, the Commission estimates that the initial burden for a 
broker-dealer that routes orders subject to the disclosures described 
by Rule 606(a)(1) to review, assess, and disclose its payment for order 
flow arrangements and profit-sharing relationships to be 10 hours \573\ 
and is updating the monetized burden estimate to $3,380 to reflect the 
latest available labor earnings data.\574\ The Commission believes that 
all broker-dealers that route such orders would describe such 
agreements and arrangements themselves.\575\ To reflect the latest 
available respondent numbers, the Commission estimates the total 
initial burden for all 292 broker-dealers that route such orders to 
review, assess, and disclose its payment for order flow arrangements 
and profit-sharing relationships to be 2,920 hours.\576\
---------------------------------------------------------------------------

    \573\ See supra note 550.
    \574\ 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 $269 per hour for 
5 hours) + (Attorney at $407 per hour for 5 hours) = 10 hours and 
$3,380. The Commission derived this estimate based on per hour 
figures from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013 adjusted to December 2017 values. See supra 
note 490.
    \575\ See Proposing Release, supra note 1, at 49475-76.
    \576\ 10 hours per broker-dealer that routes such orders x 292 
such broker-dealers = 2,920 hours. The Commission estimates the 
monetized burden for this requirement to be $986,960 ($3,380 per 
broker-dealer that routes such orders x 292 such broker-dealers). 
See id.
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    As discussed above, Rule 606(b)(1), as amended, does not modify any 
of the current customer-specific disclosure requirements but modifies 
the categories of orders to which the disclosure applies. Prior to 
these amendments, Rule 606(b)(1) applied to all customer orders, i.e., 
orders not from the account of a broker-dealer that are NMS stock 
orders having a market value of less than $200,000 and orders having a 
market value of at least $50,000 for an NMS security that is an option 
contract. However, broker-dealers must now modify their systems to 
provide the disclosures for the following types of orders not from a 
broker-dealer,

[[Page 58388]]

regardless of market value: (i) Orders in NMS stocks that are submitted 
on a held basis; (ii) orders in NMS stocks that are submitted on a not 
held basis and are exempt from the disclosure requirements of Rule 
606(b)(3); or (iii) orders in NMS securities that are option contracts.
    The Commission believes that it is reasonable to estimate that one 
third of the 292 broker-dealers that route orders subject to the 
disclosures required by Rule 606(b)(1)--97 broker-dealers--will 
implement these changes in-house, while the remaining number--195 
broker-dealers--will engage a third-party vendor to do so.\577\ The 
Commission estimates the initial burden for a broker-dealer that will 
program its systems in-house to comply with Rule 606(b)(1) as 24 
hours.\578\ The Commission estimates the initial burden for a broker-
dealer that will engage a third-party vendor to program its systems to 
comply with the rule as 3 hours \579\ and $5,000.\580\
---------------------------------------------------------------------------

    \577\ See supra note 560.
    \578\ The Commission estimates the monetized burden for this 
requirement to be $6,826. (Programmer for 16 hours at $265 per hour) 
+ (Sr. Database Administrator for 2 hours at $334 per hour) + (Sr. 
Business Analyst for 2 hours at $269 per hour) + (Attorney for 1 
hour at $407 per hour) + (Sr. Operations Manager for 2 hours at $358 
per hour) + (Systems Analyst for 1 hour at $257 per hour) = 24 hours 
and $6,826. The Commission derived this estimate based on per hour 
figures from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013 adjusted to December 2017 values. See supra 
note 490.
    \579\ The Commission estimates the monetized burden for this 
requirement to be $979. (Sr. Business Analyst for 1 hour at $269 per 
hour) + (Compliance Manager for 1 hour at $303 per hour) + (Attorney 
for 1 hour at $407 per hour) = 3 hours and $979. The Commission 
derived this estimate based on per hour figures from SIFMA's 
Management & Professional Earnings in the Securities Industry 2013 
adjusted to December 2017 values. See supra note 490.
    \580\ The Commission estimates that a third-party service 
provider would charge an average of $5,000 to upgrade a broker-
dealer's systems to comply with proposed Rule 606(b)(1).
---------------------------------------------------------------------------

    Therefore Commission estimates the total initial burden for all 292 
broker-dealers to program their systems to comply with Rule 606(b)(1) 
as 2,913 hours \581\ and $975,000.\582\
---------------------------------------------------------------------------

    \581\ 2,913 hours = (24 hours x 97 broker-dealers that route 
such orders and would perform the necessary programming upgrades in-
house) + (3 hours x 195 broker-dealers that would engage a third-
party to perform the upgrades). The monetized hourly burden is 
$853,027 = ($6,826 x 97 broker-dealers that would perform the 
upgrades in-house) + ($979 x 195 broker-dealers that would engage a 
third-party to perform the upgrades). See supra notes 578 and 579.
    \582\ $5,000 per broker-dealer that will need to engage a third-
party vendor x 195 such broker-dealers) = $975,000. See supra note 
580.
---------------------------------------------------------------------------

b. Annual Reporting and Recordkeeping Burden
i. Baseline Burden
    The Commission preliminarily believed that 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 estimated the average annual burden for a broker-dealer 
to comply with the proposed amendments to Rule 606(a)(1)(i) through 
(iii) would be 10 hours and the total annual burden for all broker-
dealers to comply with the proposed amendments would be 2,660 
hours.\583\
---------------------------------------------------------------------------

    \583\ See Proposing Release, supra note 1, at 49476.
---------------------------------------------------------------------------

    Finally, the Commission estimated 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, as required by proposed Rule 606(a)(1)(iv), would be 
15 hours.\584\ With 266 broker-dealers involved in retail order routing 
practices that would be required to comply with the rule, the 
Commission estimated the total annual burden for complying with 
proposed Rule 606(a)(1)(iv) would be 3,990 hours.\585\
---------------------------------------------------------------------------

    \584\ See id.
    \585\ See id.
---------------------------------------------------------------------------

ii. Burden of Amended Rule
    The Commission continues to believe that the annual burden to 
produce a quarterly report will remain the same under Rule 606(a), as 
amended, as under the previous rule but that all broker-dealers that 
route retail orders will 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. The Commission continues to estimate 
the average annual burden for a broker-dealer to comply with the 
amendments to Rule 606(a)(1)(i) through (iii), as amended, to be 10 
hours \586\ and is updating the monetized burden estimate to $3,380 to 
reflect the latest available labor earnings data.\587\ To reflect the 
latest available respondent numbers, the Commission estimates the total 
annual burden for all 292 broker-dealers required to perform this 
monitoring to be 2,920 hours.\588\
---------------------------------------------------------------------------

    \586\ See supra note 583.
    \587\ The Commission derived this estimate based on per hour 
figures from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013 adjusted to December 2017 values, see supra 
note 490: (Sr. Business Analyst at $269 per hour for 5 hours) + 
(Attorney at $407 per hour for 5 hours) = 10 hours and $3,380.
    \588\ 10 hours per broker-dealer that routes such orders x 292 
such broker-dealers = 2,920 hours. The Commission estimates the 
monetized burden for this requirement to be $986,960 ($3,380 per 
broker-dealer that routes such orders x 292 such broker-dealers). 
See id.
---------------------------------------------------------------------------

    The Commission continues to estimate the average annual burden for 
a broker-dealer required 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, as 
required by Rule 606(a)(1)(iv), as amended to be 15 hours \589\ and is 
updating the monetized burden estimate to $3,745 to reflect the latest 
available labor earnings data.\590\ To reflect the latest available 
respondent numbers, the Commission estimates the total annual burden 
for all 292 broker-dealers required to comply with Rule 606(a)(1)(iv), 
as amended, to be 4,380 hours.\591\
---------------------------------------------------------------------------

    \589\ See Proposing Release, supra note 1, at 49476.
    \590\ The Commission derived this estimate based on per hour 
figures from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013, see supra note 490: (Jr. Business Analyst 
at $171 per hour for 10 hours) + (Attorney at $407 per hour for 5 
hours) = 15 hours and $3,745.
    \591\ 15 hours annually per broker-dealer that routes such 
orders x 292 such broker-dealers = 4,380 hours. The Commission 
estimates the total monetized burden for this requirement to be 
$1,093,540. ($3,745 annually per broker-dealer that routes such 
orders x 292 such broker-dealers). See id.
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5. Revisions to Compliance Manuals
    As discussed above, the amendments being adopted today add several 
defined terms to Rule 600 of Regulation NMS which will impose an 
initial burden on market centers and the broker-dealers to review and 
update compliance manuals and written supervisory procedures and update 
citation references to any such defined term. Although the Commission 
did not include an initial estimate for this burden in the Proposing 
Release, the Commission is now revising its PRA estimate to include 
this burden. Based on its familiarity with these types of materials and 
the likelihood that these materials are maintained in an electronic 
form that facilitates search and replace, the Commission estimates that 
each of the 381 market centers and 4,024 broker-dealers would make 
these updates in house at a one-time burden of 2 hours for each 
respondent.\592\

[[Page 58389]]

Therefore the Commission estimates the total initial cost to be 8,810 
hours.\593\ There is no annual burden associated with this requirement.
---------------------------------------------------------------------------

    \592\ The Commission estimates the monetized burden for this 
requirement to be $426. (Paralegal for 2 hours at $213 per hour) = 2 
hours and $426. The Commission derived this estimate based on per 
hour figures from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013 adjusted to December 2017 values. See supra 
note 490.
    \593\ 2 hours x (381 market centers + 4,024 broker-dealers) = 
8,810 hours. The Commission estimates the total monetized burden for 
this requirement to be $1,876,530. ($426 per market center or 
broker-dealer that routes such orders x (381 market centers + 4,024 
broker-dealers)). See id.
---------------------------------------------------------------------------

6. Amendment to Disclosures Under Rule 605
    The amendment to Rule 605 being adopted today requires that such 
reports be kept posted on a website that is free and readily accessible 
to the public for a period of three years from the initial date of 
posting on the website. Because reports were already required to be 
posted to a website pursuant to Rule 605 prior to today's amendments, 
and the proposed amendment merely prescribes a minimum period of time 
for which such reports shall remain posted, the Commission 
preliminarily estimated the proposed amendment to Rule 605 would not 
impose an additional burden.\594\ The Commission continues to believe 
that this amendment will not impose an additional collection burden.
---------------------------------------------------------------------------

    \594\ See Proposing Release, supra note 1, at 49476.
---------------------------------------------------------------------------

E. Collection of Information Is Mandatory

    All of the collections of information are 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.\595\ 
Any information required to be disclosed publicly by the amended Rules 
would not be confidential.
---------------------------------------------------------------------------

    \595\ 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), as amended, 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 amended, would be made available the customer. The 
Commission, SROs, and other regulatory authorities could obtain copies 
of these reports as appropriate.

G. Retention Period for Recordkeeping Requirements

    Pursuant to Rule 606(a), as amended, broker-dealers shall be 
required to keep quarterly order routing reports posted on a website 
that is free and readily accessible to the public for a period of three 
years from the initial date of posting on the website.
    For Rule 606(b), as adopted, broker-dealers shall be required to 
preserve all communications required under these proposed amendments 
pursuant to Rule 17a-4, as applicable.\596\
---------------------------------------------------------------------------

    \596\ 17 CFR 240.17a-4. Registered brokers and dealers are 
already subject to existing recordkeeping and retention requirements 
under Rule 17a-4.
---------------------------------------------------------------------------

    Pursuant to the proposed amendments to Rule 605, as amended, market 
centers shall be required to keep order execution reports posted on a 
website that is free and readily accessible to the public for a period 
of three years from the initial date of posting on the website.

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 amendments to Rules 600, 605, and 
606.\597\ These costs and benefits are discussed below and have 
informed the policy choices described throughout this release.
---------------------------------------------------------------------------

    \597\ The Commission also is adopting amendments to 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), and 611(c) of Regulation 
NMS; and Rule 1000 of Regulation SCI, to update cross-references as 
a result of the amendments being adopted today, which would not 
result in costs or benefits.
---------------------------------------------------------------------------

A. Introduction

    Among the primary economic considerations for the adopted 
amendments to Rule 600, Rule 605, and Rule 606 are transparency for 
customers placing not held NMS stock orders, transparency for customers 
placing held NMS stock orders, and enhanced access to order handling 
reports.\598\
---------------------------------------------------------------------------

    \598\ See supra Section II.
---------------------------------------------------------------------------

    The Commission believes that requiring customer-specific order 
handling disclosures for orders submitted on a not held basis, as will 
be required by adopted Rule 606(b)(3), will provide information to 
customers to enable them to assess broker-dealers' order handling 
decisions and to incentivize broker-dealers to better manage any 
potential conflicts of interest the broker-dealers may face, provide 
customers with higher-quality routing services, and promote 
competition.
    The Commission is also amending Rule 606(b)(1) to require a broker-
dealer, upon customer request, to provide disclosures for orders in NMS 
stock that are submitted on a held basis, and for orders in NMS stock 
that are submitted on a not held basis and for which the broker-dealer 
is not required to provide the customer a report under Rule 606(b)(3). 
The Commission believes that amended Rule 606(b)(1) disclosures will 
help ensure customers can assess the order routing and execution 
quality provided by their broker-dealers, which, in turn, enables the 
customers to evaluate and select broker-dealers, promote competition 
among broker-dealers, and support overall market efficiency.
    The Commission also is amending Rule 606(a) such that the public 
reports include additional information that will enhance transparency 
on the routing of customer orders and enhance competition among broker-
dealers that route such orders, to the benefit of investors.
    The Commission believes that the requirement that the order routing 
reports required by Rule 606(b) be provided in a consistent, structured 
format will be useful to customers as such format will allow customers 
to more easily analyze and compare data across broker-dealers.
    Finally, the Commission believes that the amendments to 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 3 
years will allow the public to more efficiently evaluate the services 
of broker-dealers because it will be easier for the public to access 
historic reports and analyze the data over an extended time period.
    The Commission believes that these adopted amendments as a whole 
will allow customers to better assess the held NMS stock order routing 
and execution quality offered by their broker-dealers. As a result, the 
Commission 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-

[[Page 58390]]

quality order routing and execution services.
    The discussion below presents a baseline of the current practices, 
a consideration of the costs and benefits of the adopted new 
requirements, alternatives considered, and a discussion of the 
potential effects of the adopted amendments.

B. Baseline

    The baseline for considering the economic impact of amending Rule 
606 to require reporting for not held NMS stock orders consists of: (1) 
Information that customers currently receive from their broker-dealers 
regarding how their not held NMS stock 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 held NMS stock orders and of amending Rule 605 consists of: (1) 
Information that customers currently receive under Rules 605 and 606 or 
information that customers currently receive from their broker-dealers 
that is not required by Rules 605 and 606; (2) the format in which 
information required by Rule 606 for such orders is provided to 
customers; (3) conflicts of interest that broker-dealers currently 
face; (4) how long reports required by 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.
    Finally, the baseline for considering the economic impact of 
amending Rules 605 and 606 includes 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 adopted amendments. These various baseline factors are discussed in 
further detail below.
1. Current $200,000 Threshold
    Currently, Rule 606 of Regulation NMS requires public disclosure of 
a broker-dealer's order routing information for 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.\599\ While market 
participants have access to publicly available order execution quality 
statistics and order routing information for these smaller orders,\600\ 
there is no public disclosure requirement for larger orders.
---------------------------------------------------------------------------

    \599\ See 17 CFR 242.606. See also supra note 4 and accompanying 
text.
    \600\ Rule 605 requires a market center that trades NMS stocks 
to make available to the public monthly electronic execution reports 
that include uniform statistical measures of execution quality. The 
Commission staff exempted from the rule any order with a size of 
10,000 shares or greater. See Letter to Darla C. Stuckey, Assistant 
Secretary, New York Stock Exchange, Inc., from Annette L. Nazareth, 
Director, Division, dated June 22, 2001.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission analyzed how the $200,000 
relates to orders from institutional customers.\601\ With respect to 
orders from institutions, Commission staff reviewed a set of orders 
from institutions and found that 83.2% of orders studied were smaller 
than $200,000 as discussed in the Proposing Release.\602\ However, 92% 
of total dollar volume from orders of institutions in the data has a 
market value of at least $200,000. As also discussed in the Proposing 
Release, the percentage of orders from institutions that have a market 
value of $200,000 varies by activity level of the stock, with a higher 
proportion having a market value of $200,000 in more active 
stocks.\603\ While approximately 20% of orders from institutions in the 
group of most active stocks have a market value of $200,000, less than 
3% of orders from institutions in the group of least active stocks have 
a market value of $200,000.
---------------------------------------------------------------------------

    \601\ See Proposing Release supra note 1, at 49483.
    \602\ See id. 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). The authors also reported 
that the database contains a total of 840 different institutions 
during their sample period. 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 these 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).
    \603\ See id.
---------------------------------------------------------------------------

    Several commenters also discussed the relationship between the 
$200,000 threshold and institutional orders and also found that most 
institutional orders are for trade sizes smaller than $200,000. One 
commenter stated that its internal analysis of institutional trading 
volume indicated that 14% of institutional shares and 65% of 
institutional orders in the month of April 2016 were for less than 
$200,000, and from a sampling of large retail broker customer orders 
for 10 trading days in April 2016, over 10% of shares traded and over 
20% of the value traded were from orders larger than $200,000.\604\ 
Another commenter stated that approximately 35% of orders it sends to 
broker-dealers are less than $200,000.\605\ Another commenter stated 
that for January through August 2016 96% of its orders were below the 
$200,000 threshold.\606\
---------------------------------------------------------------------------

    \604\ See Markit Letter at 6-7.
    \605\ See Capital Group Letter at 2.
    \606\ See Bloomberg Letter at 11-12.
---------------------------------------------------------------------------

2. Current Reporting for NMS Stock Orders of $200,000 and Above
    Currently, as discussed in the Proposing Release, broker-dealers 
may voluntarily provide some information on routing and execution 
quality of NMS stock orders of $200,000 and above to individual 
customers in response to requests by these customers.\607\ Customers 
may also use third-party vendors for Transaction Cost Analysis 
(``TCA'') to analyze the execution prices of orders compared to various 
benchmarks; however, TCA as provided by third-party vendors may not 
encompass an analysis of routing decisions as third-party vendors, 
similar to customers, do not have access to order handling information 
necessary to do so.
---------------------------------------------------------------------------

    \607\ See Proposing Release, supra note 1, at 49478-79.
---------------------------------------------------------------------------

    The Commission further understands that reports that customers 
sending orders of at least $200,000 in market value currently receive 
upon request from their broker-dealers may not provide the consistent 
and standardized information needed to fully assess or compare the 
performance of their broker-dealers.\608\ Moreover, customer orders 
having a market value of at least $200,000 are not subject to public 
reporting, which creates more difficulty to customers in comparing 
broker-dealers and assessing broker-dealers' order routing 
practices.\609\
---------------------------------------------------------------------------

    \608\ See Proposing Release, supra note 1, at 49479 for 
explanation.
    \609\ See id.
---------------------------------------------------------------------------

    Even if a broker-dealer voluntarily provides information about NMS 
stock orders of $200,000 and above 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

[[Page 58391]]

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. This difference in 
access to reports from broker-dealers, and variations in the quality of 
reports received, may result in a non-level playing field with respect 
to order handling information.
3. Publication Period for Reports Required by Rules 605 and 606
    While Rules 605 and 606 have not specified the minimum length of 
time that order execution reports and order routing reports are 
publicly posted, generally, when new reports are available, some market 
centers and broker-dealers will remove the previous report from their 
website and replace it with their most recent report,\610\ and others 
may make reports available for a longer period of time that 
varies.\611\ The Commission understands that this may make it difficult 
for the public to compare the order routing decisions of a broker-
dealer or the execution quality of market centers through time. 
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.
---------------------------------------------------------------------------

    \610\ 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.
    \611\ See, e.g., UBS Order Routing Disclosure, available at 
https://www.ubs.com/us/en/wealth/misc/orderroutingdisclosure.html.
---------------------------------------------------------------------------

4. Available Information on Conflicts of Interest
    As discussed in the Proposing Release, Rule 606(a) requires that 
broker-dealers provide for covered orders, among other things, a 
description of any arrangement for payment for order flow \612\ and any 
profit-sharing relationships.\613\
---------------------------------------------------------------------------

    \612\ 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.
    \613\ See Proposing Release, supra note 1, at 49479-80.
---------------------------------------------------------------------------

    Many commenters agreed with the baseline that payment for order 
flow, fees, and rebates could result in conflicts of interest in 
institutional order routing.\614\ One commenter mentioned that 
investors cannot properly assess the full extent of a broker-dealer's 
conflicts of interest and the effect that conflicts have on routing 
decisions absent more detailed explanations of the conflict.\615\ For 
the reasons discussed throughout this release and in the Proposing 
Release, the Commission believes that financial incentives, such as 
rebates, have the potential to affect how broker-dealers route retail 
stock orders.\616\ Further, as noted above, conflicts of interest may 
affect institutional orders in ways similar to effects on retail 
orders. However, for the reasons discussed in the Proposing Release, 
the ad hoc nature of the order handling disclosures of institutional 
orders may not be as effective in providing institutions with 
information they can use efficiently to assess conflicts of interest, 
because the ad hoc nature of the reports limits the ability of 
institutions to make comparisons about broker-dealers' conflicts of 
interest.
---------------------------------------------------------------------------

    \614\ See, e.g., Ameritrade Letter at 1; Fidelity Letter at 1; 
FSR Letter at 1; and MFA Letter at 1-2.
    \615\ See CFA Letter at 5.
    \616\ For a discussion of studies regarding potential negative 
and positive effects of rebates, see Transaction Fee Pilot Proposing 
Release, supra note 2.
---------------------------------------------------------------------------

5. Available Information on Execution Quality
    As described above and in the Proposing Release, under the rules 
prior to these amendments, broker-dealers have not been required by 
regulation or incentivized by marketplace practices to provide 
customers standardized, comparable reports about the handling of their 
NMS stock orders of at least $200,000 in market value and instead 
customers may receive ad hoc reports from broker-dealers upon 
request.\617\ As a result, the Commission believes that customers may 
not be able to compare reliably the order handling performance of their 
broker-dealers and to evaluate the execution quality of their orders 
among broker-dealers.
---------------------------------------------------------------------------

    \617\ See Proposing Release, supra note 1, at 49480.
---------------------------------------------------------------------------

    In contrast to the ad hoc nature of reporting for NMS stock orders 
of at least $200,000 in market value, Rule 606 has required quarterly 
public reports on customer order routing and disclosure of customer 
order routing information upon request. However, the previously 
existing public reports have not required specific information on 
payment for order flow received, payment from any profit-sharing 
relationship received, or transaction rebates and access fees, and they 
have not been required to separate limit orders into marketable and 
non-marketable limit orders. Moreover, because Rule 605 reports only 
cover held orders and previously existing public reports do not 
distinguish held orders from customer orders, the scope of Rule 605 
reports do not directly align with the scope of Rule 606 reports, which 
limits the ability of customers to assess execution quality of their 
broker-dealers.
6. Format of Current Reports
    As discussed above and in the Proposing Release, broker-dealers 
provide some information on routing and execution quality of 
institutional orders in response to requests from institutional 
customers in a variety of formats. The reports typically are not in a 
structured format.\618\
---------------------------------------------------------------------------

    \618\ See Proposing Release, supra note 1, at 49480-81.
---------------------------------------------------------------------------

7. Quality of Broker-Dealer Routing Practices for Not Held NMS Stock 
Orders
    The Commission does not have data to gauge the current level of 
quality of broker-dealer routing practices for not held NMS stock 
orders, as Rule 606 requires public disclosure of a broker-dealer's 
order routing information for non-directed orders in NMS securities 
that are in amounts less than $200,000 for NMS stocks, and does not 
require broker-dealers to separately report routing of not held 
orders.\619\
---------------------------------------------------------------------------

    \619\ As noted above, including in Section V.B.4, Rule 606 
provides information on the quality of broker-dealer routing 
practices for customer orders; see also Proposing Release, supra 
note 1, at 49481.
---------------------------------------------------------------------------

8. Use of Actionable IOIs
    To encourage additional order flow, some broker-dealers use 
actionable IOIs to communicate to external liquidity providers that 
they have unexecuted liquidity. As noted above and in the Proposing 
Release, because actionable

[[Page 58392]]

IOIs convey information similar to that of an order, a response to an 
actionable IOI may result in an execution at the venue of the IOI 
sender.\620\ Accordingly, a broker-dealer's use of actionable IOIs 
creates potential information leakage similar to that of 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 not held NMS stock orders represented by such actionable IOIs. 
In addition, Rule 606 for customer orders has not required the 
inclusion of actionable IOIs in the reports.
---------------------------------------------------------------------------

    \620\ See Proposing Release, supra note 1, at 49481.
---------------------------------------------------------------------------

    The Commission recognizes that, although actionable IOIs and 
conditional orders are similar, many market participants distinguish 
conditional orders from actionable IOIs because conditional orders 
require additional negotiation before a trade can be executed.\621\ 
Further, according to comments, conditional orders typically are 
messages submitted by participants in an anonymous, dark matching 
platform to confidentially seek a potential counterparty involving a 
one-to-one interaction, rather than a one-to-many interaction typical 
of an actionable IOI.
---------------------------------------------------------------------------

    \621\ See, e.g., BIDS Letter at 4-5; Bloomberg Letter at 3-4; 
Capital Group Letter at 3; FIF Letter at 7; FSR Letter at 7; Markit 
Letter at 11-12; SIFMA Letter at 6.
---------------------------------------------------------------------------

9. Competition, Efficiency, and Capital Formation
    The adopted amendments are likely to affect competition among 
broker-dealers that route both not held and held NMS stock orders. 
These broker-dealers compete in a segment of the market for broker-
dealer services. The Commission discussed market conditions for broker-
dealer services in the Proposing Release, including that the market is 
highly competitive, with most business concentrated among a small set 
of large broker-dealers and thousands of small broker-dealers 
competing.\622\
---------------------------------------------------------------------------

    \622\ See Proposing Release, supra note 1, at 49481-82; see also 
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).
---------------------------------------------------------------------------

    As of December 2016, there were approximately 4,024 registered 
broker-dealers.\623\ Of these, the Commission estimates that 292 
broker-dealers route orders in NMS stocks on a held basis that would be 
subject to the public disclosure requirements of Rule 606(a) or the 
current customer-specific disclosure requirements of Rule 
606(b)(1).\624\ The Commission estimates that 200 broker-dealers route 
institutional orders, all of whom also route retail orders, and that 
each broker-dealer that routes institutional orders will receive an 
average of 200 requests for reports pursuant to adopted Rule 606(b)(3) 
annually.\625\ All of these broker-dealers compete for business from 
retail and institutional customers. The Commission also estimates that 
for calendar year 2017, 6,111 unique filers filed Form 13F on behalf of 
6,580 institutional investment managers. The Commission estimates the 
number of customers to be approximately this number of institutional 
investment managers.\626\
---------------------------------------------------------------------------

    \623\ See supra note 467.
    \624\ See supra Section IV.D.4.a.ii.
    \625\ See supra Section IV.C.2 and note 513.
    \626\ The Commission estimates the number of customers that may 
place institutional orders as the number of entire 13F filings 
submitted during the calendar year 2017. In calendar year 2017, 
6,580 unique managers filed 13F reports. The Commission recognizes 
that not all of these institutions necessarily trade NMS stocks. 
Further, some customers that submit institutional orders may not be 
13F institutions. While this estimate may not be precise, the 
Commission believes that it approximates the number of customers 
that may be affected by the adopted 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.\627\ In 
addition, the fragmentation of NMS stock trading into 13 registered 
exchanges, more than 40 ATSs, and over 200 OTC market makers \628\ 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, may be presented inconsistently over time, or may 
employ complex calculations using undisclosed methods.\629\ Further, 
the format of the reports may limit the comparison of reports across 
broker- dealers.\630\ 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 to compete by offering better execution 
quality, broker-dealers may route customer orders in ways that do not 
necessarily promote better execution quality.\631\ Such inefficient 
routing could have effects on the market for trading services.
---------------------------------------------------------------------------

    \627\ See Proposing Release, supra note 1, at 49436.
    \628\ See supra Section I; see also Proposing Release, supra 
note 1, at 49481.
    \629\ See generally supra Sections V.B.2, V.B.5, and V.B.6.
    \630\ See supra Section V.B.6. 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.
    \631\ See supra Section V.B.4, 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 estimates that there are 381 market centers to which Rule 
605 applies.\632\
---------------------------------------------------------------------------

    \632\ The 381 market centers estimated for purposes of the PRA 
include approximately 214 OTC market makers (not including market 
makers claiming an exemption from the reporting requirements of the 
Rule), plus 21 exchanges, 1 securities association, 104 exchange 
market makers, and 41 ATSs. See supra note 469 and accompanying 
text.
---------------------------------------------------------------------------

    These market centers compete with each other for order flow on a 
number of dimensions, including execution quality. Their primary 
customers are the broker-dealers that route their own orders 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 in an attempt to attract more retail order flow.\633\ 
Trading centers also may adjust fees and rebates to incentivize 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

[[Page 58393]]

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 will exist with greater 
competition on execution quality.
---------------------------------------------------------------------------

    \633\ See, e.g., Securities Exchange Act Release No. 67347 (July 
3, 2012), 77 FR 40673 (July 10, 2012) for the NYSE and NYSEAMER 
pilots; Securities Exchange Act Release No. 68303 (November 27, 
2012), 77 FR 71652 (December 3, 2012) for the CboeBZX 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 BX pilot.
---------------------------------------------------------------------------

    Transaction costs reflect the level of efficiency in the trading 
process, with higher transaction costs reflecting less efficiency.\634\ 
Inefficiency in the trading process creates friction, which limits the 
ability for prices to fully reflect a stock's underlying value.\635\ 
Stoll (2000) defines friction as follows: ``[f]riction in financial 
markets measures the difficulty with which an asset is traded.'' \636\ 
Stoll follows Demsetz (1968) \637\ 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 of 
arbitrageurs or informed customers to push prices to their underlying 
values, and thus friction makes prices less efficient.
---------------------------------------------------------------------------

    \634\ See Hans R. Stoll, Friction, 55 Journal of Finance 1479 
(2000).
    \635\ See id.
    \636\ See id.
    \637\ See Harold Demsetz, The Cost of Transacting, 82 Quarterly 
Journal of Economics 33 (1968).
---------------------------------------------------------------------------

    These frictions may have an adverse impact on capital formation. In 
particular, an increase in transaction costs may hinder customers' 
trading activity that would support efficient adjustment of security 
prices and as a result may limit prices' ability to reflect fundamental 
values. The resulting less efficient prices result in some issuers 
experiencing a cost of capital that is higher than if their prices 
fully reflected underlying values while some other issuers might 
experience the opposite. This, in turn, may limit efficient allocation 
and capital formation. If an issuer's cost of capital is higher than in 
perfectly efficient markets, its projects would appear less profitable 
than they otherwise would be. The opposite would be true for an issuer 
with a cost of capital lower than in perfectly efficient markets. Thus, 
on average, inefficiencies can result in funding projects that generate 
less capital than some unfunded projects would have.

C. Costs and Benefits

    The Commission identified costs and benefits associated with the 
amendments to Rules 600, 605, and 606, which are discussed below. The 
Commission quantifies the costs where possible and provides qualitative 
discussion when quantifying costs and benefits is infeasible. Many, but 
not all, of the costs of the adopted 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 
estimates being used in the economic analysis below.\638\
---------------------------------------------------------------------------

    \638\ See supra Section IV.
---------------------------------------------------------------------------

1. Customer-Specific Order Handling Disclosures
a. Scope of Customer-Specific Order Handling Disclosure in Rule 
606(b)(1) and 606(b)(3), and the De Minimis Exceptions in Rules 
606(b)(4) and (b)(5)
i. Benefits
1. Not Held Orders/Rule 606(b)(3)
    The Commission believes that the adopted approach to Rule 
606(b)(3),\639\ based on the distinction between not held and held 
orders, targets the Rule 606(b)(3) reports to the investors most likely 
to benefit from them and to the orders in which the reports would be 
most meaningful. Because of the discretion afforded in the handling of 
not held orders, the complexity in which not held orders are handled, 
and the customer-specific nature of instructions for handling not held 
orders,\640\ the granular level of information the Rule 606(b)(3) 
reports provide for not held orders will be beneficial. Commenters 
further indicated that retail investor orders are generally held and 
institutional investor orders are generally not held.\641\ The 
Commission also recognizes that broker-dealers have routing discretion 
on held orders. However, not held orders allow discretion on additional 
dimensions such as timing and execution strategy.
---------------------------------------------------------------------------

    \639\ See Section III.A.1.b.iii.
    \640\ Not held NMS stock orders from customers frequently limit 
broker-dealer discretion in some manner.
    \641\ See supra note 58.
---------------------------------------------------------------------------

    In light of the comments received suggesting the order type 
approach, the Commission staff performed a supplemental analysis of 
that approach. To examine the usage of not held orders by institutional 
customers, the staff analyzed the percentage of not held orders 
received from institutional and individual accounts from the FINRA's 
OATS data.\642\ The staff studied orders submitted from customer 
accounts of 120 randomly selected NMS stocks listed on NYSE during the 
sample period of December 5, 2016, to December 9, 2016, consisting of 
40 large-cap stocks, 40 mid-cap stocks, and 40 small-cap stocks.\643\ 
Consistent with the comments, the staff analysis confirms that orders 
received from institutional accounts are more likely to be not held 
orders than orders received from individual accounts. Specifically, the 
staff analysis found that among the orders received from the 
institutional accounts, about 69% of total shares and close to 39% of 
total number of orders in the sample are not held orders, whereas among 
the orders received from the individual accounts, about 19% of total 
shares and about 12% of total number of orders in the sample are not 
held orders. To the extent that institutional investors are generally 
more sophisticated and in a better position to understand and, 
therefore, benefit from the Rule 606(b)(3) reports, this result 
suggests that targeting the not held orders for these customer-specific 
reports results in the reports being available to those most likely to 
benefit from them. Additionally, because placing not held orders 
requires an understanding of the price, time, and other discretion 
embedded in not held orders, those placing not held orders are likely 
to be relatively sophisticated, even if they are not institutions. 
Because Rule 606(b)(3) reports will be very detailed, these customers 
are likely to be among those sophisticated enough to value the 
information in Rule 606(b)(3) reports and interpret the content of the 
reports in ways unique to them.\644\
---------------------------------------------------------------------------

    \642\ The OATS data classifies institutional accounts as defined 
in FINRA Rule 4512(c) and individual accounts as an account that 
does not meet the definition of FINRA Rule 4512(c) and is not a 
proprietary account. In OATS data, ``Account Type'' identifies the 
type of beneficial owner of the account for which the order was 
received or originated. From OATS data, the analysis used orders 
originated from the following account types only: Individual 
Customer (I)--An account that does not meet the definition of FINRA 
Rule 4512(c) and is also not a proprietary account; Institutional 
Customer (A)--An institutional account as defined in FINRA Rule 
4512(c). The analysis also used indicators for order origination 
from the OATS data. By FINRA definition, order origination 
identifies whether the order was received from a customer of the 
firm, originated by the firm, or whether the order was received from 
another Broker/Dealer. By FINRA definition, F--Order was received 
from a customer or originated with the Firm; W--Received from 
another Broker/Dealer. The analysis used orders with the indicator F 
only.
    \643\ For more details, see OATS Reporting Technical 
Specifications, available at http://www.finra.org/sites/default/files/TechSpec_062718.pdf.
    \644\ Some customers give complete discretion to a broker-dealer 
in handling their orders while other customers may place limits on 
or provide instructions regarding how a broker-dealer can handle 
their orders.
---------------------------------------------------------------------------

    Consistent with commenters, the Commission believes that the 
adopted approach will facilitate identification of orders by broker-
dealers that is consistent with many of the broker-dealers' current 
practices, which in turn could promote the accuracy of order handling 
information of not held orders and help ensure the benefits to 
customers that receive the reports. As

[[Page 58394]]

noted by multiple commenters, broker-dealers and other market 
participants are familiar with the held and not held order type 
classifications, classifying orders as held or not held would be 
consistent with current industry practice, and the terms held and not 
held are common terms of usage in the securities markets.\645\ Indeed, 
as pointed out by commenters, broker-dealers already must mark orders 
that they execute as held or not held, these order classifications are 
commonly recognized in the FIX Protocol and utilized in OATS technical 
specifications, the Commission's definition of ``covered order'' in 
Rule 600(b)(15) already relies on these order classifications, and 
broker-dealers already characterize orders on a held or not held basis 
to comply with Rule 605's covered order requirement and other rules 
such as FINRA's Manning rule (FINRA Rule 5320).
---------------------------------------------------------------------------

    \645\ See Citadel Letter at 3; Markit Letter at 3, 7-8; KCG 
Letter at 4; Capital Group Letter at 2-3; SIFMA Letter at 3.
---------------------------------------------------------------------------

2. De Minimis Exceptions and Rule 606(b)(1)
    The Commission is adopting Rules 606(b)(4) and Rule 606(b)(5) de 
minimis exceptions from Rule 606(b)(3)'s requirements, which except a 
broker-dealer from the Rule 606(b)(3) requirements at the firm level or 
the customer level.\646\
---------------------------------------------------------------------------

    \646\ See supra Section II.A.1.b.iv and note 135.
---------------------------------------------------------------------------

    With respect to the Rule 606(b)(4) de minimis, commenters suggested 
that firms that receive less than 5% of orders from institutions should 
be exempt from requirements to provide disclosures for institutional 
orders, both at the individual investor level and in the 
aggregate,\647\ and that the de minimis threshold should closely match 
a broker-dealer's core business and targeted customer profile.\648\ 
Commenters that supported a de minimis exception from Rule 606(b)(3) 
also supported disclosure based on whether an order is held or not held 
and generally discussed the reasoning for a de minimis exception in 
that context.\649\
---------------------------------------------------------------------------

    \647\ See STA Letter II at 2; Ameritrade Letter at 2; Wells 
Fargo Letter at 5.
    \648\ See, e.g., Wells Fargo Letter at 5; Citadel Letter at 3; 
Citadel Letter II at 1-2 (noting that the 5% threshold suggested by 
other commenters should ensure that smaller broker dealers are not 
adversely affected by the new disclosure requirement, and noting 
that a threshold based on a percentage of orders or shares received 
could potentially be set lower than a threshold based on a 
percentage of executed shares).
    \649\ See, e.g., FIF Letter at 5, 10; STA Letter II at 2; 
Citadel Letter at 3; Thomson Reuters Letter at 1; Ameritrade Letter 
at 2.
---------------------------------------------------------------------------

    To assess commenters' suggestions of a 5% de minimis threshold for 
Rule 606(b)(3) requirements, the staff conducted a supplemental 
analysis, which found that among 342 broker-dealers that receive not 
held orders from customers in the sample data, 28 broker-dealers would 
receive de minimis exceptions from Rule 606(b)(3)'s requirements.\650\ 
In addition, the analysis found that among all 746 broker-dealers in 
the sample another 404 broker-dealers did not receive any not held 
orders from customers and would not be subject to Rule 606(b)(3). 
Therefore, to the extent that each of these broker-dealers avails 
itself of the firm-level de minimis exception under Rule 606(b)(4), 
customers sending not held orders to these broker-dealers may not 
receive Rule 606(b)(3) reports, and also therefore, the benefits of 
increased transparency of the customer-specific order handling 
disclosure required by Rule 606(b)(3).\651\ However, the Commission 
believes that the amount of not held orders that will be excluded under 
the de minimis exception would be minimal. Specifically, the staff 
analyzed the broker-dealers that are likely to receive the firm-level 
exception and the amount of not held orders of these broker-dealers.
---------------------------------------------------------------------------

    \650\ See supra notes 642 and 643. In addition, 164 broker-
dealers receive only not held orders.
    \651\ One commenter stated that a de minimis exception would be 
inconsistent with the objective of providing a standardized report 
for all customers, which was one of the Commission's motivations for 
Rule 606(b)(3). See Bloomberg Letter at 15-16.

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[[Page 58395]]

[GRAPHIC] [TIFF OMITTED] TR19NO18.000

    Figure 1 displays the distribution of broker-dealers that receive 
not held orders by the ratio of not held shares as a fraction of total 
shares for each broker-dealer. As Figure 1 indicates, broker-dealers 
that would meet the firm-level exception because they rarely receive 
not held orders in relation to held orders are concentrated below the 
5% threshold. Specifically, for 23 of the 28 broker-dealers that would 
meet the firm-level exception, not held orders account for less than 
2.5% of each broker's total order receipts.\653\ Moreover, as shown in 
Table 1 below, the supplemental staff analysis found that less than 
0.05% of total shares and less than 0.1% of total not held shares in 
the sample would be excluded from the Rule 606(b)(3) reports by the 
firm-level de minimis exception, indicating that the amount of not held 
orders that will be excluded under that exception would be minimal.
---------------------------------------------------------------------------

    \652\ ``Not held ratio (nh ratio)'' stands for the ratio of not-
held shares to the total shares for each broker-dealer.
    Note: The data is from FINRA's OATS data, consisting of 120 
randomly selected NMS stocks listed on NYSE during the sample period 
of December 5, 2016 to December 9, 2016, consisting of 40 large-cap 
stocks, 40 mid-cap stocks, and 40 small-cap stocks. Not held ratio 
is calculated by the ratio of not held shares as a fraction of total 
shares for each broker-dealer that receives non-zero not held orders 
in the sample. The horizontal axis is divided by increments of 0.25% 
of not held ratio.
    \653\ See Section III.A.1.b.iv supra for a discussion of why a 
5% threshold is reasonable in light of the cluster of firms below 
2.5%.

                                             Table 1--Number of Broker-Dealers and Volume By Not Held Ratio
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                          % of total not     Cum. % of                       Cum. % of
                     Not held ratio                        # of broker-    # of broker-     held shares   total not held    % of total     total shares
                                                              dealers         dealers          (0%)         shares (0%)     shares (0%)        (0%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
0% (only held orders)...................................             404             404  ..............  ..............  ..............  ..............
0%< nh ratio <5%........................................              28             432            0.08            0.08            0.05            0.05
5%< = nh ratio <10%.....................................               8             440            0.10            0.18            0.06            0.11
10%< = nh ratio <15%....................................               4             444            0.29            0.47            0.17            0.28
15%< = nh ratio <20%....................................               6             450            3.68            4.16            2.19            2.47
20%< = nh ratio <25%....................................               5             455            0.38            4.54            0.23            2.70
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Further, some firms, for business reasons, may choose to provide 
the Rule 606(b)(3) order handling disclosures to their customers, 
regardless of the de minimis exceptions. Further, as discussed in 
Section III.A.1.vi, broker-dealers that qualify for the firm-level de 
minimis exception still must provide, if requested, the Rule 606(b)(1) 
reports for

[[Page 58396]]

not held NMS stock orders that they receive from customers, and 
therefore customers will still receive the benefits of the customer-
specific reports required by the adopted amendment to Rule 606(b)(1) 
discussed below.
    The Commission also acknowledges that adopted Rule 606(b)(5)'s 
customer-level de minimis exception may limit the benefits of Rule 
606(b)(3) for some types of customers because some orders that would 
have been included in the Rule 606(b)(3) reports would be excluded 
under this de minimis exception.\654\ Because, under the customer-level 
de minimis exception, a broker-dealer will not be obligated to provide 
the new Rule 606(b)(3) order handling disclosures to any customer that 
trades on average each month for the prior six months less than 
$1,000,000 of notional value of not held orders through the broker-
dealer, customers sending not held orders less than this threshold will 
not receive the benefit of Rule 606(b)(3) reports. The Commission also 
considered that the average and rolling nature of the customer-level de 
minimis exception may not capture certain customers that exceed the 
threshold during certain months and not others. As a result, broker-
dealers would be required to provide such customers with the Rule 
606(b)(3) reports for only some months. However, the months for which 
the customer might not receive the detailed order handling information 
in the Rule 606(b)(3) reports are the ones in which the customer was 
less active. For example, customers could conceivably receive reports 
eleven months out of the year if they have one month of significant 
trading volume during a trading year. In this example, the one month 
excluded from the report would not be a significant part of their 
overall activity. Moreover, some firms, for business reasons, may 
choose to provide the Rule 606(b)(3) order handling disclosures to 
their customers, regardless of the customer-level de minimis exception. 
Additionally, as discussed above, broker-dealers still must provide, if 
requested, the Rule 606(b)(1) disclosures for not held NMS stock orders 
subject to the customer-level de minimis exception that they receive 
from customers, and therefore customers could still receive the 
benefits from the customer-specific reports required by the adopted 
amendment to Rule 606(b)(1). Further, to the extent that customers 
receive additional information on broker-dealers' order handling 
practices and as a result could assess and compare their broker-dealers 
better, customers may choose to send more not held orders in order to 
receive Rule 606(b)(3) reports.
---------------------------------------------------------------------------

    \654\ Because of the lack of data that would quantify the costs 
that would result from the customer-level de minimis exception, the 
Commission provides a qualitative discussion.
---------------------------------------------------------------------------

    The Commission also analyzed how the benefits of Rule 606(b)(1) 
compare to the scope of rules prior to today's amendments. The 
Commission believes that amended Rule 606(b)(1) reports are targeting 
the appropriate orders resulting in the reports being available to 
those mostly likely to benefit from them. Under the scope of public 
order handling reports prior to the amendments, customer orders with a 
market value of less than $200,000 were included in the public order 
routing reports and broker-dealers would need to prepare Rule 606(b)(1) 
reports of such orders upon request. In addition, broker-dealers would 
need to prepare 606(b)(1) reports for orders having a market value of 
at least $200,000 upon requests under the scope of previously existing 
reporting requirements. The amended Rule 606(b)(1) requires a broker-
dealer, upon customer request, to provide the disclosures set forth in 
Rule 606(b)(1) for orders in NMS stock that are submitted on a held 
basis, and for orders in NMS stock that are submitted on a not held 
basis and for which the broker-dealer is not required to provide the 
customer a report under Rule 606(b)(3) pursuant to the de minimis 
exceptions. As discussed in Section III.A.1.b.vi., whereas the Rule 
606(b)(3) disclosures are designed primarily for institutional 
customers, the Rule 606(b)(1) disclosures that cover held NMS stock 
orders are more retail customer-focused and thus better aligned with 
the type of customer most likely to submit held NMS stock orders. The 
staff's supplemental analysis found that about 25% of shares and about 
33% of not held orders in the sample would have received 606(b)(1) 
reports under the requirements prior to today's amendments but will 
receive Rule 606(b)(3) reports. As discussed in Section V.C.1.a.i,1., 
Rule 606(b)(3) reports are more likely to benefit these customers 
submitting not held orders than Rule 606(b)(1) reports are. A staff's 
supplemental analysis also showed that about close to 41% of total 
shares and about 66% of total numbers of orders in the sample would be 
eligible for the disclosures required by Rule 606(b)(1). As discussed 
above, because customers sending held orders may have a different level 
of sophistication to understand the benefits of the 606(b)(1) reports 
and may have less of a need for the detail and granularity in customer-
specific reports, these customers may not frequently request the Rule 
606(b)(1) reports. However, as broker-dealers are required to provide 
Rule 606(b)(1) reports on customers' requests, Rule 606(b)(1) could 
provide an option to these customers to request additional information 
if they believe that they would benefit from doing so. As a result, the 
amended Rule 606(b)(1) could keep the same benefits for such customers 
by providing them the opportunity to better compare and monitor broker-
dealers' order routing practices, which could promote better execution 
quality of held orders and competition among broker-dealers.
3. Comparison to the Proposal
    The Commission also believes that the benefits of the amended scope 
are greater than the potential benefits of the Proposal, which would 
have required standardized customer-specific reports on orders of at 
least $200,000.\655\ As discussed below, the Commission believes that 
the proposed scope, reflected by the proposed definition of 
institutional order, excluded many institutional orders whereas the 
adopted scope better targets those likely to benefit from the 
standardized Rule 606(b)(3) customer-specific reports, provides for 
more accurate identification of the orders to be included and includes 
a more comprehensive set of orders in the Rule 606(b)(3) reports.
---------------------------------------------------------------------------

    \655\ See Proposing Release, supra note 1, at 49444.
---------------------------------------------------------------------------

    Relative to the proposed $200,000 threshold, the Commission 
believes that using not held orders to trigger the Rule 606(b)(3) 
reports better targets the standardized customer-specific reports to 
the investors most likely to benefit from them and to the orders in 
which the reports would be more meaningful. Further, the Commission 
believes that some investors who are not institutions could benefit 
from Rule 606(b)(3) reports with respect to orders for which they 
provide more discretion to their broker-dealers and in which they may 
provide some unique instructions. The not held order type 
classification better captures this kind of discretion than does the 
$200,000 threshold.
    While the proposed rule intended to target institutional orders for 
inclusion in the standardized customer-specific reports required by 
Rule 606(b)(3), the $200,000 threshold would have excluded most 
institutional trading. As discussed in the Proposing Release, in a 
Commission staff analysis, approximately 83.2% of the total number of 
orders from institutions to buy or sell a quantity of an NMS stock

[[Page 58397]]

during the calendar year 2013 and 2014 had a market value less than 
$200,000, and in the least active stocks, less than 3% of orders from 
institutions would exceed the threshold.\656\ Consistent with this 
staff analysis, multiple commenters indicated that distinguishing 
retail orders from institutional orders on the basis of the dollar-
value threshold would exclude the majority of orders from institutions 
from the institutional order handling disclosure requirements and 
include retail orders that fall over the $200,000 threshold within the 
definition of institutional order.\657\ Commenters also stated that 
because institutional customers break up their orders into smaller 
child orders, a distinction based on dollar-value threshold would 
result in inaccurate order identification or duplicate reporting of 
institutional customer orders as both institutional and retail 
orders.\658\
---------------------------------------------------------------------------

    \656\ See Proposing Release, supra note 1, at 49483.
    \657\ See, e.g., Capital Group Letter at 2; FIF Letter at 3; FIF 
Addendum at 2; FSR Letter at 3; HMA Letter at 5-6; ICI Letter at 3-
7; KCG Letter at 5; Markit Letter at 6-7.
    \658\ See Bloomberg Letter at 11; Citadel Letter at 2; Dash 
Letter at 3; FIF Addendum at 2; FSR Letter at 4; HMA Letter at 5-6; 
MFA Letter at 3; SIFMA Letter at 2.
---------------------------------------------------------------------------

    The Commission believes that the adopted approach will create 
greater benefits than the proposed $200,000 threshold because it 
provides more accurate identification of the orders to be included in 
the reports for customers. In particular, to the extent that some 
orders are unpriced and broker-dealers would need to estimate the 
dollar price of such orders to determine whether they meet the $200,000 
threshold, the proposed rule could create misspecification of orders 
because of estimation error. If broker-dealers incorrectly assign 
prices to unpriced orders, orders that should have been included in the 
Rule 606(b)(3) reports would be excluded from those reports, which 
could create inaccuracies as to which orders would be covered by the 
Rule 606(b)(3) reports. As a contrast, the distinction based on not 
held and held order identification will reduce the inaccuracies of the 
order handling disclosure because all orders, as discussed above, are 
already marked as not held or held and thus the identification would 
require no additional processing, which can introduce errors. Moreover, 
as discussed above, broker-dealers are already familiar with the 
identification of orders using the not held and held basis, further 
facilitating the accuracy as to which the intended orders will be 
covered by the Rule 606(b)(3) reports.
    The Commission also believes that the adopted approach will provide 
more comprehensive 606(b)(3) reports for customers than the proposed 
$200,000 threshold, thus providing greater benefits to those customers 
and potentially benefiting more customers. A staff's supplemental 
analysis found that close to 60% of all shares and close to 34% of the 
total number of orders in the sample are not held orders and therefore 
will receive Rule 606(b)(3) reports under the adopted approach, whereas 
about 45% of all shares and just above 1% of total number of orders in 
the sample data have a market value of at least $200,000 and therefore 
would have received Rule 606(b)(3) reports under the proposed 
rule.\659\ The staff analysis suggests that the adopted approach will 
cover a greater universe of orders in the Rule 606(b)(3) reports 
relative to the proposed $200,000 threshold.
---------------------------------------------------------------------------

    \659\ See supra notes 642 and 643.
---------------------------------------------------------------------------

    The Commission believes that the adopted approach will provide 
benefits to customers placing not held orders having a market value of 
less than $200,000 whereas the proposed rule would not. The staff's 
supplemental analysis found that, among the sample orders of less than 
$200,000, about 45% of the total shares and about 33% of the total 
number of orders in the analysis were not held orders. These orders 
were considered as ``retail-sized orders'' and not entitled to the Rule 
606(b)(3) disclosures under the proposed rule. Thus customers sending 
these orders would not have been entitled the benefit of receiving the 
Rule 606(b)(3) disclosures. Under the adopted approach, these orders 
will receive the Rule 606(b)(3) reports. As a result, customers sending 
not held orders of less than $200,000 in market value will receive the 
benefits of enhanced transparency in their broker-dealers' order 
handling disclosure required by Rule 606(b)(3). The Commission 
therefore believes that customers placing not held orders of less than 
$200,000 in market value will receive greater benefits as a whole from 
the Commission's adopted approach as compared to the proposed rule 
because the adopted rule will require broker-dealers to provide 
detailed and uniform information pursuant to Rule 606(b)(3) for all not 
held orders regardless of order dollar value.
    The Commission acknowledges that the benefits to customers that 
place held orders with at least $200,000 in market value could be lower 
under the adopted rule than under the proposed rule. Specifically, held 
orders having a market value of at least $200,000 will not be included 
in the standardized customer-specific reports under adopted Rule 
606(b)(3), whereas they would have been included under the Proposal. 
The staff's supplemental analysis found that among orders having a 
market value of at least $200,000, close to 23% of total shares and 
about 36% of the total number of orders in the sample will not receive 
Rule 606(b)(3) reports under the adopted rule, whereas these orders 
would have been included in the customer-specific reports under the 
proposed $200,000 threshold. Thus, some customers that send held orders 
of a market value of at least $200,000 will not benefit from the order 
handling transparency under Rule 606(b)(3). However, a customer could 
request the disclosures set forth in Rule 606(b)(1) for these orders, 
which would maintain the status quo. Also, customers could switch to 
sending not held orders from held orders in order to receive the 
benefits of the Rule 606(b)(3) reports, which could result in a worse 
execution quality for these orders, assuming customers currently 
optimize their decision on when to request that an order be handled as 
not held. However, the Commission recognizes that if the benefits of 
including large held orders in the standardized customer-specific 
report under adopted Rule 606(b)(3) outweigh the execution quality cost 
of requesting not held handling of such orders, the customer could 
submit such orders as not held.
ii. Costs
    As discussed in detail below, the Commission recognizes that the 
scope of orders eligible for the Rule 606(b)(3) reports influences the 
compliance and other costs of the adopted amendments. First, broker-
dealers will incur costs to ensure the Rule 606(b)(3) reports cover the 
required orders and to implement the de minimis exceptions set forth in 
Rule 606(b)(4) and Rule 606(b)(5). The Commission believes the 
compliance costs associated with identifying not held orders are lower 
than the compliance costs associated with the proposed $200,000 
threshold. In addition, the Commission believes that the two de minimis 
exceptions will reduce the costs to broker-dealer of producing the 
customer-specific reports of Rule 606(b)(3), but acknowledges that 
broker-dealers might incur costs in producing the customer-specific 
reports in Rule 606(b)(1) for the orders that, due to the de minimis 
exceptions, are not eligible for the customer-specific reports of Rule 
606(b)(3). Further, the Commission acknowledges additional costs that 
will originate from the

[[Page 58398]]

uncertainty created by the de minimis exceptions and from potential 
behavior changes of broker-dealers and customers. The Commission 
quantifies the costs where possible and provides qualitative discussion 
when quantifying costs and benefits is not feasible. Many, but not all, 
of the costs of the adopted 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 
estimates being used in the economic analysis below.\660\
---------------------------------------------------------------------------

    \660\ See supra Section IV.
---------------------------------------------------------------------------

1. Compliance Costs
    The requirement for customer-specific order handling disclosure 
under Rule 606(b)(3) based on not held or held orders will create 
compliance costs, as broker-dealers will need to prepare the customer-
specific reports for not held orders required by Rule 606(b)(3).\661\ 
The estimates of the related compliance costs are encompassed in the 
cost estimates discussed in Section V.C.1.b.ii.3. The adopted approach 
will create compliance costs for broker-dealers to implement a process 
to identify not held orders for inclusion in Rule 606(b)(3) reports and 
for the processing time to screen order data for not held orders when 
generating the reports.\662\ However, the Commission believes that the 
adopted approach is targeted to moderate compliance burdens. In 
particular, as discussed in Section V.C.1.a.i, multiple commenters 
stated that broker-dealers are already familiar with the held and not 
held order type classifications and orders are already marked as held 
or not held.\663\ Therefore, classifying orders as held or not held 
would not create other additional implementation or ongoing costs for 
broker-dealers.
---------------------------------------------------------------------------

    \661\ The staff's supplemental analysis found that when all of 
the orders broker-dealers receive are on a not held basis, about 46% 
of total shares are less than $200,000. In addition, when the ratio 
of not held orders that broker-dealers receive from customers is 50% 
or less excluding broker-dealers receiving a firm-level de minimis 
exception, about 14% of total shares of orders included in the 
analysis have a market value of at least $200,000 and are not held 
orders. As a result, the analysis suggests that the reporting costs 
could vary depending on the amount of not held orders that the 
broker-dealers receive.
    \662\ The adopted approach will also create initial compliance 
costs for market centers and the broker-dealers that will have to 
review and update compliance manuals and written supervisory 
procedures and update citation references to any such defined term. 
The estimates of the related compliance costs are encompassed in the 
cost estimates discussed in Section IV.D.5.
    \663\ See Citadel Letter at 3; Markit Letter at 3, 7-8; KCG 
Letter at 4; Capital Group Letter at 2-3; SIFMA Letter at 3.
---------------------------------------------------------------------------

    The Commission also acknowledges that the de minimis thresholds in 
adopted Rules 606(b)(4) and (b)(5) will also create compliance costs to 
the extent a broker-dealer avails itself of one or both of the 
exceptions. Specifically, to apply the de minimis thresholds, broker-
dealers will need to create systems to identify whether the amount of 
not held orders broker-dealers receive from customers would meet the 
threshold of either the firm-level or the customer-level de minimis 
exception. Broker-dealers will also need to conduct extra data 
processing to determine whether they or any customers are excepted and 
to screen out any excepted orders when creating the Rule 606(b)(3) 
reports.
    The amended rule would also impose additional compliance costs on 
broker-dealers from the requirement set forth in Rule 606(b)(1) prior 
to today's amendments. As discussed above, Rule 606(b)(1), as amended, 
requires a broker-dealer, upon customer request, to provide the 
disclosures set forth in Rule 606(b)(1) for orders in NMS stock that 
are submitted on a held basis, and for orders in NMS stock that are 
submitted on a not held basis and for which, under the de minimis 
exceptions, the broker-dealer is not required to provide the customer a 
report under Rule 606(b)(3). As discussed above, Rule 606(b)(1), as 
amended, does not modify any of the customer-specific disclosure 
requirements prior to today's amendments but rather modifies the 
categories of orders to which the disclosure applies. Under this 
modification, Rule 606(b)(1) includes held orders and not held orders 
subject to the de minimis exceptions. Therefore, broker-dealers that 
receive such orders could incur costs to respond to customer requests 
as required by Rule 606(b)(1). However, to the extent that broker-
dealers already have systems in place to prepare the reports required 
by the rule prior to these amendments, the amended rule should not 
create substantial new costs to these broker-dealers to create a new 
system to prepare Rule 606(b)(1) reports. Additionally, because broker-
dealers would need to prepare Rule 606(b)(1) reports only when 
customers request such reports, and, as discussed above, to the extent 
that customers typically placing held orders may not value customer-
specific reports required by Rule 606(b)(1) and therefore would not 
frequently request such reports, Rule 606(b)(1) would not impose 
significant ongoing compliance costs to broker-dealers.
    The Commission also analyzed how the compliance costs of the 
adopted rule compare to the anticipated compliance costs of the 
proposed rule. Under the adopted approach, broker-dealers will need to 
prepare Rule 606(b)(3) reports for not held orders of any dollar value, 
including not held orders with a market value less than $200,000, and 
will need to, upon request, prepare Rule 606(b)(1) reports for held 
orders of any dollar value and for not held orders covered by the de 
minimis exceptions under Rule 606(b)(4) or 606(b)(5). As discussed in 
Section V.C.1.a.i., the adopted rule will include more orders in the 
Rule 606(b)(3) reports than under the proposed rule. The staff's 
supplemental analysis also found that among the orders of less than 
$200,000 in the sample data, about 45% of the total shares and about 
33% of the total number of orders are not-held.\664\ These orders were 
considered ``retail-sized orders'' under the proposed rule. Thus, 
broker-dealers would have not been required to prepare Rule 606(b)(3) 
reports for these orders, but would have been required to prepare 
public order routing reports and Rule 606(b)(1) reports upon request. 
The Commission believes that the adopted approach should moderate 
processing costs for broker-dealers compared to the proposed rule. To 
the extent that broker-dealers already have a system to generate Rule 
606(b)(1) reports pursuant to the previously existing rule, broker-
dealers would need to modify existing systems to prepare Rule 606(b)(3) 
reports without the need to create entirely new systems to process 
customer orders. Additionally, as discussed above, broker-dealers that 
receive an insignificant amount of not held order flows will receive 
exceptions in preparing for Rule 606(b)(3) reports under Rule 606(b)(4) 
and 606(b)(5), which could limit the scale of order processing costs on 
certain broker-dealers to provide Rule 606(b)(3) reports. The 
Commission also believes that the adopted rule would impose lower 
implementation and processing costs on broker-dealers relative to the 
Proposal. To the extent that some orders are unpriced, under the 
proposed rule broker-dealers would have needed to estimate the current 
market price of NMS stocks when the orders were received to identify 
the value of the orders for comparison to the $200,000 threshold in the 
Proposal. This would require broker-dealers to create systems to 
estimate the value of unpriced orders. Under the adopted rule, however, 
consistent with the Commission's analysis immediately above, broker-
dealers would not incur such

[[Page 58399]]

compliance costs because orders are currently identified as held or not 
held.
---------------------------------------------------------------------------

    \664\ See supra notes 642 and 643.
---------------------------------------------------------------------------

2. Influence of De Minimis Exceptions on Compliance Costs
    The Commission believes that the two de minimis exceptions to the 
adopted rule will further limit the scale of compliance costs on 
certain broker-dealers to provide Rule 606(b)(3) reports. Specifically, 
the Commission believes that adopted Rule 606(b)(4), which provides for 
a firm-level de minimis exception for broker-dealers, will limit the 
costs to broker-dealers that rarely handle not held NMS stock order 
flow. Absent a firm-level de minimis threshold, every broker-dealer 
that handles not held orders, regardless of its customer base and core 
business, would be subjected to compliance costs to create the systems 
and processes to generate and deliver the Rule 606(b)(3) reports. The 
supplemental staff analysis found that among the 342 broker-dealers 
that receive not held orders from customers in the sample data, about 
8% (28 broker-dealers) would qualify for the firm-level de minimis 
exception from Rule 606(b)(3)'s requirements. Accordingly, the firm-
level de minimis exception in Rule 606(b)(4) would result in 
approximately 8% of broker-dealers not incurring the compliance costs 
associated with the standardized customer-specific order handling 
reports required by Rule 606(b)(3). As discussed in Section 
V.C.1.a.i.2., the number of orders that will be excluded under the de 
minimis exception would be minimal compared to the current reporting 
requirement and to the proposal. The minimal amount of not held orders 
excluded under the firm-level de minimis exception suggests that there 
would be only limited benefits of Rule 606(b)(3) in circumstances where 
broker-dealers handle a minimal amount of not held orders, and that the 
resulting benefits of customer-specific order handling disclosures 
required by Rule 606(b)(3) may not be as great as intended.
    The Commission also believes that the adopted approach of including 
a de minimis exception at the customer-level under the adopted Rule 
606(b)(5) will also limit the compliance costs of broker-dealers 
associated with the new customer-specific order handling disclosures 
under Rule 606(b)(3). This exception, therefore, could reduce 
compliance costs for broker-dealers of processing orders to produce and 
to deliver Rule 606(b)(3) reports for numerous customers that do not 
actively place not held orders.
    The Commission also believes that the three-month grace period 
included in the firm-level de minimis exception could further limit the 
scale of compliance costs of broker-dealers. As discussed in Section 
III.A.1.b.iv., Rule 606(b)(4) allows broker-dealers to have a grace 
period of up to three calendar months to provide the new customer-
specific disclosures the first time a broker-dealer meets or exceeds 
the 5% de minimis threshold. The adoption of the grace period will 
provide time for broker-dealers to create the systems necessary to 
prepare the 606(b)(3) reports, which could allow the broker-dealers to 
manage their implementation and ongoing compliance costs. In addition, 
once the broker-dealers set up the system to comply with the rule 
during the grace period, the broker-dealers could use the system in the 
future, which could help reduce the on-going reporting costs in 
preparing additional Rule 606(b)(3) reports.
    The Commission acknowledges that the two de minimis exceptions may 
create uncertainty as to whether a customer would have access to the 
Rule 606(b)(3) report and as to whether a broker-dealer would be 
required to produce Rule 606(b)(3) reports on request. The staff's 
supplemental analysis found that a small number of broker-dealers fell 
slightly outside the 5% de minimis threshold during a recent sample 
period.\665\ Specifically, eight broker-dealers receive not held orders 
greater or equal to 5% and less than 10% of the total shares of their 
orders in the sample. These broker-dealers would not qualify for the 
firm-level de minimis exception despite not predominantly receiving not 
held orders, and thus would not be excepted from preparing Rule 
606(b)(3) reports for not held orders under the adopted rule. 
Additionally, the staff analysis found that five broker-dealers that 
meet the de minimis exception receive not held orders greater or equal 
to 2.5% and less than 5% of the total shares of their orders in the 
sample. These results indicate that the threshold for the firm-level de 
minimis exception could create uncertainty for broker-dealers as to 
whether they might receive enough not held orders to qualify for the de 
minimis exception and for how long they would qualify for the de 
minimis exception. However, the Commission believes that the firm-level 
de minimis exception under Rule 606(b)(4) could mitigate the 
uncertainty that is discussed above. As discussed in Section 
V.C.1.a.i.2., a supplemental staff analysis found that 23 broker-
dealers that meet the de minimis exception receive not held orders less 
than 2.5% of the total shares of their orders in the sample, and among 
these broker-dealers the largest ratio of not held orders as percentage 
of total shares is less than 2.2%, which indicates that there is less 
concern of uncertainty regarding whether they meet the firm-level de 
minimis exception. Moreover, as discussed in Section III.A.1.b.iv., 
Rule 606(b)(4) requires that once a broker-dealer has equaled or 
exceeded the firm-level threshold based on its not held NMS stock order 
flow during a given six calendar month period, it must provide reports 
pursuant to Rule 606(b)(3) for at least the next six calendar months 
regardless of the nature of its order flow during the Compliance 
Period. Additionally, as discussed in Section III.A.1.b.iv., if, at any 
time after the end of a Compliance Period, the broker-dealer's not held 
NMS stock order flow falls below the 5% threshold for the prior six 
calendar months, the broker-dealer is not required to provide reports 
pursuant to Rule 606(b)(3), except with respect to orders received 
during the Compliance Period. These features of the firm-level de 
minimis exception under Rule 606(b)(4) could mitigate the uncertainty 
as to whether a broker-dealer would be required to produce Rule 
606(b)(3) reports on request for the next six calendar months after the 
calendar month the broker-dealer exceeded this 5% threshold.
---------------------------------------------------------------------------

    \665\ See supra notes 642 and 643.
---------------------------------------------------------------------------

    Further, as discussed above, the Commission acknowledges that the 
customer-level de minimis exception under Rule 606(b)(5) may result in 
certain customers with seasonality in their trading volume exceeding 
the threshold during certain months and not during others. As discussed 
above, to the extent that such customers receive net benefits from 
receiving new customer-specific reports under the requirement of Rule 
606(b)(3) and that such customers have flexibility in their trading 
activities,\666\ customers could be willing to incur the costs to alter 
trading behavior to receive the Rule 606(b)(3) reports more frequently 
during the year. Because customers' trading activity can be affected by 
future market conditions or unexpected events in the financial markets, 
it could be difficult for customers to predict at the time they are 
placing an order, whether that order could be in the standardized 
customer-specific reports.
---------------------------------------------------------------------------

    \666\ The Commission believes index funds time their trades to 
minimize tracking error. These institutions are concerned even about 
how when they trade within a trading day affects their tracking 
error. These institutions are unlikely to delay trading by a month 
just to qualify to receive a report for one additional inactive 
month.

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[[Page 58400]]

3. Other Costs
    The Commission also acknowledges that the firm-level de minimis 
exception in adopted Rule 606(b)(4) could incentivize broker-dealers to 
keep their not held trading volume below the 5% threshold. As discussed 
above, there are a small number of broker-dealers with not held orders 
slightly below or above the 5% de minimis threshold. Specifically, 
according to Table 1, for 8 broker-dealers, not held orders account for 
between 5% and 10% of orders received by that broker-dealer. To avoid 
the compliance costs, broker-dealers could discourage customers from 
using not held orders so as not to exceed the 5% threshold and 
therefore not to be subject to the obligations of providing the new 
disclosures upon request. Under this scenario, customers sending not 
held orders to these broker-dealers may not receive the benefit of the 
disclosure of customer-specific order handling practices required by 
Rule 606(b)(3) and could face additional execution costs if they 
suboptimally submit held orders relative to today. However, the 
Commission notes that for business reasons, some firms might choose to 
provide the new customer-specific order handling disclosures to its 
customers, regardless of the de minimis exception, limiting the costs 
of such incentives on investors. Further, customers that value the Rule 
606(b)(3) reports could be willing to incur the cost of switching to 
the broker-dealers that do not receive or use the firm-level exception 
in order to ensure receipt of the customer-specific reports. As a 
result, the threat of losing customers could dampen the broker-dealers' 
incentives to encourage their customers to use held orders.
    The Commission also acknowledges that the customer-level de minimis 
threshold under Rule 606(b)(5) could result in changes in customers' 
behavior, including an increase in not held orders over held orders or 
a consolidation of the customer's not held order flow with one broker-
dealer in order to exceed the customer-level threshold to be entitled 
to receive such reports, which could be less optimal for customers 
relative to today. As discussed above, a broker-dealer will not be 
obligated to provide the new Rule 606(b)(3) order handling disclosures 
to any customer that trades on average each month for the prior six 
months less than $1,000,000 of notional value of not held orders 
through the broker-dealer. Therefore, a customer that submits more than 
$1,000,000 of notional value each month, but not in not held orders or 
at a single broker-dealer, could qualify for the Rule 606(b)(3) reports 
by instructing brokers to handle more orders as not held and/or by 
consolidating its order submission with fewer broker-dealers. However, 
some firms may choose to provide the new customer-specific order 
handling disclosures to its customers, regardless of the de minimis 
exceptions for business reasons, and the expectation of these reports 
could mitigate customers' incentives.
b. Customer Requests for Information on Customer-Specific Handling 
Under Adopting Rule 606(b)(3)
i. Benefits
    The required customer-specific order handling disclosures being 
adopted under Rule 606(b)(3) will provide transparency about order 
routing and execution quality for not held orders placed by 
customers.\667\
---------------------------------------------------------------------------

    \667\ See supra at Section III.A.1.b.iii.
---------------------------------------------------------------------------

1. Execution Quality Benefits
    The Commission believes that Rule 606(b)(3) will benefit customers, 
because broker-dealers will have an additional incentive to improve 
their order routing decisions for customers submitting orders on a not 
held basis, who could also use the reports required by the amendments 
to Rule 606 to compare routing and execution quality among broker-
dealers, which could lead to better execution quality for not held 
orders. As a result, Rule 606(b)(3), as adopted, could lead to more 
transparent order routing practices and execution quality disclosures, 
which could enhance competition in the market for brokerage services. 
The disclosures in Rule 606(b)(3) will provide customers that submit 
not held 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 Rule 
606(b)(3) increase the transparency of order routing and execution 
quality for customers' not held orders, broker-dealers will 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 on which they currently compete.
    The Commission believes that amended Rule 606(b)(3) could affect 
competition between trading centers. Broker-dealers routing more orders 
to the trading centers that are more beneficial for their customers 
could further promote competition between trading centers and promote 
innovation on execution quality. To illustrate, if broker-dealers 
change their order routing decisions to focus more on execution quality 
and route fewer orders to a given trading center, that trading center 
will have an incentive to take measures to attract and gain back order 
flow by innovating on execution quality. In addition to comparing 
broker-dealers on the basis of the reports, the amended Rule 606(b)(3) 
could facilitate and inform customer dialogues with their broker-
dealers about the broker-dealers' 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 a result, as several 
commenters stated, the information on execution quality could better 
enable customers placing orders on a not held basis to evaluate the 
impact that routing decisions have on the quality of their order 
executions and could provide information regarding broker-dealers' 
potential conflicts of interest.\668\ The Commission believes that the 
amended Rule 606(b)(3) will promote better order handling practices 
among broker-dealers, therefore potentially promoting competition 
between trading centers and ultimately incentivizing broker-dealers to 
improve execution quality of not held orders.
---------------------------------------------------------------------------

    \668\ See, e.g., Capital Group Letter at 3 and 6; STA Letter at 
4; FSR Letter at 4-5; HMA Letter at 10; ICI Letter at 9; Schwab 
Letter at 2; Markit Letter at 9-10; Better Markets Letter at 5-8.
---------------------------------------------------------------------------

2. Benefits of Enhanced, Standardized Report
    As adopted, Rule 606(b)(3) will address the concerns that current 
customer reports are not standardized. As discussed in the Proposing 
Release,\669\ some customers currently request and receive reports 
about order routing and execution quality of their orders from their 
broker-dealers. However, these reports are not standardized and, as a 
result, it may be difficult to compare broker-dealers on the basis of 
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 not held orders have easier 
access to such reports compared to customers with a smaller volume of 
not held orders. Moreover, the information provided by a broker-dealer 
may vary over time without any standardized or required content for the 
reports. As adopted, Rule 606(b)(3) could address

[[Page 58401]]

both of these concerns as the reports will be standardized for all 
broker-dealers and all customers placing not held orders (subject to 
two de minimis exceptions) making comparisons easier and analysis more 
useful. Furthermore, every customer placing orders on a not held basis 
will be able to receive reports upon request from their broker-dealer.
---------------------------------------------------------------------------

    \669\ See Proposing Release, supra note 1, at 49437.
---------------------------------------------------------------------------

    The Commission believes that the benefits of the reports required 
by Rule 606(b)(3) may be modest for some customers that already receive 
reports from their broker-dealers on the handling of their not held 
orders, depending on the information such customers currently receive 
and how standardized that information is across broker-dealers. For 
example, the reports that a particular customer already receives may be 
more detailed and tailored to that customer. The Commission recognizes 
that some current ad hoc reports also may provide additional, more 
detailed, and/or more tailored information than what Rule 606(b)(3) 
requires. Customers receiving such enhanced reports may not benefit 
significantly from the information specified in Rule 606(b)(3). 
Nevertheless, the Rule 606(b)(3) requirement that the disclosures be 
standardized may allow these customers to more readily compare their 
broker-dealers, particularly if their broker-dealers currently provide 
disparate responses to similar requests.
    The Commission believes that Rule 606(b)(3) will enable customers 
to better compare broker-dealers' order handling practices, which will 
allow customers to more efficiently monitor, evaluate, and select 
broker-dealers. Under 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.\670\ Under Rule 606(b)(3) a customer 
will 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 will be able to monitor whether broker-
dealers route orders to the trading center offering highest rebate or 
lowest fees.\671\ 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 inducing 
price impact. Rule 606(b)(3) could mitigate such concerns.
---------------------------------------------------------------------------

    \670\ See Hitesh Mittal, Are You Playing in a Toxic Dark Pool? A 
Guide to Preventing Information Leakage, 3 Journal of Trading 20 
(Summer 2008).
    \671\ 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.
---------------------------------------------------------------------------

    As adopted, Rule 606(b)(3) requires the inclusion of actionable 
IOIs in customer-specific order handling disclosures. As adopted, 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 Commission believes that the inclusion of 
actionable IOIs in the adopted reporting requirements of broker-dealers 
should provide customers a more complete picture of how their not held 
orders are handled. Since actionable IOIs can convey information 
similar to that of 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 believes that actionable IOIs should be included 
in the required disclosure of how not held orders are handled. In 
addition, because an actionable IOI can convey information similar to 
that of an order, the use of actionable IOIs may contribute to 
information leakage in a way similar to that of the use of orders.\672\ 
Specifically, the Commission believes that such information will enable 
customers in assessing whether their broker-dealers are exposing their 
not held orders to the select market participants with which the 
broker-dealer has affiliations or business relationships or from which 
the broker-dealer receives other incentives. In addition, the 
Commission believes that disclosure of this information will provide 
the customer with a more complete understanding of the broker-dealer's 
order handling activities for purposes of assessing the broker-dealer's 
execution quality generally. Excluding actionable IOIs, therefore, will 
not provide a complete picture of order routing and executions of a 
customer's not held orders and could provide broker-dealers with an 
incentive to use actionable IOIs instead of orders to circumvent the 
adopted disclosure requirements in Rule 606.
---------------------------------------------------------------------------

    \672\ See Proposing Release, supra note 1, at 49486.
---------------------------------------------------------------------------

    The Commission considered whether adopting a definition of 
actionable IOI in Rule 600(b)(1) may limit its potential benefits. 
Specifically, the adopted definition is substantively similar to the 
description of actionable IOI in the Regulation of Non-Public Trading 
Interest Proposing Release. Comments received on the Regulation of Non-
Public Trading Interest Proposing Release indicated that some 
commenters were concerned that the discussion of actionable IOIs in 
that release was too stringent.\673\ If the definition of actionable 
IOI is, in fact, too narrow, then some IOIs will not be included in the 
definition of actionable IOI and will not be captured by the required 
reports on handling of not held orders. Consequently, it is possible 
that customers placing orders on a not held basis might find the 
reports to be less informative on 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 adopted amendments. 
However, as discussed in Section III.A.2., the Commission's purpose 
here is improving the usefulness of the order handling and routing 
information conveyed by broker-dealers to their customers placing 
orders on a not held basis, and thus the definition of actionable IOI 
being adopted is appropriately tailored to serve the purpose of this 
rulemaking, minimizing the concern of limiting the benefits of the 
amendments.
---------------------------------------------------------------------------

    \673\ Comments on the Regulation of Non-Public Trading Interest 
Proposing Release 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/s72709-48.pdf.
---------------------------------------------------------------------------

    Several commenters stated that the proposed definition for 
actionable IOIs is unclear, specifically as to whether the definition 
of actionable IOI excludes conditional orders.\674\ The inclusion of 
conditional orders in the Rule 606(b)(3) report could have benefits 
because broker-dealers would include additional information in the Rule 
606(b)(3) reports, which therefore could increase the benefits 
resulting from increased transparency. However, as discussed in Section 
III.A.2., many market participants distinguish conditional orders from 
actionable IOIs, because conditional orders are not firm 
representations of trading interest and may require additional 
negotiation before a trade can be executed. Therefore, the Commission 
acknowledges that the inclusion of conditional orders in the definition 
of actionable IOI may cause confusion in

[[Page 58402]]

producing and consuming order handling reports, which could limit the 
benefits of Rule 606(b)(3) reports.
---------------------------------------------------------------------------

    \674\ See BIDS Letter at 4-5; Bloomberg Letter at 3-4; Capital 
Group Letter at 3; FIF Letter at 7; Markit Letter at 11-12; NYSE 
Letter at 2; SIFMA Letter at 6.
---------------------------------------------------------------------------

    The Commission is adopting a modification to Rule 606(b)(3) that 
requires broker-dealers to disclose the fact that actionable IOIs were 
sent to customers placing not held orders but not the identity of such 
customers. The Commission believes that such modification should help 
ensure that customers receive detailed information in their report, 
while protecting the identity of institutions providing liquidity. The 
Commission believes that disclosing the specific venue or venues to 
which a broker-dealer exposed a not held order by an actionable IOI 
will be useful for the customer to further assess the extent of 
information leakage of their orders and potential conflicts of interest 
facing their broker-dealers. Specifically, the Commission believes that 
such information will enable customers to assess whether their broker-
dealers are exposing their not held orders to the select market 
participants with which the broker-dealer has affiliations or business 
relationships or from which the broker-dealer receives other 
incentives. In addition, the Commission believes that disclosure of 
this information will provide the customer with a more complete 
understanding of the broker-dealer's order handling activities for 
purposes of assessing the broker-dealer's execution quality generally. 
Under the proposed Rule 606(b)(3), the Commission believed that 
requiring broker-dealers to identify the institutions to which they 
routed actionable IOIs would allow customers to receive additional 
details in their reports so that customers could better compare their 
broker-dealers. Regarding the requirement that broker-dealers identify 
the institutions to which they routed actionable IOIs, commenters 
expressed concerns that such identification may discourage institutions 
from providing liquidity if they do not wish their names to be 
disclosed to protect their proprietary information.\675\ The Commission 
acknowledges that such identification may discourage such institutions 
from providing liquidity or induce broker-dealers to compromise the 
identity of their customers placing not held orders, which could reduce 
the benefits of disclosing actionable IOIs in the customer-specific 
reports. Thus, the modification to Rule 606(b)(3), as adopted, should 
help reduce the potential for information leakage and conflicts of 
interest between broker-dealers and their customers placing not held 
orders without discouraging institutions to provide liquidity.
---------------------------------------------------------------------------

    \675\ See STA Letter II at 3; FIF Letter at 7; Fidelity Letter 
at 4; Markit Letter at 11.
---------------------------------------------------------------------------

    The Commission also recognizes that, relative to proposed Rule 
606(b)(3), this modification could result in customers receiving fewer 
details in their reports. While customers could have used such details 
to better compare their broker-dealers, the Commission does not believe 
that the identities of particular customers placing not held orders 
would significantly influence customers' decisions. Therefore, this 
modification does not significantly reduce benefits compared to the 
Proposal.
3. Additional Benefits
    An additional benefit of Rule 606(b)(3), and specifically the 
benefit of having the standardized customer-specific order handling 
information available upon request, is that customers placing orders on 
a not held basis could combine the order handling information with 
existing TCA or enhance their TCA. As noted above, customers sending 
not held orders often work with independent third-party vendors to 
perform TCA as a means of evaluating the cost and quality of brokerage 
services. Customers sending not held orders 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 order routing strategy of not 
held orders, or cost, routing, and execution quality for individual 
child orders. The disclosures required by adopted Rule 606(b)(3) will 
close this informational gap, so that customers will have more 
information on how broker-dealers handle and execute parent and child 
not held orders.
    With this additional information, customers placing orders on a not 
held basis 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 adopted Rule 
606(b)(3) may be a factor that can explain transaction cost variations, 
and thus the reports from the adopted 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 adopted Rule 606(b)(3) will not.\676\ With TCA alone, a customer 
may observe different implementation shortfalls across broker-dealers. 
The adopted 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 believes that Rule 606(b)(3) may complement and 
enhance all customers' evaluations of order handling quality of not 
held orders, including those of customers that use TCA.
---------------------------------------------------------------------------

    \676\ For example, Rule 606(b)(3) will not require reports to 
contain any information on implementation shortfall costs of parent 
orders, which are a key focus for investors placing not held orders. 
In general, the amendments, as adopted, 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 
adopting 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.
---------------------------------------------------------------------------

    Rule 606(b)(3) also requires the customer-specific order handling 
report to be divided into separate sections for the customer's directed 
not held orders and non-directed not held orders, with each section 
containing the disclosures regarding the customer's order flow with the 
broker-dealer specified in Rule 606(b)(3), as well as the disclosures 
for each venue to which the broker-dealer routed not held orders 
specified in Rules 606(b)(3)(i) through (iv). Commenters suggested that 
directed not held orders be clearly segregated in the reports because 
this distinction could provide a more qualitative level of transparency 
and provide a more accurate description of broker-dealer's order 
routing practices, which could enable customers to better compare and 
monitor broker-dealers' order routing practices.\677\ Specifically, 
commenters stated that to the extent that broker-dealers have more 
discretion on routing non-directed orders, dividing reports into 
directed and non-directed orders could bring greater transparency to 
customers placing not held orders. The Commission believes that 
reporting separate order handling statistics for the directed and non-
directed not held orders will provide more valuable information to 
customers than if the statistics combined these orders. In particular, 
this will allow customers to specifically observe how the broker-
dealers exercise routing discretion, which should increase the benefits 
of

[[Page 58403]]

order disclosure by better informing customers of potential leakage and 
conflicts of interest. By providing the order handling information 
separately for non-directed not held orders, the Rule 606(b)(3) report 
will provide a customer with a more precise reflection of how and where 
its broker-dealer is routing the customer's not held orders pursuant to 
the discretion it is afforded. Otherwise, with directed not held orders 
and non-directed not held orders commingled in the report, it would be 
more difficult for a customer to differentiate routing behavior for 
which its broker-dealer exercised discretion from routing behavior that 
the customer itself directed. Therefore, the Commission believes that 
customers also will benefit from being able to analyze Rule 606(b)(3) 
order handling disclosures that are specific to their directed orders.
---------------------------------------------------------------------------

    \677\ See supra note 245.
---------------------------------------------------------------------------

    The Rule 606(b)(3) reports also require the broker-dealer to 
disclose, among other things, information on not held order 
execution.\678\ This information will be relevant to a customer 
assessing its broker-dealer's execution of its directed orders, 
including a customer interested in validating that its broker-dealer is 
routing its directed not held orders consistent with the customer's 
instructions. These enhanced disclosures will better enable customers 
to analyze not held order routing and execution quality provided by 
broker-dealers, which will allow customers to more efficiently monitor, 
evaluate, and select broker-dealers. In addition, customers and broker-
dealers will be able to evaluate execution quality of not held orders 
on different trading centers more efficiently. Therefore, the 
Commission believes that customers will benefit from the enhanced 
transparency in Rule 606(b)(3) reports.
---------------------------------------------------------------------------

    \678\ See supra Section III.A.6.
---------------------------------------------------------------------------

    Finally, Rule 606(b)(1) and Rule 606(b)(3) will require reports to 
be made available using an XML schema and associated PDF renderer 
published on the Commission's website.\679\ The benefits, as well as 
the costs associated with this requirement, are discussed in Section 
V.C.4.
---------------------------------------------------------------------------

    \679\ See supra Section III.A.5.c.
---------------------------------------------------------------------------

ii. Costs
    The required customer-specific order handling disclosures being 
adopted under Rule 606(b)(3) will require broker-dealers to provide, 
upon request, standardized reports on not held order handling, which 
include more detailed information on broker-dealers' order routing 
practices. These requirements will result in initial and ongoing 
compliance and reporting costs to broker-dealers. These costs are 
quantified in Section V.C.1.b.ii.3. Additionally, the customer-specific 
order handling disclosure requirement under Rule 606(b)(3) could alter 
the information content of the report if broker-dealers already provide 
more information than is required by the adopted amendment or broker-
dealers try to disguise order routing behavior to avoid customers' 
monitoring.
1. The Potential for Less Information
    As discussed above, some customers currently request reports about 
the handling of their not held 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 Rule 606(b)(3) 
will require. If broker-dealers currently provide more detailed or 
additional information to customers, reporting requirements under Rule 
606(b)(3) could impose a cost on such customers if the broker-dealers 
stop providing the more detailed or additional information and instead 
provide only the data required for customer-specific order handling by 
Rule 606(b)(3). The Commission believes that this scenario is not very 
likely because, following Rule 606(b)(3)'s implementation, 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 the level of detail in such a 
report might depend on the business relationship between the broker-
dealer and the customer. Customers that send or may send a large number 
of orders to broker-dealers might be able to get customized reports 
that they can more easily compare than customers that send fewer 
orders; and those reports might be more detailed, compared to reports 
that customers that send fewer orders receive. While Rule 606(b)(3) 
reduces this discrepancy, in that all customers will be able to request 
the standardized reports required by Rule 606(b)(3), the Commission 
recognizes that, to the extent large customers placing orders on a not 
held basis are able to receive customized reports that provide 
information not contained in the required reports, those large 
customers placing not held orders will continue to have an advantage 
over smaller customers placing not held orders who are not able to 
receive the same reports.
2. Skewed Routing Practices
    In addition, the greater transparency provided as a result of Rule 
606(b)(3) might lead broker-dealers to change how they handle not held 
orders. Given that broker-dealers will be aware of the metrics to be 
used a priori, they might route not held orders in a manner that 
promotes a positive reflection on their respective services but that 
may be suboptimal for their customers. Any changes to broker-dealers' 
order routing decisions resulting from the Commission's adoption of 
Rule 606(b)(3) may be intended to benefit customers placing not held 
orders, but if broker-dealers and customers focus exclusively on the 
metrics in the reports required by Rule 606(b)(3), the order routing 
decisions could also be viewed as suboptimal for some customers.
    For example, if a broker-dealer routes not held 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, in 
order to achieve these objectives she might route the majority of non-
marketable limit order shares to the trading center offering the 
highest rebate. A customer placing not held orders that reviews the 
order handling report 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 on 
the basis of other variables, which might not be completely reflected 
in the amended reports. Under the 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.
3. Compliance Costs
    The disclosure requirements of Rule 606(b)(3) will also impose 
compliance costs, as the required disclosures could entail some 
reprogramming by broker-dealers that execute or route orders subject to 
the customer-specific disclosures required by Rule 606(b)(3). A broker-
dealer would have to program

[[Page 58404]]

its systems to filter their order data by a condition using a held or a 
not held indicator, subject to two de minimis exceptions. In addition 
to reprogramming, receiving and processing customer requests, as well 
as preparing and transmitting the data to customers on request, will 
impose costs.
    The Commission estimates and discusses compliance burdens and costs 
for broker-dealers that routes orders subject to the customer-specific 
disclosures required by Rule 606(b)(3) in Section IV.D.1.ii. The 
Commission estimates total initial implementation costs for all broker-
dealers that route orders subject to the customer-specific order 
handling disclosures required by Rule 606(b)(3) and that do not 
currently retain order handling information required by the adopted 
rule to program systems to comply with the adopted rule change is 
24,070 hours, resulting in a monetized total cost burden of 
$7,789,300.\680\ In addition these broker-dealers would incur an 
additional cost of $5,660,000 \681\ to engage the third-party service 
providers and to purchase hardware and software upgrades.
---------------------------------------------------------------------------

    \680\ See supra note 510.
    \681\ See id.
---------------------------------------------------------------------------

    The Commission estimates and discusses compliance burdens and costs 
for broker-dealers responding to a Rule 606(b)(3) request (for broker-
dealers that handle their own responses) in Section IV.D.1.b. The total 
annual cost for all 200 broker-dealers that route orders subject to the 
customer-specific order handling disclosures required by Rule 606(b)(3) 
to comply with the customer response requirement in Rule 606(b)(3) is 
estimated to be 67,000 hours, resulting in a cost of $14,928,000, plus 
an additional fee of $1,300,000 to compensate third-party service 
providers for producing the reports.\682\ The Commission recognizes 
that the hours and costs that it has estimated could be lower if this 
report function is outsourced to a third-party to the extent that a 
third-party is specialized in preparing the order handling reports and 
has a system in place. In particular, economies of scale could help 
lower the costs incurred by third-parties relative to the broker-
dealers themselves, and, therefore, the third parties could charge some 
broker-dealers less to produce the reports than the broker-dealers 
would incur to produce the reports themselves.
---------------------------------------------------------------------------

    \682\ See supra notes 525.
---------------------------------------------------------------------------

    As discussed in Section III.A.6, Rule 606(b)(3) requires the 
inclusion of actionable IOIs in the reports on order handling that 
broker-dealers will 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 data and run 
calculations related to actionable IOIs. The estimated cost of 
including actionable IOIs in the customer-specific order handling 
reports required by Rule 606(b)(3) is included in the aggregate costs 
described in the discussion above and in greater detail in Section 
IV.D.1.
    Additionally, as noted above, adopted Rule 606(b)(3) requires 
segregated reporting of directed not held orders and non-directed not 
held orders. The Commission expects that broker-dealers will incur 
costs from separately reporting directed and non-directed not held 
orders as a result of having to process additional data and run 
additional calculations. The estimated cost of separate reporting is 
included in the aggregate costs described in the discussion below and 
in greater detail in Section IV.D.1.
    As discussed above, Rule 606(b)(1), as amended, does not modify any 
of the current customer-specific disclosure requirements but modifies 
the categories of orders to which the disclosure applies. Current Rule 
606(b)(1) applies to all customer orders, i.e., orders having a market 
value of less than $200,000. However, broker-dealers must now modify 
their systems to provide the disclosures for the following types of 
orders, regardless of market value: (i) Orders in NMS stocks that are 
submitted on a held basis; (ii) orders in NMS stocks that are submitted 
on a not held basis and are excepted from the disclosure requirements 
of Rule 606(b)(3); or (iii) orders in NMS securities that are option 
contracts.
    The Commission believes that it is reasonable to estimate that one 
third of the 292 broker-dealers that route orders subject to the 
disclosures required by Rule 606(b)(1)--97 broker-dealers--will 
implement these changes in-house, while the remaining number--195 
broker-dealers--will engage a third-party vendor to do so.\683\ The 
Commission estimates the initial burden for a broker-dealer that will 
program its systems in-house to comply with Rule 606(b)(1) as 24 
hours.\684\ The Commission estimates the initial burden for a broker-
dealer that will engage a third-party vendor to program its systems to 
comply with the rule as 3 hours and $979.\685\
---------------------------------------------------------------------------

    \683\ See supra note 560.
    \684\ See supra note 578.
    \685\ See supra note 579.
---------------------------------------------------------------------------

    Therefore Commission estimates the total initial burden for all 292 
broker-dealers to program their systems to comply with Rule 606(b)(1) 
as 2,913 hours \686\ and $975,000.\687\
---------------------------------------------------------------------------

    \686\ See supra note 581.
    \687\ See supra note 582.
---------------------------------------------------------------------------

4. Other Potential Costs
    Further, as a result of adopting Rule 606(b)(3), broker-dealers 
that route not held NMS stock orders will likely reevaluate their best 
execution methodologies to take into account the availability of new 
statistics and other information that may be relevant to their decision 
making. This may impose a cost only to the extent that broker-dealers 
choose to build the required statistics into their best execution 
methodologies. In addition, they may choose to do so only if the 
benefits justify the costs.
    Another potential cost of adopted 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 plan to aggregate the time 
series of the reports. For example, suppose that a customer chooses to 
no longer purchase TCA once Rule 606(b)(3) reports become available, 
because the customer decides that the information contained in the Rule 
606(b)(3) reports is sufficient. If fewer customers purchase TCA, it 
will have a negative impact on third-party providers of TCA as well as 
third-party data vendors, because of a reduction in the demand for 
their services, for example. Further, the quality of TCA provided by 
third-parties may decrease because third-party providers of TCA might 
have fewer resources for the development and maintenance of their 
product offerings and because fewer customers would reduce the amount 
of data that the third-party providers would use to build their 
models.\688\ However, as discussed in Section V.C.1.b.i, the reports 
required by adopting Rule 606(b)(3) will provide information that could 
be complementary to TCA. As discussed above, in fact, adopted Rule 
606(b)(3) could make TCA more useful and provide incentives for 
customers to use TCA. As a result, the Commission believes that adopted 
Rule 606(b)(3) will not replace TCA.
---------------------------------------------------------------------------

    \688\ As stated in the proposing release, 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.
---------------------------------------------------------------------------

    The Commission considered whether the customer-specific order 
handling

[[Page 58405]]

reports of adopted Rule 606(b)(3) could impose costs on broker-dealers 
by revealing sensitive, proprietary information about broker-dealers' 
order handling techniques. Rule 606(b)(3) does not require public 
disclosure, so the Commission believes that there would be minimal risk 
of information leakage to the public. Moreover, as some commenters 
stated, to the extent that the customer-specific order handling 
disclosures will aggregate information to be disclosed across all of 
the customer's not held NMS stock orders, the information leakage risk 
is low because reverse engineering specific order routing strategies 
from such aggregated data would be extremely difficult.\689\
---------------------------------------------------------------------------

    \689\ See Capital Group Letter at 5; Markit Letter at 19.
---------------------------------------------------------------------------

    To the extent it is likely for customers choose to make the 
disclosure public, order routing practices of not held NMS stock orders 
of the customers' broker-dealers could become available publicly, which 
other customers placing not held NMS stock orders could use in 
comparing their broker-dealers' order routing. To the extent that the 
order routing reports could reveal sensitive, proprietary information 
about broker-dealers' order handling techniques, the broker-dealers' 
trading strategies could be used by their competitors, specifically, 
putting smaller broker-dealers at a competitive disadvantage relative 
to larger broker-dealers, as the majority of their trading strategies 
could more easily be revealed to other market participants. However, 
because the customer-specific order handling disclosure required by 
Rule 606(b)(3) could reveal highly sensitive proprietary information 
about the revealing customers' trading strategy, it is unlikely that 
customers would make their own reports public. In addition, even if the 
customer did share its report, the fact that the information in it is 
aggregated obscures the broker-dealer's order handling decision for any 
particular order. Therefore, the Commission believes the risk that the 
customer-specific order handling disclosure required by Rule 606(b)(3) 
would reveal sensitive, proprietary information about broker-dealers' 
order handling techniques would be minimal.
2. Public Order Handling Report
    Rule 606(a) requires each broker-dealer to make publicly available 
quarterly reports on its routing of non-directed orders in NMS 
securities.\690\ The Commission believes that the amendments to Rule 
606(a), as adopted, will increase the level of transparency about order 
routing and execution quality for non-directed orders in NMS stocks 
that are submitted on a held basis through the enhanced disclosure of 
data regarding order routing and execution.\691\
---------------------------------------------------------------------------

    \690\ The Commission had proposed, but is not adopting, a 
similar requirement for broker-dealers to provide public quarterly 
reports broken down by calendar month on the order routing and 
execution quality of institutional orders by each broker-dealer. See 
infra Section V.D.3 for an analysis of the proposed amendments for 
institutional orders that the Commission is not adopting.
    \691\ See supra Section III.C. and Adopted Rule 606(a)(1)(iv).
---------------------------------------------------------------------------

    The benefits and costs of each of these amendments are discussed 
below. Wherever possible, we quantify cost estimates for a given 
amendment. For the remaining amendments concerning non-directed orders 
in NMS stocks that are submitted on a held basis, we provide total 
quantitative cost estimates for these amendments in Section V.C.2.f.
a. Orders Subject to Rule 606(a) Public Disclosures
i. Benefits
    As adopted, Rule 606(a) applies to NMS stock orders of any size 
that are submitted on a held basis. Rule 606(a) also continues to apply 
to any order (whether held or not held) for an NMS security that is an 
option contract with a market value less than $50,000, as the 
Commission did not propose, and is not adopting, any modifications to 
Rule 606's coverage of option orders.\692\ Specifically, Rule 
606(a)(1), as amended, states that every broker-dealer must make 
publicly available for each calendar quarter a report on its routing of 
non-directed orders in NMS stocks that are submitted on a held basis 
and in non-directed orders that are customer orders in NMS securities 
that are option contracts during that quarter broker down by calendar 
month. As noted above,\693\ the Commission is adopting a modified 
definition of the term ``non-directed order'' that no longer includes a 
dollar-value limitation on NMS stock orders,\694\ but continues to 
exclude orders from a broker-dealer.\695\
---------------------------------------------------------------------------

    \692\ See supra notes 37 and 38.
    \693\ See supra Section III.A.1.b.vii.
    \694\ See Rule 600(b)(49). Consistent with this modification, 
Rule 606(a)(1)(i) also is revised to no longer refer to the defined 
term ``customer order.''
    \695\ See supra Section III.A.1.b.
---------------------------------------------------------------------------

    Under the scope of public order handling reports prior to these 
amendments, held orders with market value of at least $200,000 were not 
included in public order routing reports and broker-dealers may 
voluntarily provide some information on routing and execution quality 
in response to requests by these customers that submit such orders. 
Because the amended rule requires public order routing reports for held 
orders of all sizes, these orders will be included in the public order 
routing reports. In addition, pursuant to Rule 606(b)(1), customers 
sending held orders of at least $200,000 in market value will continue 
to receive the same information from the pre-existing customer-specific 
order routing disclosure rule.
    The staff's supplemental analysis found that more than 80% of 
shares and more than 88% of orders received from individual accounts 
\696\ are held orders, suggesting that the amended Rule 606(a) would 
provide public order routing disclosure for the types of orders that 
retail investors are more likely to use, which would make the public 
reports more relevant to these investors. The staff analysis also found 
that among the orders of less than $200,000, about 55% of total shares 
and about 67% of number of the orders in the sample are held orders. 
The analysis indicates that the public order routing reports prior to 
these amendments are likely to reflect not held orders in addition to 
held orders, and therefore, the amendments would result in public order 
routing reports better reflecting held orders but lessen the relevance 
of the reports for not held orders. The staff analysis also showed that 
about 10% of total shares and about 0.4% of total numbers of orders in 
the sample are held orders with a market value of at least $200,000. 
These orders will receive public order routing reports under the 
amendment in addition to the disclosures required by Rule 606(b)(1).
---------------------------------------------------------------------------

    \696\ See supra notes 642 and 643.
---------------------------------------------------------------------------

    The Commission believes that, compared to the scope of public order 
handling reports prior to the amendments, Rule 606(a)(1), as amended, 
could make the public order routing reports more informative and 
therefore could improve the value of the public order routing reports. 
To the extent that broker-dealers generally handle not held orders 
differently from held orders, and to the extent that typically 
institutional customers use not held orders,\697\ the information 
pertinent to understanding broker-dealers' order handling practices for 
not held orders is not the same as for held orders. Moreover, as 
discussed above, the staff analysis showed that orders received from 
institutional accounts are more likely to be not held orders than 
orders received from individual accounts, suggesting that the amended 
public reports would target customers distinct from institutional 
investors. As

[[Page 58406]]

discussed in Section V.C.1.a.i, commenters suggested that the held and 
not held order type classifications would be effective proxies for 
distinguishing institutional investor orders and retail investor orders 
because retail investor orders are generally held to the market and 
institutional investor orders are generally not held to the 
market.\698\ Moreover, as discussed in Section V.C.1.a.i, because 
broker-dealers have discretion on time and price for not held orders 
and do not on held orders, customers placing held orders would have a 
different level of sophistication than customers that typically place 
not held orders. In addition, to the extent that the previously 
existing public order routing reports were in aggregate forms and 
therefore the customer could not distinguish the order routing 
practices of held orders from not held orders, replacing public order 
routing reports with customer-specific reports for not held orders 
could provide different scopes of benefits of order routing disclosure 
to the customers. As previously discussed, customers sending not held 
orders may have a different preference on order routing and a different 
level of sophistication in understanding the price, time, and other 
discretion embedded in not held orders. As a result, the amended rule 
may better serve customers that do not require an understanding of the 
price, time, and other discretion embedded in not held orders and 
therefore would allow these customers to better understand the reports 
and more efficiently monitor, evaluate, and select broker-dealers. 
Additionally, the amended 606(a) could provide more effective order 
routing reports for customers and inform customers of different scopes 
of disclosure that could address the extent of discretion that the 
broker-dealers exercise in order handling. Therefore, the Commission 
believes that relative to the baseline and the proposed definition of 
retail orders, the amendment to Rule 606(a) could make the public order 
routing reports more informative, and may better target the information 
needed by investors that typically use held orders, thus making 
available more useful public order routing reports to customers and 
increasing the benefits from improved public order routing reports. 
With more targeted information, the Commission believes that customers 
will be able to better compare and monitor broker-dealers' order 
routing practices, which will promote competition among broker-dealers 
and improve the benefits of public information on order routing of held 
orders.
---------------------------------------------------------------------------

    \697\ See supra Section III.A.1.b.ii.
    \698\ See Ameritrade Letter at 2; BlackRock Letter at 2; Citadel 
Letter at 2-3; Markit Letter at 4; Schwab Letter at 3; Capital Group 
Letter at 2-3; KCG Letter at 4; FIF Letter at 2-3; FIF Addendum at 
2; STA Letter II at 2. One commenter noted its belief that the vast 
majority of orders entered by institutional customers are with not-
held instructions and the vast majority of orders entered by retail 
investors have held instructions. See STA Letter at 4.
---------------------------------------------------------------------------

    The Commission believes that the amended rule will enhance benefits 
for customers sending held orders having a market value of at least 
$200,000 relative to the baseline and the proposed definition of retail 
orders. As discussed above, to the extent that the majority of orders 
from individual accounts are held orders, customers sending held orders 
of at least $200,000 will receive information from public order routing 
reports that better reflect held orders under the amended rule. Because 
the amended rule includes held orders of all sizes, the public order 
routing reports will include all relevant orders and therefore 
customers could use the reports to compare and monitor broker-dealers 
order routing practices. As a result, customers sending held orders of 
at least $200,000 could use the information from the public order 
routing reports in assessing broker-dealers' order routing practices, 
which could promote better execution quality and competition among 
broker-dealers. In addition, from the disclosures set forth in Rule 
606(b)(1), customers sending held orders of at least $200,000 in market 
value will continue to receive the same information from the pre-
existing customer-specific order routing disclosure rule, in addition 
to the information from the public order routing reports.
ii. Costs
    Amended Rule 606(a) will create compliance costs, as broker-dealers 
will need to distinguish held orders from all customer orders they 
receive and prepare public order routing reports regarding these held 
orders and prepare reports, subject to the de minimis exceptions in 
Rules 606(b)(4) and (b)(5). The related compliance costs are discussed 
in Section V.C.2.f. The costs related to Rules 606(b)(4) and (b)(5) are 
discussed in Section V.C.1.a.ii.
    The Commission believes that the amended Rule 606(a) will result in 
implementation costs but might not create substantial ongoing costs for 
broker-dealers. As discussed in detail in Section V.C.1.a.i., broker-
dealers' familiarity with held and not held orders would facilitate 
compliance with and may contain potential compliance costs imposed on 
broker-dealers because broker-dealer could use less processing time to 
identify held orders as compared to the proposed $200,000 threshold. 
The staff's supplemental analysis \699\ found that among the sample 
orders of less than $200,000, about 55% of shares and 67% of number of 
orders are held orders, suggesting that these broker-dealers would be 
already engaged in public reporting of orders less than $200,000 and 
therefore would not need to develop entirely new systems for the public 
reports for held orders. The staff analysis also found that the total 
held orders that are newly included in the public order routing reports 
are about 10% of total shares and less than 0.5% of total number of 
orders in the sample of NMS stocks in the analysis, suggesting that the 
implementation costs would not be significant for broker-dealers as a 
whole that newly need to prepare public order routing reports. 
Additionally, to the extent that broker-dealers would have a system in 
place to prepare the customer-specific reports under the scope of 
public order handling reports prior to these amendments, broker-dealers 
would need to modify their existing systems rather than build an 
entirely new system. Further, to the extent that broker-dealers would 
not need to identify the market value of orders, the amended rule could 
require fewer processing time for broker-dealers as compared to the 
proposed $200,000 threshold. Therefore, the Commission believes that 
the amended rule would not impose significant compliance costs to the 
broker-dealers as a whole to prepare the public order routing reports 
for held orders of all sizes.
---------------------------------------------------------------------------

    \699\ See supra notes 642 and 643.
---------------------------------------------------------------------------

    The Commission also acknowledges that the amended rule will create 
additional compliance costs for broker-dealers that receive held orders 
of at least $200,000. As discussed above, under the amended rule, 
broker-dealers would need to prepare for the reports, subject to the de 
minimis exceptions in Rules 606(b)(4) and (b)(5), for all held orders, 
in addition to the public order routing reports. As previously 
discussed, the staff analysis showed that close to 23% of total shares 
and about 36% of total numbers of orders that are not included in the 
scope of public order handling reports prior to these amendments will 
be included under the amended rule subject to the de minimis exceptions 
set forth in Rules 606(b)(4) and (b)(5). The staff analysis also 
suggests that depending on the amount of held orders relative to total 
orders that broker-dealers receive, the compliance costs would vary 
across

[[Page 58407]]

broker-dealers.\700\ Although broker-dealers will incur cost in 
switching between pre-existing customer-specific order routing reports 
and public order routing reports, the Commission believes that the 
amended rule may limit certain costs. For example, as the staff 
analysis found, when all of the orders broker-dealers receive are on a 
held basis, about 19% of total shares have a market value of at least 
$200,000 and the rest of 81% of total shares of orders in the sample 
data have a market value less than $200,000.
---------------------------------------------------------------------------

    \700\ For example, based on the staff's supplemental analysis, 
when all of the orders broker-dealers receive are on a held basis, 
about 19% of total shares have a market value of at least $200,000. 
In addition, when the ratio of not held orders that broker-dealers 
receive from customers is greater than 50% and less than 100%, less 
than 4% of total shares of orders in the analysis are on a held 
basis and have a market value of at least $200,000.
---------------------------------------------------------------------------

    The Commission believes that the broker-dealers already have a 
system to produce public order routing reports and therefore may simply 
send the received orders of at least $200,000 to the system they use to 
generate public order routing reports without a creating a completely 
creating a new system to capture held order with a market value of at 
least $200,000. Furthermore, as discussed in Section V.C.1.a.i., 
because broker-dealers are already familiar with held and not held 
distinction, and broker-dealers already characterize on a held or not 
held basis to comply with Rule 605's covered order requirement and 
other rules such as FINRA Rule 5320, broker-dealers would not incur 
additional costs in distinguishing held orders from not held orders. 
Additionally, as the staff analysis indicates, to the extent that 
broker-dealers receiving orders of both at least $200,000 and less than 
$200,000 value would already have systems in place to prepare for the 
reports required by the previously existing, the amended rule would not 
create substantial costs to these broker-dealers that are subject to 
reporting requirement of both amended Rule 606(a) and 606(b)(1). 
Therefore, the Commission believes that the amended rule would not 
impose significant compliance costs to the broker-dealers that need to 
include held orders having a market value at least $200,000 to the 
public order routing reports.
    The Commission also believes amended Rule 606(a) would not impose 
substantial costs on the customers whose orders would have been 
included in public order routing reports under the baseline and the 
proposed definition of retail orders but will not be included in the 
reports under the amendment. The staff's supplemental analysis found 
that among the orders of less than $200,000 in market value, about 45% 
of total shares and about 33% of the total number of orders in the 
sample of 120 NMS stocks will not be included in aggregated public 
order routing reports under the adoption, whereas these orders would 
have been included in the public routing reports under the baseline and 
the proposed definition of retail orders. Thus, customers that send not 
held orders of less than $200,000 in market value would not receive the 
benefit from the enhanced order handling transparency provided in the 
public order routing reports under the amended Rule 606(a). Instead, 
the orders that were included in the public routing reports under the 
baseline and the proposed definition of retail orders and are not 
included under the amended rule are subject to Rule 606(b)(3) and 
therefore would be included in the customer-specific reports required 
by Rule 606(b)(3). As discussed above, customers placing not held 
orders likely have a different level of sophistication in understanding 
the price and time discretion embedded in not held orders. Moreover, 
the enhanced Rule 606(b)(3) reports will be very detailed and of more 
value to those likely to make special requests of their broker-dealers, 
such as those who use not held orders. As a result, under the 
amendment, customers placing not held orders of less than $200,000 in 
market value would receive reports that target their needs and 
sophistication. Moreover, as discussed above, to the extent that the 
amendment to Rule 606(a) could better target the public order routing 
to the needs of investors that typically use held orders, the amended 
would not affect customers typically placing not held orders. 
Therefore, even though a customer's not held orders are not included in 
the public routing reports, the customer would receive Rule 606(b)(3) 
reports and therefore would receive the benefit of increased 
transparency from the customer-specific order handling disclosure 
required by Rule 606(b)(3).
b. Marketable Limit Orders and Non-Marketable Limit Order
i. Benefits
    The Commission believes that the amendments to Rule 606(a) that 
require broker-dealers to differentiate marketable and non-marketable 
limit orders will create an opportunity for more detailed analysis.
    In particular, the amendments could allow the public, including 
customers placing orders subject to Rule 606(a)(1), to better 
understand the potential conflicts of interest broker-dealers face when 
routing such orders,\701\ which 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 orders.\702\ In addition, if the amended disclosure results in 
broker-dealers improving their order routing for orders subject to Rule 
606(a)(1), which, in turn, may change which trading centers the broker-
dealers route such orders to, the amended disclosure could further 
promote competition among trading centers.\703\ In addition, adopting 
this new disclosure may lead to innovation by existing trading centers 
and may attract new entrants and the formation of new trading 
centers.\704\
---------------------------------------------------------------------------

    \701\ Academic research has identified indications of such 
routing behavior for orders that retail investors typically use. On 
examining the order routing of 10 broker-dealers, the researchers 
find that 4 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. For more details, see Battalio, Corwin, and 
Jennings Paper, supra note 368. See also Proposing Release, supra 
note 1, at 49492.
    \702\ See Proposing Release, supra note 1, at 49492 and 
Transaction Fee Pilot Proposing Release, supra note 2, at 13310. 
Several commenters agreed that the separation of marketable and non-
marketable limit orders in the Rule 606(a) disclosures could provide 
customers with more useful information they can use when assessing 
if and how well broker-dealers manage the potential conflicts of 
interest. See, e.g., CFA Letter at 4-5, 9; Fidelity Letter at 8-9; 
Ameritrade Letter at 3.
    \703\ See Proposing Release, supra note 1, at 49492.
    \704\ In particular, a trading center that loses order flow to 
venues that offer better execution quality will have the incentive 
to innovate to improve its execution quality. Therefore, because the 
amended disclosures may encourage broker-dealers to route for better 
execution quality, they may lead to innovation on trading centers.
---------------------------------------------------------------------------

ii. Costs
    As adopted, the amendments to Rule 606(a) requiring broker-dealers 
to differentiate between marketable and non-marketable limit orders 
will impose costs on broker-dealers. Specifically, broker-dealers will 
incur new compliance and reporting costs if they do not currently break 
down marketable and non-marketable limit orders and will need to break 
out this information in their internal systems. The estimates for 
compliance costs are contained in the estimates for the costs of 
producing the reports discussed in Section V.C.2.f. One commenter 
indicated that the amendment will require broker-dealers to obtain a 
searchable, historical store of all NMS quotes to be integrated into 
the reporting system, so that marketability

[[Page 58408]]

of orders can be determined.\705\ The Commission believes that whether 
to use a historical store of quotes depends on how broker-dealers 
capture marketable and non-marketable limit orders as required by the 
public order handling reports prior to today's amendments. Some broker-
dealers already have to break down marketable and non-marketable for 
Rule 605 reports. To do so, some of these broker-dealers capture quotes 
in real-time and some broker-dealers match orders up with quotes later. 
Only the latter approach requires setting up an historical store of 
quotes for broker-dealers and broker-dealers likely will select the 
system with lesser costs to them. The Commission expects that any 
broker-dealers that are not already separating marketable and non-
marketable orders for Rule 605 reports, will also likely manage costs 
by selecting the system with lesser costs to them and, therefore, would 
not necessarily need to set up an historical store of quotes. The 
Commission estimated the costs associated specifically with 
implementation of systems to allow the marketability of orders to be 
determined to comply with the requirement that the Rule 606(a)(1). The 
estimates for the costs of producing the reports discussed in Section 
IV.D.4.a.ii. contain the estimates for the compliance costs that 
consider the two most likely approaches discussed above.
---------------------------------------------------------------------------

    \705\ See Markit Letter at 33.
---------------------------------------------------------------------------

c. Net Payment for Order Flow and Transaction Fees and Rebates by 
Specific Venue
i. Benefits
    As discussed above in Section V.C.2.b.i., the information required 
by Rule 606(a)(1)(iii) could also allow the public, including customers 
placing orders covered by Rule 606(a)(1), to better understand the 
potential conflicts of interest broker-dealers face when routing such 
orders which 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 orders.\706\
---------------------------------------------------------------------------

    \706\ See Proposing Release, supra note 1, at 49438-40, for an 
example of routing decisions being affected by conflicts of 
interest.
---------------------------------------------------------------------------

    Under Rule 606(a)(1)(iii), customers and the public could use 
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 to gauge whether payments for 
order flow or maker-taker fees affect the order routing decisions of 
broker-dealers.\707\ Brokerage commissions, which are known to the 
customer, may depend on the rebates and take fees collected or paid by 
broker-dealers.\708\ 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 new disclosure requirements, customers might 
take only brokerage commissions into account and might, therefore, sub-
optimally 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 orders. The information required 
by adopted Rule 606(a)(1)(iii), together with the other adopted 
amendments to Rule 606(a), will give customers additional information 
to make decisions on the basis of more than the brokerage commissions.
---------------------------------------------------------------------------

    \707\ See, e.g., Battalio, Corwin, and Jennings Paper, supra 
note 368.
    \708\ The Commission does not believe that fees and rebates are 
the only determinants of brokerage commissions.
---------------------------------------------------------------------------

    In addition, as discussed in Section V.C.2.b.i., if broker-dealers 
improve their order routing for orders covered by Rule 606(a)(1), which 
may result in changes to which trading centers they route such orders 
to, it could promote competition between trading centers, leading to 
innovation or new entrants to the market. The trading centers may 
change their fees or attempt otherwise to attract such order flow, and 
the quarterly public reports that are broken down by calendar month 
will allow them to see effects of any changes they implement.
    Commenters in general indicated that information on any payment for 
order flow, payment from any profit-sharing relationship received, the 
transaction fees paid, and transaction rebates in the report as 
required by Rule 606(a)(1) could allow customers to better assess their 
broker-dealers' order routing practices and provide additional 
incentives to broker-dealers to monitor the potential conflicts of 
interest.\709\ As discussed above and in the Proposing Release, the 
Commission believes requiring broker-dealers to modify or provide 
additional information in the order routing reports will enhance the 
benefits of improved transparency.\710\
---------------------------------------------------------------------------

    \709\ See, e.g., Better Markets at 3-5, 7; FSR Letter at 7; HMA 
Letter at 11; Schwab Letter at 2.
    \710\ See Proposing Release, supra note 1, at 49442-43.
---------------------------------------------------------------------------

    Some commenters raised concerns that enhanced reporting 
requirements under Rule 606(a)(1)(iii) will generate extensive 
information and may undermine the Commission's transparency goals. 
Specifically, some commenters stated that the Commission's transparency 
goals may be limited because the disclosure presents too much 
information and could create more confusion than provide clarity to 
retail investors.\711\ In addition, one commenter stated that the 
additional information may not help customers better evaluate broker-
dealers and may not promote competition among broker-dealers unless 
investors are educated on the interpretation of the information on the 
reports.\712\ The Commission continues to believe that retail customers 
will benefit from the increased transparency and information being made 
available under the new Rule 606(a)(1)(iii). The Commission believes 
that to the extent a customer does not understand these disclosures, 
the customer could ask their broker-dealer for a better explanation of 
the arrangement, which may help mitigate some commenters' concerns that 
transparency goals may be limited because of too much information. 
Additionally, to the extent retail investors would like more 
information regarding these disclosures, they could seek such 
information from all available resources.
---------------------------------------------------------------------------

    \711\ See Fidelity Letter at 5; STA Letter at 3.
    \712\ See Harvan Letter.
---------------------------------------------------------------------------

ii. Costs
    Adopted Rule 606(a)(1)(iii) will impose initial compliance 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. The estimates for the compliance costs are contained 
in the estimates for the costs of producing the reports discussed in 
Section V.C.2.f.
    In addition to compliance costs, amended Rule 606(a)(1)(iii) could 
result in costs to broker-dealers or investors, depending on how 
broker-dealers and investors adjust their behavior in response to the 
increased transparency. Increased transparency from adopted Rule 
606(a)(1)(iii) 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 
customers--

[[Page 58409]]

in particular retail customers, the public, academics, regulators, and 
the financial media, might 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 that the potential costs 
from increased public scrutiny resulting from the enhanced disclosures 
to be relatively high, compared to the benefit from sending such orders 
to internalizers or routing orders to high-rebate and low-fee trading 
centers. If this were to occur then these orders might be more likely 
to be routed to trading centers other than internalizers, such as 
exchanges or alternative trading systems,\713\ 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 
order flow sent to internalizers who pay for it, the broker-dealers 
would receive less payment for such order flow and might pass the lost 
payments on to their customers by raising brokerage commissions or 
other fees. Similarly, if broker-dealers were to route such orders to 
trading centers with lower rebates and higher fees, they might pass the 
reduction in rebate revenue and increase in fee costs on to their 
customers by raising brokerage commissions or other fees.
---------------------------------------------------------------------------

    \713\ A ``trading center'' is defined in Rule 600 of Regulation 
NMS. See 17 CFR 242.600(b)(78).
---------------------------------------------------------------------------

    Increased transparency Rule 606(a)(1)(iii) about net payment for 
order flow and payments from profit-sharing relationships, and 
subsequent scrutiny by customers, the public, academics, regulators, 
and the financial media, might also lead broker-dealers to alter their 
payment for order flow or profit-sharing relationships or not enter 
into 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 customers.
d. Discussion of Arrangement Terms With a Specified Venue
i. Benefits
    The Commission believes that the additional information provided by 
Rule 606(a)(1)(iv) will 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 will 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 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 Rule 606(a)(1)(iii) and 
discussed in Section V.C.2.c.i.
    Consistent with the limit order disclosure discussion above,\714\ 
the disclosures required by Rule 606(a)(1)(iv) could allow the public, 
including retail customers placing held NMS stock orders, to better 
understand the potential conflicts of interest broker-dealers face when 
routing such orders, incentivize broker-dealers to improve order 
routing, and promote competition in the market.\715\
---------------------------------------------------------------------------

    \714\ See supra Section V.C.2.b.i.
    \715\ See Proposing Release, supra note 1, at 49438-40, for an 
example of routing decisions being affected by conflicts of 
interest.
---------------------------------------------------------------------------

    The Commission agrees with comments that stated that the disclosure 
of any agreement that may influence a broker-dealer's routing decisions 
could be useful for customers to assess the potential conflicts of 
interest facing broker-dealers when implementing their order routing 
decisions and the enhanced disclosures provide more complete 
information for customers to better understand and evaluate a broker-
dealer's order routing decision.\716\ Therefore, the Commission 
believes that the disclosure requirements in Rule 606(a)(1)(iv) could 
motivate broker-dealers to improve execution quality of orders.
---------------------------------------------------------------------------

    \716\ See, e.g., Better Markets Letter at 4-6; CFA Letter at 9; 
Fidelity Letter at 7; HMA Letter at 11; Markit Letter at 31.
---------------------------------------------------------------------------

    Some commenters indicated that voluminous information may limit the 
transparency benefits for customers because it may not be easy to find 
or use the information to assess and compare broker-dealers.\717\ As 
discussed in Section V.C.2.c.i., the Commission believes that the 
requirements would provide information that would not be overly 
voluminous or difficult to comprehend for customers, in particular 
retail customers. Additionally, the requirements in Rule 606(a)(1)(iv) 
are already substantially improving transparency compared to the 
reporting practices prior to these amendments. Therefore, the 
Commission believes that the reporting requirement under the adopted 
Rule 606(a)(1)(iv), as adopted, will 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 Rule 606(a)(1)(iv) are similar 
to the benefits of the disclosures by Rule 606(a)(1)(iii) that are 
discussed in Section V.C.2.c.i.
---------------------------------------------------------------------------

    \717\ See, e.g., Fidelity Letter at 9; STA Letter at 3.
---------------------------------------------------------------------------

ii. Costs
    The Commission recognizes that the amendments to Rule 606(a)(1)(iv) 
will impose initial and ongoing compliance costs on broker-dealers. As 
discussed in Section IV.D.4.b.ii., the Commission estimates the total 
initial paperwork cost for complying with Rule 606(a)(1)(iv), as 
adopted, to be 2,920 hours, resulting in a cost of $986,960.\718\ In 
addition, as discussed in Section IV.D.4.b.ii, the Commission estimates 
the total annual paperwork cost for complying with Rule 606(a)(1)(iv), 
as adopted, to be 4,380 hours, resulting in a cost of $1,093,540.\719\
---------------------------------------------------------------------------

    \718\ See supra note 576.
    \719\ See supra note 591.
---------------------------------------------------------------------------

    More detailed disclosure about payment for order flow arrangements 
and profit-sharing relationships might impose other costs to customers 
that submit orders covered by Rule 606(a)(1) if it leads 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. 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. Similar to the discussion in Section V.C.2.c.ii., increased 
transparency from adopted Rule 606(a)(1)(iv) about payment for order 
flow arrangements and profit-sharing relationships could lead to 
subsequent scrutiny by customers and the public might 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. If broker-dealers were to perceive 
the

[[Page 58410]]

potential costs from increased transparency resulting from the enhanced 
disclosures to be relatively high compared to the benefit from sending 
orders to internalizers, then these orders might be more likely to be 
routed to trading centers other than internalizers, such as exchanges 
or alternative trading systems, 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 order flow sent to 
internalizers who pay for it, the broker-dealers would receive less 
payment for such order flow and might pass the lost payments on to 
their customers by raising brokerage commissions or other fees. 
Similarly, if broker-dealers were to route such orders to trading 
centers with lower rebates and higher fees, they might pass the 
reduction in rebate revenue and increase in fee costs on to their 
customers by raising brokerage commissions or other fees.
e. Additional Amendments to Rule 606(a)(1) Disclosures
    In addition to the amendments discussed above, the Commission is 
adopting other amendments to Rule 606(a)(1) reports.\720\ The benefits 
and costs of these additional amendments are discussed below.
---------------------------------------------------------------------------

    \720\ See supra Sections III.B.4, 5 and 6.
---------------------------------------------------------------------------

i. Replacement of Division of Rule 606(a)(1) Reports by Listing Market 
Division by S&P 500 Index and Other NMS Stocks
1. Benefits
    The Commission believes that S&P 500 inclusion is an important 
determinant of execution quality and, therefore, is important for order 
routing strategies. In particular, a Commission staff analysis finds 
that the amendment to divide the Rule 606(a)(1) order routing reports 
required by securities included in the S&P 500 Index and other NMS 
stocks could provide customers with relevant information on how their 
orders are routed. Because the S&P 500 index is correlated with certain 
liquidity and trading characteristics (which are a determinant of 
execution quality),\721\ the reports under the amendment could more 
meaningfully reflect how broker-dealer routing varies with trading 
characteristics than do the public order handling reports prior to 
today's amendments.\722\
---------------------------------------------------------------------------

    \721\ S&P 500 stocks are in general larger and have more trading 
volume than non-S&P 500 stocks. Academic literature has shown that 
stocks with larger size and greater trading volume have smaller 
transaction costs than smaller stocks with lower trading volume. For 
example, see Tarun Chordia, Richard Roll, and Avanidhar 
Subrahmanyam, Commonality in liquidity, 56 Journal of Financial 
Economics 3-28 (2000); David Easley, Soeren Hvidkjaer, and Maureen 
O'Hara, Is Information Risk a Determinant of Asset Returns?, 57 
Journal of Finance, 2185-2221 (2002).
    \722\ The Commission recognizes that dividing such reports by 
three separate sections based on listing markets would still produce 
information that is useful to investors and, therefore, replacing 
the division of Rule 606(a)(1) reports by listing venues with a 
division by securities included in the S&P 500 Index and other NMS 
stocks could result in costs. These costs are discussed in Section 
V.C.2.e.i.2.
---------------------------------------------------------------------------

    Specifically, the Commission staff analyzed execution quality as 
measured by effective spreads from Rule 605 reports (``Rule 605 data'') 
for common stocks with S&P 500 index inclusion and on different market 
centers \723\ to determine whether the execution quality of executing a 
market or a marketable limit order for common stock varies across 
market centers and S&P 500 index inclusion.\724\ The staff's analysis 
controls for stock and order characteristics.\725\ Accordingly, the 
staff's analysis considers whether execution quality depends on S&P 500 
index inclusion, and specifically which market centers provide better 
execution, as a means to assess the degree to which the amendment 
provides useful information.
---------------------------------------------------------------------------

    \723\ The analysis uses historical data from market centers as 
they existed during the indicated time period. The Commission notes 
that the names of some of the market centers have since changed.
    \724\ The Commission purchased the Rule 605 data from CoreOne 
Technologies, a provider of financial data. The data used in this 
analysis spans from January 1, 2012, through September 30, 2017. The 
CRSP U.S. 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.
    \725\ Specifically, to capture the effect of stock and order 
characteristics on execution quality, the analysis uses a regression 
analysis that controls for stock characteristics, such as dollar 
volume, market capitalization, and mean variance of daily returns, 
and order characteristics such as order type and order size. The 
regression analysis also controls for years to mitigate the effect 
of time variation on execution quality. In addition, the Rule 605 
data 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. The purpose of the 
analysis is to estimate the relative rankings of transaction costs 
across exchanges; therefore, the use of equally weighted effective 
spread has no impact on the economic analysis in a qualitative 
manner.
---------------------------------------------------------------------------

    While the staff's analysis is not a direct test of whether order 
routing differs for stocks included in S&P 500 versus those not 
included in the S&P 500,\726\ it does directly measure one important 
factor in whether such routing information will be useful--differences 
in execution quality. Information on both execution quality 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 that provide better execution quality. If execution 
quality, as measured by effective spreads, shows that S&P 500 index 
inclusion matters for which market centers offer better execution 
quality, then including the index information could enhance the ability 
of customers to assess one of the components of best execution. Hence, 
the staff's analysis provides some indication of whether dividing the 
reports by S&P 500 inclusion, as required by the adopted amendment, 
would provide customers and the public with useful information 
regarding the impact of routing decisions.\727\
---------------------------------------------------------------------------

    \726\ The direct test would be whether order routing differs for 
stocks included in S&P 500 versus those not included in the S&P 500, 
which would require quarterly reports for orders required by Rule 
606(a). However, the quarterly reports are not filed with the 
Commission, and the staff was unable to obtain aggregated 606 
reports from a vendor. Therefore, the Commission staff did not 
analyze 606 reports prior to today's amendments to see if routing 
differs by listing exchange of the stock.
    \727\ The staff used Alphabets in Table 2 and Table 3 for each 
market center so that the identity of exchange is not revealed.

  Table 2--Regression Results for the Association Between Execution Venue and Mean Effective Spread for Common
                                                     Stocks
----------------------------------------------------------------------------------------------------------------
                                                                           Mean effective spread (bp)
                                                               -------------------------------------------------
                      Dependent variable                                  (1)                      (2)
                                                               -------------------------------------------------
                                                                  Jan. 2012-Aug. 2016      Oct. 2016-Sept. 2017
----------------------------------------------------------------------------------------------------------------
Intercept.....................................................                *** 21.55                *** 20.28
Market Center
    A.........................................................                *** 20.34                *** 17.84

[[Page 58411]]

 
    B.........................................................                *** 17.02                *** 18.45
    C.........................................................                *** 24.34                *** 12.28
    D.........................................................                *** 33.93
    E.........................................................                *** 15.43                 *** 8.69
    F.........................................................                *** 20.40                *** 17.58
    G.........................................................                *** 26.28                *** 22.79
    H.........................................................                *** 43.36                *** 10.35
    I.........................................................                *** 19.38
    J.........................................................                *** 18.47                ***-16.07
    K.........................................................                *** 86.64               *** 104.04
    L.........................................................                *** 21.55                *** 13.78
    M.........................................................                 *** 5.89                  ** 0.89
    N.........................................................  .......................                *** 19.70
S&P500 Index..................................................                ***-12.40                ***-18.96
Interaction Terms
    S&P500 Index * A..........................................                ***-20.95                ***-18.44
    S&P500 Index * B..........................................                ***-18.44                ***-17.72
    S&P500 Index * C..........................................                ***-25.47                ***-14.34
    S&P500 Index * D..........................................                ***-34.23
    S&P500 Index * E..........................................                ***-10.50                 ***-4.32
    S&P500 Index * F..........................................                ***-21.22                ***-17.93
    S&P500 Index * G..........................................                ***-27.18                ***-23.26
    S&P500 Index * H..........................................                ***-44.40                ***-13.43
    S&P500 Index * I..........................................                ***-20.90
    S&P500 Index * J..........................................                ***-19.75                 ***17.74
    S&P500 Index * K..........................................                ***-84.79               ***-100.83
    S&P500 Index * L..........................................                ***-21.55                ***-13.34
    S&P500 Index * M..........................................                 ***-6.95                   *-2.14
    S&P500 Index * N..........................................  .......................                ***-18.54
Observations..................................................               29,141,050                3,963,474
Adjusted R \2\................................................                    5.06%                    6.29%
----------------------------------------------------------------------------------------------------------------
Note: Data is from the Rule 605 reports and CRSP and includes years from 2012 to 2017. The variable categories
  that are dropped are: Market orders, one trading venue, order size from 100-499 shares, and the 2012 calendar
  year (for the regression using data from January 2012 through August 2016). Note that the regression using
  data from October 2016 through September 2017 included quarter-fixed effects instead of year-fixed effects.
  Also, note that for the regression from October 2016 through September 2017, the analysis did not include CBSX
  and NSX data because these two exchanges stopped operating. The control variables are indicators for
  marketable limit order; order size for 500-1,999 shares, 2,000-4,999 shares, and >=5,000 shares; and security
  specific variables including dollar volume, market capitalization, and daily return variance. T-statistics are
  estimated from White standard errors. *** indicates significance of a 2-tailed test at the 1% level, ** at the
  5% level, and * at the 10% level. The Chi-square tests are used to test the null hypothesis that all of the
  exchange coefficients, with the exception of the intercept coefficient, are jointly zero. The pairwise F tests
  are used to test the null hypothesis that pairs of the exchange coefficients, with the exception of the
  intercept coefficient, are zero.

    Table 2 presents the results of the staff's analysis of effective 
spreads for common stocks traded on all existing exchanges and off 
exchange, after controlling for differences due to stock and order 
characteristics. The methodology in the staff analysis does not allow 
the analysis to treat IEX as a separate market center for the entire 
period because IEX data became available from September 2016, so the 
analysis divides the analysis into two subperiods.\728\ Column 1 
reports the result for the first sub-sample period, and column 2 
reports the result for the second sub-sample periods. 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 NYSE. The S&P 500 index rows in the table report the 
basis point difference between the average effective spreads on S&P 500 
stocks and the average effective spreads on non-S&P 500 stocks. The 
rows for interaction terms of each market center and the S&P 500 index 
in the table report the basis point difference between the average 
effective spreads of S&P 500 stocks on that market center and the 
average effective spreads on the NYSE.
---------------------------------------------------------------------------

    \728\ The staff did several analyses because CBSX data is 
available until January 2014 and NSX data is available until May 
2014. Staff conducted similar analysis without these two exchanges 
and during the time period that all the exchanges in the sample were 
operating. These regression analyses change the estimated 
coefficients in the regression analysis; however it does not change 
the conclusion that reporting divided by S&P 500 index and other NMS 
securities, as in the adopted amendment, could provide relevant 
information on execution quality to customers and the public. The 
additional analyses provide more robust analysis to support the 
staff's conclusion.
---------------------------------------------------------------------------

    For illustration, the intercept in Column 1 indicates that the 
average effective spread for market order NMS stocks that are executed 
on the NYSE is 21.55 basis points. The 20.34 estimate for Exchange A 
indicates that the effective spreads on Exchange A are 20.34 basis 
points greater than those on the NYSE. The estimate -12.04 for S&P 500 
index indicates that the effective spreads for S&P 500 stocks are 12.04 
basis points less than non-S&P 500 stocks. And, the estimate for the 
interaction between Exchange A and the S&P 500 index indicates that the 
effective spreads for S&P 500 stocks traded on Exchange A are 20.95 
basis

[[Page 58412]]

points lower than NYSE stocks on average.\729\
---------------------------------------------------------------------------

    \729\ 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.
---------------------------------------------------------------------------

    The analysis of Table 2 suggests that partitioning the Rule 606 
reports by S&P 500 index inclusion will be useful. Specifically, the 
structure of the regressions in Table 2 allows for a ranking of the 
exchanges by effective spread to gauge whether the exchanges that 
provide the better execution quality in S&P 500 stocks are different 
than those that provide the better execution quality in other NMS 
stocks. If the relative ranking of exchanges in S&P 500 stocks is 
similar to the relative ranking in other NMS stocks, then partitioning 
the order routing reports by S&P 500 inclusion would not provide 
information useful for considering the impact of broker-dealer routing 
on execution quality.
    Upon examination, Table 2 shows that the ranking of the market 
centers by effective spreads is different depending on stocks in that 
market center being included in the S&P 500 index. For example, the 
five market centers with the best execution quality relative to the 
NYSE traded stocks are Exchange M, E, B, J, and I, in descending order. 
However, in comparing S&P 500 stocks that are traded in these five 
trading centers, the ranking of the market centers for S&P 500 stocks 
by effective spreads changes. For S&P 500 stocks, the five market 
centers that have the best execution quality relative to the NYSE 
traded stocks are stocks traded on Exchange I, A, J, C, and M, in 
descending order.\730\ This indicates that there seem to be differences 
between market centers in terms of effective spreads for stocks, 
depending on whether they are included in the S&P 500 index, which may 
inform customers in assessing the execution quality their broker-
dealers provide.
---------------------------------------------------------------------------

    \730\ The analysis in Table 2 uses an indicator for each market 
center, an indicator for being included in the S&P 500 index, and an 
interaction term between each market center and the S&P 500 index. 
To obtain the rankings for execution quality for S&P 500 stocks, 
Commission staff summed the three estimates and compared the 
relative magnitudes of the summed estimates across market centers.
---------------------------------------------------------------------------

    Commenters suggested removing the requirement that the report be 
divided by listing market and separating reports by S&P 500 and non-S&P 
500 stocks because the division based on the S&P 500 index could give 
retail customers more meaningful data, as S&P 500 stocks have the 
largest market capitalization and have significant retail customer 
interest. Commenters mentioned that S&P 500 stocks, therefore, could 
have a different correlated execution quality level than lower volume 
issuances, providing useful information to retail customers.\731\ 
Therefore, the staff's analysis indicates that reporting divided by the 
S&P 500 index and other NMS securities, as in the adopted amendment, 
could provide relevant information about execution quality to customers 
and the public.
---------------------------------------------------------------------------

    \731\ See, e.g., Schwab Letter at 3 and Fidelity Letter at 9.
---------------------------------------------------------------------------

2. Costs
    The amendment to Rule 606(a)(1), as adopted, will result in initial 
compliance costs to prepare separate disclosures and ongoing costs to 
adjust reporting when the constituents of the S&P 500 change. The 
Commission acknowledges that the S&P 500 index is a proprietary index, 
which is accessible via a fee-based subscription. The Commission also 
notes that the list of S&P 500 index stocks is readily available on the 
internet on many free websites and thus obtaining the constituents of 
the index should be at a minimal cost to broker-dealers. Moreover, as 
discussed in Section III.B.5.b., many data dissemination services 
obtain this information from the S&P and redistribute this information 
as part of data packages consumed by broker-dealers as a part of the 
broker-dealers normal course of business. Thus, the Commission believes 
that there will be few or no additional data costs to broker-dealers 
resulting from this requirement.
    Additionally, on the basis of staff analysis, not separating order 
routing reports by primary listing market could also reduce some 
informational value relative to the public order handling reports prior 
to today's amendments. In particular, the staff analysis indicates that 
removal of primary listing exchanges could reduce the value of the 
606(a)(1) reports for monitoring execution quality from broker-dealers, 
because reporting by listing exchange still provides information 
distinct from the S&P 500 index.

           Table 3--Regression Results for Association Between Execution Venue and Mean Effective Spread for Common Stocks by Listing Exchange
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Dependent variable                                                                          Mean effective spread (bp)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Time Period.............................................            Jan. 2012 through Aug. 2016
                                                                   Oct. 2016 through Sept. 2017
                                                         -----------------------------------------------------------------------------------------------
Listing Exchange........................................        (1)             (2)             (3)             (4)             (5)             (6)
                                                               NYSE           NASDAQ           AMEX            NYSE           NASDAQ           AMEX
--------------------------------------------------------------------------------------------------------------------------------------------------------
Intercept...............................................       *** 18.60       *** 84.35      *** 161.47       *** 21.56       *** 37.48      *** 122.29
Market Center:
    A...................................................        ***-3.47       ***-28.39       ***-35.13        ***-8.26        *** 9.29       ***-21.38
    B...................................................        ***-5.94       ***-31.49       ***-39.39        ***-5.93        *** 9.40       ***-20.29
    C...................................................        ***-1.21       ***-22.82       ***-29.22        ***-8.80        *** 3.51       ***-18.16
    D...................................................        *** 1.91       ***-11.55       *** 17.93
    E...................................................           -0.33       ***-33.79         *-12.66        ***-6.66           -0.56        **-13.72
    F...................................................        ***-4.14       ***-28.61       ***-34.00        ***-6.77        *** 8.83       ***-20.01
    G...................................................        ***-3.84       ***-21.70       ***-28.93        ***-6.38       *** 14.40       ***-18.29
    H...................................................        *** 1.31  ..............           -0.76       ***-11.02  ..............       ***-24.29
    I...................................................        ***-2.60       ***-31.09       ***-38.77
    J...................................................        ***-5.85       ***-30.22       ***-41.11        ***-3.40       ***-18.52       ***-19.06
    K...................................................  ..............       ***-41.56  ..............  ..............         **-7.89
    L...................................................        ***-2.93       ***-27.01       ***-33.85        ***-9.86        *** 5.08       ***-28.33
    M...................................................        ***-2.56       ***-48.71       ***-69.04       ***-11.74       ***-11.35       ***-39.14
    N...................................................  ..............  ..............  ..............        ***-4.73       *** 11.52       ***-16.31
S&P500 Index............................................       ***-12.86       ***-72.80  ..............       ***-18.44       ***-42.56

[[Page 58413]]

 
Interaction Terms:
    S&P500 Index * A....................................        *** 2.73       *** 29.10  ..............        *** 6.95        ***-4.94
    S&P500 Index * B....................................        *** 4.33       *** 31.40  ..............        *** 6.21        ***-4.14
    S&P500 Index * C....................................        *** 0.50       *** 22.69  ..............        *** 7.23         **-1.43
    S&P500 Index * D....................................        ***-0.67       *** 11.56
    S&P500 Index * E....................................        *** 4.34       *** 44.30  ..............       *** 10.26       *** 11.49
    S&P500 Index * F....................................        *** 3.40       *** 28.77  ..............        *** 6.02        ***-4.43
    S&P500 Index * G....................................        *** 2.99       *** 21.97  ..............        *** 5.57       ***-10.07
    S&P500 Index * H....................................        ***-2.27  ..............  ..............        *** 9.09
    S&P500 Index * I....................................        *** 2.27       *** 30.15
    S&P500 Index * J....................................        *** 4.16       *** 30.29  ..............        *** 5.06       *** 20.47
    S&P500 Index * K....................................  ..............       *** 43.18  ..............  ..............       *** 12.26
    S&P500 Index * L....................................        *** 2.22       *** 28.53  ..............        *** 9.07            0.59
    S&P500 Index * M....................................        *** 2.15       *** 48.26  ..............       *** 10.94       *** 14.03
    S&P500 Index * N....................................  ..............  ..............  ..............        *** 5.58        ***-5.78
Observations............................................      13,258,370      15,015,886         864,846       1,776,195       2,085,181         102,046
Adjusted R \2\..........................................           7.55%           3.35%           4.11%          11.43%           4.26%           5.84%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Data is from the Rule 605 reports and CRSP, and includes years from 2012 to 2017. The variable categories that are dropped are: Market orders, one
  trading venue, order size from 100-499 shares, and the 2012 calendar year (for the regression using data from January 2012 through August 2016). Note
  that the regression using data from October 2016 through September 2017 included quarter-fixed effects instead of year-fixed effects. Also, note that
  for the regression using data from October 2016 through September 2017, the analysis did not include CBSX and NSX because these two exchanges stopped
  operating. The control variables are indicators for marketable limit order; order size for 500-1,999 shares, 2,000-4,999 shares, and >= 5,000 shares;
  and security specific variables including dollar volume, market capitalization, and daily return variance. T-statistics are estimated from White
  standard errors. *** indicates significance of a 2-tailed test at the 1% level, ** at the 5% level, and * at the 10% level. The Chi-square tests are
  used to test the null hypothesis that all of the exchange coefficients, with the exception of the intercept coefficient, are jointly zero. The
  pairwise F tests are used to test the null hypothesis that pairs of the exchange coefficients, with the exception of the intercept coefficient, are
  zero.

    Similar to Table 2 in Section V.C.2.d.i.1., 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 by the exchanges where stocks are listed, e.g., if 
broker-dealers route orders differently for NYSE-listed stocks compared 
to NASDAQ-listed stocks, the removal of listing exchanges from the 
reports will not provide this information to customers and the 
public.\732\ Such information can be useful for customers and the 
public, as long as order routing decisions determine execution quality. 
Specifically, Commission staff analyzed execution quality as measured 
by effective spreads from Rule 605 reports for common stocks with 
different primary listing exchanges, with different market centers, and 
with S&P 500 index information to determine whether the cost of 
executing a market or a marketable limit order for common stock varies 
across market centers and primary listing exchanges, while also 
accounting for the effects of the S&P 500 index inclusion.
---------------------------------------------------------------------------

    \732\ The Commission notes that there are differences in order 
routing decisions depending on the primary listing exchange because 
of existing rules, regulations, and practices. For example, the NYSE 
does not trade NASDAQ- or NYSEAMER-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 will be lost when reporting by 
primary listing exchanges is removed.
---------------------------------------------------------------------------

    In the Proposing release, the Commission reported the results of a 
staff analysis that found that reporting order routing information by 
listing exchange would provide useful information and, therefore, 
removing this partition would impose a cost on investors. Because the 
Commission is adopting a different partition than proposed, 
specifically replacing a listing-exchange partition with a partition 
based on S&P 500 inclusion, the Commission staff has revised its 
analysis to examine whether a listing-exchange partition would provide 
useful information beyond that information investors could learn from 
S&P 500 inclusion. Specifically, the analysis examines whether, after 
accounting for S&P 500 inclusion, listing exchange still affects the 
relative rank of costs to trade on the various market centers. Such a 
result would indicate that an S&P 500 partition is not a direct 
substitute for all of the information captured by a listing-exchange 
partition. The staff's analysis controls for stock and order 
characteristics.\733\ Accordingly, the staff's analysis considers 
whether execution quality depends on primary listing exchanges in 
addition to S&P 500 index inclusion as a means to assess whether the 
amendment might reduce some of the usefulness of the reports.\734\
---------------------------------------------------------------------------

    \733\ See supra note 725.
    \734\ See Section V.C.2.e.i.1, which discusses the usefulness of 
using execution quality measures in the analysis.
---------------------------------------------------------------------------

    Table 3 presents the results of the staff's analysis of effective 
spreads for common stocks listed on the NYSE, NASDAQ, and AMEX. Columns 
1 through 3 report the results for each of these primary listing 
exchanges. 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. The 
S&P 500 index rows in the table report the basis point difference 
between the average effective spreads on stocks that are included in 
the S&P 500 index and the average effective spreads on each listing 
exchange. The rows for interaction terms of each market center and S&P 
500 index in the table report the basis point difference between the 
average effective spreads of S&P 500 stocks on that market center and 
the average effective spreads on each listing exchange.
    As an illustrative example, 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 18.60 basis points and the -
3.47 estimate for Exchange A indicates that the effective

[[Page 58414]]

spreads for NYSE-listed stocks traded on Exchange A are 3.47 basis 
points lower after controlling for differences due to stock and order 
characteristics. The -12.86 estimate for the S&P 500 index indicates 
that the effective spreads for S&P 500 stocks are 12.86 basis points 
less than non-S&P 500 index stocks, and the 2.73 estimate for the 
interaction between Exchange A and the S&P 500 index indicate that the 
effective spreads for S&P 500 stocks that are traded on Exchange A are 
2.73 basis points higher.
    Table 3 indicates that the average effective spreads vary 
significantly by the market center where the orders were executed. 
Table 3 shows that most market center effective spreads are 
significantly different than those of the listing exchange. For 
example, after controlling for the effect of stock and order 
characteristics and the effect of the S&P 500 index inclusion, Column 1 
shows that, for NYSE-listed stocks, the average effective spread on 
Exchange A is 3.47 basis points less than on the NYSE itself, and the 
average effective spread on NASDAQ is 1.31 basis points higher than on 
the NYSE. Table 3 also indicates that the average effective spreads 
vary significantly by listing exchange. For example, 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.\735\ Table 
3 also shows that AMEX-listed stocks tend to have even higher average 
effective spreads than NASDAQ-listed stocks by comparing the results in 
Column 3 with those in Column 2.
---------------------------------------------------------------------------

    \735\ 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 3. However, because the 
606 reports do not distinguish individual stocks, the Commission 
believes that the staff analysis is appropriate for assessing the 
costs of the adopting amendments.
---------------------------------------------------------------------------

    The results in the table suggest that because the relative ranking 
of each market center changes depending on the listing exchange, the 
adopted amendment to remove listing exchanges from the report could 
reduce the usefulness of Rule 606 reports. 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 will have little or 
no relationship to whether order routing information informs on 
execution quality. Such a result implies that removing listing 
exchanges from order routing reports would not reduce the amount of 
information in the reports. However, upon examination, Table 3 shows 
that the ranking of the market centers by effective spreads is 
different depending on the primary listing exchange even after 
considering the effect of the S&P 500 index.
    For example, the five market centers that have the best execution 
quality relative to the NYSE-listed stocks are Exchange B, J, F, G, and 
A, in descending order. However, for the same NYSE-listed stocks, the 
ranking of the market centers for S&P 500 stocks by effective spreads 
changes. For S&P 500 stocks, the five market centers that have the best 
execution quality relative to the NYSE-listed stocks are Exchange J, B, 
H, G, and L, in descending order.\736\ Similarly, the five market 
centers that have the best execution quality relative to the NASDAQ-
listed stocks are Exchange M, K, E, B, and I, in descending order. 
However, for the same NASDAQ-listed S&P 500 stocks, the five market 
centers that have the best execution quality relative to the NASDAQ-
listed stocks are Exchange B, C, F, A, and L, in descending order. The 
analysis indicates that there seem to be differences among market 
centers in terms of effective spreads for stocks with different primary 
listings. The Commission acknowledges that the staff's analysis 
presented in Table 3 may not be a perfect test of assessing whether the 
partition based on S&P 500 index inclusion relative to the omission of 
information of listing venues would have more useful information in the 
report. Instead, the staff analysis assesses whether S&P 500 inclusion 
encompasses all of the information in the listing exchanges. 
Specifically, the staff's analysis shows that listing venues contain 
information relevant to execution quality, and therefore, broker-
dealers' order routing, after accounting for the effects of S&P 500 
index inclusion.
---------------------------------------------------------------------------

    \736\ The analysis in Table 3 includes an indicator for each 
market center, an indicator for being included in the S&P 500 index, 
and an interaction term between each market center and S&P 500 index 
for each listing exchange. Therefore, in order to obtain the 
rankings for execution quality for S&P 500 stocks, Commission staff 
calculated the sum of the three estimates and compared the relative 
magnitudes of the summed estimate across market centers for each 
listing exchange.
---------------------------------------------------------------------------

    On the basis of the staff's analysis, the Commission recognizes 
that replacing the listing exchange partition with an S&P 500 index 
partition, as in the adopted amendment, could provide additional 
information to customers and the public, as discussed in Section 
V.C.2.e.i.1. At the same time, the Commission also acknowledges that 
eliminating the listing information from the report required by Rule 
606(a)(1), as in the adopted amendment, could reduce the information 
content of the reports.
    The Commission recognizes that because the amendments change which 
orders are covered by Rule 606(a)(1), the analysis does not directly 
provide evidence of the costs of eliminating the listing information 
from the report, but rather provides an indication of potential costs. 
The public order handling reports will cover a different set of orders 
than are covered in the Rule 605 data, and the Rule 605 data do not 
have information to distinguish orders covered by Rule 606(a)(1) from 
orders covered by Rule 606(b)(3). Therefore, Commission staff cannot 
conduct a separate analysis for orders covered by Rule 606(a)(1). The 
Commission believes, however, that it can reasonably assume that 
execution quality for orders covered by Rule 606(a)(1) is sufficiently 
correlated with the execution quality for orders covered by Rule 
606(b)(3) for the analysis to provide informative results because 
exchanges have few mechanisms that would treat the orders differently.
ii. Other Amendments to Reporting
    The Commission believes that the amendments to Rule 606(a)(1) to 
require quarterly public order routing reports to be broken down by 
calendar month will 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. Multiple commenters stated that disclosing the information 
contained in the public routing reports by calendar month could enable 
customers to better assess and monitor broker-dealers' routing 
decisions.\737\ This adopted amendment will, however, require an 
initial cost to change the process for completing the reports. The 
Commission believes this cost to be small because broker-dealers 
typically process data daily and reporting the data broken down by 
month will be a change only in the aggregation of the data, from 
quarterly to monthly.
---------------------------------------------------------------------------

    \737\ See, e.g., Markit Letter at 29; Fidelity Letter at 9.
---------------------------------------------------------------------------

    In addition, the Commission is adopting the requirement that the 
public order routing report required by Rule 606(a)(1) and the 
customer-specific order routing report required by Rule 606(b)(1) be 
made available using an XML schema and associated PDF renderer 
published on the Commission's

[[Page 58415]]

website. The benefits and costs associated with this requirement are 
discussed in Section V.C.4. The Commission believes that requiring both 
the public and the customer-specific order routing reports to be 
provided in this format should be useful to customers, as it will allow 
them to more easily analyze and compare the data provided in both types 
of reports across broker-dealers, for the reasons discussed above.\738\ 
The amendments to Rule 606(a)(1) and Rule 606(b)(1), as adopted, will 
require an initial cost to change the process for completing the 
reports.\739\
---------------------------------------------------------------------------

    \738\ See supra Section III.A.3.
    \739\ The benefits and costs associated with this requirement 
more generally are discussed in Section V.C.4.
---------------------------------------------------------------------------

    Finally, the Commission is amending Rules 605(a)(2) and 606(a)(1), 
as adopted, to require market centers and broker-dealers to keep the 
reports posted on a website that is free and readily accessible to the 
public for a period of three years from the initial posting on the 
website. As commenters stated,\740\ such analysis may lead to increased 
transparency with regard 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. Under the adopted amendments to Rule 605(a)(2) and 
606(a)(1), customers and the public could examine the order execution 
of a market center and broker-dealers' order routing through time.
---------------------------------------------------------------------------

    \740\ See, e.g., Citadel Letter at 1; Markit Letter at 29.
---------------------------------------------------------------------------

    Regarding the requirement to make the reports available for three 
years, the Commission believes that, once the report is posted, 
maintaining the reports on the website will not pose any additional 
burden on broker-dealers, and thus any additional costs to maintain the 
report on the website will be negligible.\741\ In addition, the adopted 
amendment could impede third-party vendors that aggregate the time 
series of 605 and 606 reports because customers may find third-party 
services less useful, particularly for the three years that the reports 
are publicly available. As a contrast, the customers of third-party 
vendors could avoid costs associated with third-party sources because 
under the adopted amendment, customers could directly access the 
information for the three-year period.
---------------------------------------------------------------------------

    \741\ See infra Section V.C.2.f.
---------------------------------------------------------------------------

f. Compliance Costs for Rule 606(a)(1) Order Routing Reports
    As discussed in more detail in Section IV.D.4., the Commission 
estimates the costs to comply with the amendments to Rule 606(a) that 
require broker-dealers to distinguish between marketable and non-
marketable limit orders and with adopted Rule 606(a)(1)(iii) that 
requires disclosure of net payment for order flow and transaction fees 
and rebates by Specified Venue are as follows.
    As discussed in Section IV.D.4.ii., the Commission estimates that 
the initial hourly burden will be 240 hours \742\ for a broker-dealer 
that routes orders subject to the disclosures required by Rule 
606(a)(1) to both update its data capture systems and format the report 
required by the rule, resulting in a monetized cost burden of $76,800 
per broker-dealer.\743\ The Commission estimates that the one-time, 
initial burden for a broker-dealer that routes orders subject to the 
disclosures required by Rule 606(a)(1) and that does not currently 
create the required order handling information to engage a third-party 
to program its systems to implement the requirements of the amendments 
to Rule 606(a) will be 20 hours, resulting in an estimated monetized 
cost burden of $6,410 per broker-dealer.\744\ Also, as discussed in 
Section IV.D.4.ii, the Commission further estimates a fee of $32,000 
per broker-dealer to reflect the complexities associated with requiring 
broker-dealers to distinguish between marketable and non-marketable 
limit orders.
---------------------------------------------------------------------------

    \742\ See supra note 566.
    \743\ See id.
    \744\ See supra note 567.
---------------------------------------------------------------------------

    The Commission estimates that all 292 broker-dealers that route 
orders covered by Rule 606(a)(1) will need to update their systems to 
capture the information required by the rule. The Commission believes 
that some broker-dealers will implement the changes in-house, while 
others will engage a third party vendor. Accordingly, the Commission 
believes that it is reasonable to estimate that one third of the 292 
broker-dealers that route such orders--97 broker-dealers--will 
implement the changes in-house, while the remaining number--195 broker-
dealers will engage a third-party vendor to do so.\745\
---------------------------------------------------------------------------

    \745\ See supra note 560.
---------------------------------------------------------------------------

    The Commission estimates the initial burden for broker-dealers that 
will program their systems in-house to capture the data and produce a 
report to comply with the rule as 23,280 hours.\746\ The Commission 
estimates that the total initial cost for broker-dealers that will 
engage a third-party vendor to program their systems to capture the 
data and produce a report to comply with the rule as 3,900 hours and 
$6,240,000.\747\
---------------------------------------------------------------------------

    \746\ See supra note 568.
    \747\ See supra note 570.
---------------------------------------------------------------------------

    Therefore, the Commission estimates that the total initial burden 
to comply with Rule 606(a) for all 292 broker-dealers that the 
Commission estimates route retail orders is 27,180 hours, resulting in 
a monetized cost burden of $8,699,550,\748\ plus an additional cost of 
$6,240,000\749\ to third-party service providers.
---------------------------------------------------------------------------

    \748\ See supra notes 572.
    \749\ See supra note 570.
---------------------------------------------------------------------------

    The Commission 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 will remain the 
same compared to a quarterly report previously required under Rule 
606(a).\750\ However, broker-dealers will 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 estimates 
the annual burden for a broker-dealer to comply with the adopting 
amendments to Rule 606(a)(1)(i) through (iii) to be 10 hours, resulting 
in a monetized cost burden of $3,380.\751\ With 292 broker-dealers that 
route retail orders required to comply with the adopting amendments, 
the Commission estimates the total annual burden to be 2,920 hours, 
resulting in a monetized cost burden of $986,960.\752\
---------------------------------------------------------------------------

    \750\ See supra Section IV.D.4.b.
    \751\ See supra note 574.
    \752\ See supra note 576.
---------------------------------------------------------------------------

    As discussed in Section IV.D.4.a.ii., because Rule 606(b)(1) prior 
to today's amendments applies to all customer orders, broker-dealers 
must now modify their systems to provide the disclosures for the 
following types of orders, regardless of market value: (i) Orders in 
NMS stocks that are submitted on a held basis; (ii) orders in NMS 
stocks that are submitted on a not held basis and are exempt from the 
disclosure requirements of Rule 606(b)(3); or (iii) orders in NMS 
securities that are option contracts.
    The Commission believes that it is reasonable to estimate that one 
third of the 292 broker-dealers that route orders subject to the 
disclosures required by Rule 606(b)(1)--97 broker-dealers--will 
implement these changes in-house, while the remaining number--195 
broker-dealers--will engage a third-party vendor to do so.\753\ The 
Commission estimates the initial burden

[[Page 58416]]

for a broker-dealer that will program its systems in-house to comply 
with Rule 606(b)(1) as 24 hours.\754\ The Commission estimates the 
initial burden for a broker-dealer that will engage a third-party 
vendor to program its systems to comply with the rule as 3 hours and 
$979.\755\
---------------------------------------------------------------------------

    \753\ See supra note 560.
    \754\ See supra note 578.
    \755\ See supra note 579.
---------------------------------------------------------------------------

    Therefore Commission estimates the total initial burden for all 292 
broker-dealers to program their systems to comply with Rule 606(b)(1) 
as 2,913 hours \756\ and $975,000.\757\
---------------------------------------------------------------------------

    \756\ See supra note 581.
    \757\ See supra note 582.
---------------------------------------------------------------------------

    As discussed in Section IV.5., the amendments being adopted today 
add several defined terms to Rule 600 of Regulation NMS which will 
impose an initial burden on market centers and the broker-dealers that 
will have to review and update compliance manuals and written 
supervisory procedures and update citation references to any such 
defined term. The Commission estimates that it will take each of 381 
market centers and 4,024 broker-dealers two hours to make these updates 
in house at a one-time burden of two hours for each respondent.\758\ 
Therefore the Commission estimates the total initial cost to be 8,810 
hours.\759\ As discussed in Section IV.5, there is no annual burden 
associated with this requirement.
---------------------------------------------------------------------------

    \758\ See supra note 592.
    \759\ See supra note 593.
---------------------------------------------------------------------------

3. Disclosure of Order Execution Information
    The adopted amendment to Rule 605(a)(2) requires market centers to 
keep reports required pursuant to Rule 605(a)(1) posted on a website 
that is free and readily accessible to the public for a period of three 
years from the initial date of posting on the Website.
a. Benefits
    Similar to the analogous requirements in Rules 606(a), as adopted, 
described above, the Commission 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. This will 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 on the basis of the data more easily. Several commenters 
stated that the adopted amendment to Rule 605(a)(2) could better enable 
investors to evaluate the impact that routing decisions have on the 
quality of their order executions and provide information regarding 
broker-dealers' potential conflicts of interest.\760\
---------------------------------------------------------------------------

    \760\ See, e.g., Angel Letter at 3-5; Dash Letter at 2-3; FSR 
Letter at 1.
---------------------------------------------------------------------------

b. Costs
    As discussed in Section V.C.2.e. above, the Commission 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. In addition, 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 will be 
publicly available and more easily accessible.
4. Structured Format of Reports
    The Commission is adopting the requirement that the Rule 606(b)(1) 
order routing and Rule 606(b)(3) order handling reports be made 
available using the Commission's XML schema and associated PDF 
renderer. The Commission is also adopting the requirement that the 
public order handling reports required under Rule 606(a)(1) be made 
available using an XML schema and associated PDF renderer published on 
the Commission's website. As discussed earlier, the Commission 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.\761\ In addition, the 
associated PDF renderer will provide users with an instantly human-
readable format for those who prefer to review manually individual 
reports, while still providing a uniform presentation. Multiple 
commenters stated that presenting the data in a consistent, machine 
readable format such as XML could make data analysis easier and could 
enable customers to make more informed decisions in selecting broker-
dealers.\762\
---------------------------------------------------------------------------

    \761\ See supra Section III.A.5.
    \762\ See FIF Letter at 17; CFA Letter at 11; FIA Letter at 1; 
HMA Letter at 12; Markit Letter at 17, 28; and Better Markets Letter 
at 2.
---------------------------------------------------------------------------

    The Commission understands that varying degrees of structuring have 
varying costs. 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.\763\ 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 
will enhance their ability to conduct large-scale analysis and 
immediate comparison of broker-dealers across date ranges. Moreover, as 
an open standard, XML is widely available to the public at no cost.
---------------------------------------------------------------------------

    \763\ See http://www.finra.org/industry/web-crd/web-eft-schema-documentation-and-schema-files.
---------------------------------------------------------------------------

    The Commission also believes that if the reports are provided in a 
structured format, users could avoid costs associated with third-party 
sources that 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 Commission also acknowledges 
that the required reporting in structured format could hurt certain 
third-party vendors that charge for access to structured data of data 
reported in an unstructured format, because customers may find that 
third-party service is less useful for them. However, without the need 
to spend time in manually reviewing and rekeying the unstructured 
information for analysis, some third-party vendors may be able to 
conduct more comprehensive analysis in a more timely fashion than they 
could have offered previously.
    The XML schema will also incorporate certain validations to help 
ensure consistent formatting among all reports help to ensure data 
quality. However, these validations will not be designed to ensure the 
underlying accuracy of the data.
    The Commission considered alternative formats to XML, such as 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 will 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 required reports. The Commission 
believes the simpler characteristics of the information in the required 
reports are better suited for XML.

[[Page 58417]]

    Two commenters raised concerns regarding the need for providing 
such reports in the XML/PDF format specifically of the Rule 606(b)(1) 
reports, stating that customers rarely request these reports, and 
stating their view that the cost of implementing the proposed format 
would outweigh the benefits.\764\ However, for the reasons stated 
above, the Commission believes providing these reports in XML has 
benefits and would not impose substantial costs to broker-dealers to 
produce the XML/PDF format of the reports. To the extent that broker-
dealers would need to abide by the requirement of Rule 606(b)(1) only 
when customers request such reports, and, as discussed in Section 
V.C.1.a.ii., to the extent that customers typically placing held orders 
may not have a need for additional customer-specific reports required 
by Rule 606(b)(1) and therefore would not frequently request such 
reports, Rule 606(b)(1) would not impose significant ongoing compliance 
costs to broker-dealers to create the XML/PDF format of the reports. 
Moreover, as discussed in Section V.C.1.a.i., although customers 
placing held orders would rarely request reports set forth in 
606(b)(1), customers will have an option to request additional 
information if they choose to do so. As a result, customers that 
request 606(b)(1) reports would be able to better compare and monitor 
broker-dealers' order handling practices, which could promote better 
execution quality of held orders and competition among broker-dealers. 
Therefore, the Commission believes that the use of the XML/PDF format 
will enable customers to more easily analyze and compare the 
individualized data provided.
---------------------------------------------------------------------------

    \764\ See Thomson Reuters Letter at 2; FIF Letter at 9, 12.
---------------------------------------------------------------------------

5. Other Definitions in Adopted Amendments to Rule 600
a. Definition of Non-Marketable Limit Order in Adopted Rule 600(b)(54)
    The Commission believes that the amendments to Rule 600(b)(54) will 
help ensure consistent and correct interpretation and application of 
the adopting amendments to Rule 606(a)(1) for retail orders. The 
Commission also believes that there are no costs associated with 
adopting Rule 600(b)(54), because it is a definition that is widely 
used by market participants.
b. Definitions of ``Orders Providing Liquidity'' and ``Orders Removing 
Liquidity'' in Adopted Rule 600(b)(58) and (59)
    The Commission believes that Rules 600(b)(58) and (59), as adopted, 
will help ensure consistent and correct interpretation and application 
of Rule 606(b)(3), as adopted, for institutional orders. The Commission 
also believes that there are no costs associated with adopted Rules 
600(b)(58) and (59) because the Commission understands that the two 
definitions are widely used by market participants.

D. Alternatives Considered

1. Alternative Scope for the Customer-Specific Reports
    In addition to the alternative of adopting the proposed $200,000 
threshold in the definition of ``institutional order,'' as discussed 
above, the Commission also considered an alternative in which the 
Commission would adopt a new entity-centric definition of 
``institutional order'' and require order handling disclosure in Rule 
606(b)(3) for such ``institutional'' orders. Several commenters 
suggested that the applicability of the customer-specific disclosures 
be based on the entity placing the order.\765\ The entity-centric 
approach could be based on the definition of ``institutional order,'' 
that draws from FINRA Rules 2210(a)(4) and 4512(c) in defining an 
institutional order.\766\
---------------------------------------------------------------------------

    \765\ See ICI Letter at 6-7; MFA Letter at 3; Fidelity Letter at 
3; STA Letter at 4; CFA Letter at 8; SSGA Letter at 1; CFA Letter at 
8; Bloomberg Letter at 13.
    \766\ See supra Section III.A.1.b.ii.
---------------------------------------------------------------------------

    The definition of ``institutional investor'' in FINRA Rule 
2210(a)(4) and the definition of ``institutional account'' in FINRA 
Rule 4512(c) are well-established existing definitions that are 
familiar to most market participants and apply to entities that the 
Commission believes are broadly considered to be institutional by 
market participants. Therefore, broker-dealers' familiarities with 
FINRA definitions would facilitate compliance with and might reduce 
potential compliance costs for such a definition for participants 
already familiar with the FINRA rules. In addition, commenters 
suggested that funds are considered to be institutional market 
participants and that their orders should qualify as institutional 
orders,\767\ and one commenter specifically characterized private funds 
as traditional institutional investors.\768\ This is consistent with 
the Commission's understanding, as reflected by its statement in the 
Proposing Release that a hedge fund--a type of private fund--is an 
example of a type of institutional customer,\769\ that market 
participants are accustomed to considering private funds to be 
institutional investors.
---------------------------------------------------------------------------

    \767\ See ICI Letter at 6; IDC Letter at 1-2; Capital Group 
Letter at 3; Ameritrade Letter at 1-2.
    \768\ See Dash Letter at 3.
    \769\ See Proposing Release, supra note 1, at 49433 n.1.
---------------------------------------------------------------------------

    The Commission recognizes that the alternative definition, which is 
an entity-based definition of an institutional order, would capture 
most orders submitted by institutional market participants and is 
likely to reduce the potential misclassification of institutional 
orders as non-institutional orders and vice versa. The Commission also 
recognizes that the scope of FINRA Rules 2210(a)(4) and 4512(c), as 
incorporated into the definition of institutional order in the 
alternative, is generally tailored to cover the broad range of 
institutions that would likely benefit from the order handling 
disclosures required by Rule 606(b)(3), while minimizing the potential 
misclassification of institutional orders. However, as explained below, 
the Commission did not adopt this alternative.
    As discussed in Section III.A.1.b.ii., the entity-centric approach 
suggested by commenters would require the Commission to set forth the 
types of customers that may request the Rule 606(b)(3) disclosures for 
their NMS stock orders, but would not entail any differentiation in the 
types of orders covered by Rule 606(b)(3). As result, NMS stock orders 
from qualifying customers that are submitted on a held basis would be 
covered by the Rule 606(b)(3) disclosures. This is a suboptimal outcome 
that is avoided by the adopted order type-based approach to Rule 
606(b)(3)'s applicability. Including held orders within the Rule 
606(b)(3) disclosures would be inconsistent with the purpose of the 
disclosures to provide insight into how a broker-dealer exercises order 
handling and routing discretion because broker-dealers must attempt to 
execute held orders immediately and are provided no discretion in 
handling them. Moreover, including a customer's held orders in the Rule 
606(b)(3) report could obfuscate the reports' depiction of the 
discretion actually exercised by the broker-dealer. Order handling and 
routing behavior dictated by the fact that the customer submitted a 
held order could be misunderstood in the report as the product of 
broker-dealer discretion.

[[Page 58418]]

    The alternative approach also would require the Commission to 
prescribe institutional status criteria that customers must fit in 
order to be entitled to receive the disclosures. A risk with such an 
approach is that the criteria could be over-inclusive or under-
inclusive. The Commission is particularly concerned about potential 
under-inclusiveness because customers that do not fit the criteria 
would not be entitled to receive the disclosures. Under FINRA Rule 
4512, a broker-dealer is not required to obtain for ``institutional 
accounts'' certain additional information that it is required to obtain 
for accounts that are not ``institutional accounts.'' \770\ Likewise, 
under FINRA Rule 2210(a)(4), a broker-dealer is subject to less 
prescriptive review requirements for ``institutional communications'' 
that are solely to ``institutional investors'' than it is subject to 
for other, ``retail communications.'' \771\ Under both of these FINRA 
rules, exclusion from the defined ``institutional'' criteria triggers a 
more stringent due diligence or review obligation for the broker-
dealer. The opposite would be true under an entity-centric approach to 
Rule 606(b)--if the institutional status criteria adopted by the 
Commission were not met, the market participant would be excluded from 
the more detailed disclosure regime.\772\
---------------------------------------------------------------------------

    \770\ See FINRA Rule 4512(a)(2).
    \771\ See FINRA Rule 2210.
    \772\ See supra Section III.A.1.b.
---------------------------------------------------------------------------

    The alternative could create costs to customers because of 
misclassification of orders if broker-dealers are not able to easily 
discern whether an order meets the definition to be included in the 
customer-specific reports. Specifically, orders for NMS stock from 
persons that have total assets under $50 million and that are not a 
type of market participant expressly covered by the adopted definition 
would not be included in the reports under the alternative. Broker-
dealers would not be obligated to provide these persons with the order 
handling disclosures in the adopted Rule 606(b)(3), because these 
persons do not fall within the definition under this alternative. 
Therefore, these persons would not benefit from the increased order 
handling transparency provided for in new Rule 606(b)(3). These persons 
instead would receive the order handling disclosures made available by 
amended Rule 606(b)(1).\773\
---------------------------------------------------------------------------

    \773\ Additionally, if an institutional order were misclassified 
as a retail order, the order would be subject to the Rule 606(a)(1) 
and Rule 606(b)(1) order routing disclosure requirements, therefore 
reducing the accuracy of public retail order routing reports and 
reducing the benefits of increased transparency of retail order 
routing disclosure that are discussed in Section V.C.2.a.ii.
---------------------------------------------------------------------------

    Furthermore, the alternative could create costs to retail investors 
due to misclassification of orders if broker-dealers cannot easily 
discern whether an order meets the definition of a retail order. Such a 
misclassification would exclude retail market participants that should 
be included, or include an institutional market participant that should 
be excluded. Under this scenario, the 606(a)(1) report could contain 
less accurate information regarding retail order routing, reducing the 
benefit of increased transparency of the public retail order report. 
Also, because misclassified retail orders would be subject to the 
requirements of 606(b)(3) reports under the adopted rule, retail 
investors would not receive the benefit of 606(a)(1) reports. As 
discussed in Section V.C.1.a.i.1., information pertinent to 
understanding broker-dealers' order handling practices for customers' 
orders that retail investors typically place is not the same as for 
institutional market participants. In addition, as discussed in Section 
V.C.2.a.i., because the information contained in 606(a)(1) reports 
could be more relevant to retail orders than 606(b)(3) reports, 
misclassification of orders would limit the benefits that retail 
customers could receive from the enhanced transparency of the retail 
order routing reports.
2. Scope of Broker-Dealer's Obligation Under Rule 606(b)(3)
    The Commission is adopting the Rule 606(b)(3) requirement that 
every broker-dealer must, on request of a customer that places, 
directly or indirectly, one or more orders in NMS stocks that are 
submitted on a not held basis with the broker-dealer, disclose to such 
customer a report on its handling of institutional orders for that 
customer, unless a de minimis exception in Rules 606(b)(4) or (b)(5) 
applies. In addition, the Commission is maintaining the exclusion of 
broker-dealers from the current definition of ``customer'' and that 
exclusion is maintained for purposes of Rule 606(b)(3), which cross-
references the term ``customer.''
    The Commission considered an alternative that would apply the 
disclosure requirements to broker-dealers that receive not held NMS 
stock orders from other broker-dealers. Compared to the adopted Rule 
606(b)(3), this alternative could enable customers to receive more 
comprehensive order handling data, which could improve customers' 
understanding of execution details of their orders, such as payment for 
order flow, rebates, and access fees. As some commenters stated, this 
alternative could help customers make more informed investment 
decisions.\774\ Thus, this alternative could benefit customers by 
providing them with additional information on their order handling by 
broker-dealers, so that customers could assess and monitor their 
broker-dealers' order routing practices, which could promote 
competition among broker-dealers.
---------------------------------------------------------------------------

    \774\ See Dash Letter at 4-5; FIF Letter at 3, 7-8; and SIFMA 
Letter at 3-4.
---------------------------------------------------------------------------

    However, this alternative could also increase compliance and 
reporting costs to broker-dealers. As one commenter stated,\775\ to the 
extent that broker-dealers may outsource order routing technology to 
other broker-dealers, executing broker-dealers may be required to 
create individual order handling reports and make their execution data 
available to customers with whom they have no prior relationship.
---------------------------------------------------------------------------

    \775\ See Bloomberg Letter at 16.
---------------------------------------------------------------------------

    Additionally, the competition among broker-dealers could provide 
incentives for broker-dealers to provide order-handling information to 
customers regardless of the scope of the reporting requirements. For 
instance, customers could choose not to send orders on a not held basis 
to introducing broker-dealers that are unable to provide the 
information, which could incentivize introducing broker-dealers to 
request the information from their executing broker-dealers that, in 
turn, may risk losing introducing broker-dealers as customers unless 
they provide the information. As one commenter stated, such competitive 
market forces could motivate broker-dealers to provide additional 
information that could address customers' expectations.\776\ Moreover, 
customers could choose to negotiate with broker-dealers for additional 
disclosures, such as introducing broker-dealers requesting the 
information from their executing broker-dealers. With the information, 
customers could assess whether their broker-dealer is adequately 
serving its investing and trading expectations, as well as whether they 
would be better served by utilizing the services of a broker-dealer 
that is able to provide the full suite of detailed order handling 
information set forth in Rule 606(b)(3).
---------------------------------------------------------------------------

    \776\ See id.
---------------------------------------------------------------------------

3. Public Availability of Aggregated Rule 606(b)(3) Order Handling 
Information
    Proposed Rule 606(c) required public quarterly reports broken down 
by

[[Page 58419]]

calendar month on the order routing and execution quality of aggregated 
institutional orders by each broker-dealer. Under the rule amendments 
for not held NMS stock orders as adopted, but not as proposed, broker-
dealers are required only to provide customer-specific order handling 
reports required by Rule 606(b)(3), and none of the information set 
forth in Rule 606(b)(3) is required to be made public.
    Prior to and after today's amendments, Rule 606 does not require a 
broker-dealer to provide public reports for not held NMS stock 
orders.\777\ While an institutional customer or a customer that submits 
NMS stock orders on a not held basis can request individualized reports 
from broker-dealers about the handling of its orders, the lack of 
public reports relating to such orders makes it difficult for a 
customer to compare handling of such orders by broker-dealers that the 
customer does not have a business relationship with. Further, 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.\778\
---------------------------------------------------------------------------

    \777\ Separately, there are no publicly available reports about 
the handling of institutional or not held NMS stock orders published 
by independent researchers and analysts, academic researchers, the 
public at large, or third-party vendors.
    \778\ Prior to today's amendments, a customer placing not held 
NMS stock orders could only compare broker-dealers on the basis of 
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, and the customer cannot compare how its broker-dealers 
handle the orders it had sent compared to all of the not held NMS 
stock orders the broker-dealers had received. In addition, the ad 
hoc reports provided by the broker-dealers upon request by a 
customer placing not held NMS stock 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.
---------------------------------------------------------------------------

    The Commission considered the proposed Rule 606(c) as an 
alternative to this adopted rule. Specifically, this alternative would 
require broker-dealers to publicly report, on a quarterly basis, 
aggregated Rule 606(b)(3) order handling information. As discussed in 
Section III.B., several commenters provided critiques of or suggested 
revisions to the proposed rule regarding the proposed public aggregated 
order handling reports.\779\ The Commission has considered these 
comments and has revised its analysis of the economic effects of such 
public aggregated reports since the Proposal.
---------------------------------------------------------------------------

    \779\ See Fidelity at 6; Market Letter at 6.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, proposed Rule 606(c) would 
provide the benefits of increasing the transparency of order handling 
and providing additional information to customers beyond that provided 
by customer-specific reports required by amended 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 
Rule 606(b)(3) orders handled by the broker-dealers.\780\ The 
aggregated reports would assist customers in facilitating discussions 
with their broker-dealers about the broker-dealers' handling of their 
orders. The reports would also allow current and prospective customers 
to compare broker-dealers' order handling and, ultimately, to inform 
their choice of broker-dealers. For example, the reports could allow 
customers to compare the execution services of their current broker-
dealers with other competitors, who might route orders more often to 
the venues offering better average execution quality. Moreover, this 
alternative could 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. 
Further, the public aggregated order handling reports could improve the 
extent and quality of information available for independent research 
and analysis by academic researchers, the public at large, or third-
party venders, thereby furthering the public monitoring of broker-
dealers conflicts of interest and enhancing the benefits of increased 
transparency.
---------------------------------------------------------------------------

    \780\ See Fidelity at 6.
---------------------------------------------------------------------------

    In light of the comments received and after further consideration, 
the Commission now believes that the aggregated information in the 
proposed public report would provide more limited benefits than those 
described in the Proposal. In particular, the reports might not allow 
for meaningful insight into the quality of broker-dealers' order 
routing performance or comparisons of order handling performance across 
broker-dealers. Moreover, the aggregation required for the reports 
would dilute the information necessary to compare one customer to a 
broker-dealer's customers more generally or to compare across broker-
dealers.\781\
---------------------------------------------------------------------------

    \781\ See supra notes 337-339 and accompanying text.
---------------------------------------------------------------------------

    Further, the Commission does not believe that it could easily 
design the aggregated reports to limit such dilution without raising 
the risk of revealing sensitive information of customers that submit 
not held NMS stock orders, in particular the institutional customers 
that typically submit such orders. Each customer has a unique set of 
circumstances, goals, and order flow that dictates how a broker-dealer 
handles that customer's orders. For example, if a broker-dealer were to 
aggregate together the orders of both its quantitative trading firm and 
mutual fund clients in a single, aggregated public report, the dilutive 
effect would result in a washing out of the routing nuances that are 
relevant to each type of customer and that are important to 
understanding a broker-dealer's routing decisions when granted full 
discretion.\782\
---------------------------------------------------------------------------

    \782\ If a broker-dealer were not required to aggregate the 
orders, however, the report might reveal the strategies of each type 
of customer.
---------------------------------------------------------------------------

    In addition, not held NMS stock orders from customers frequently 
limit broker-dealer discretion in some manner, which would reduce the 
value of the reports in providing information about the broker-dealer's 
own decisions in order handling. For broker-dealers that do not 
typically have full discretion on the handling of a not held NMS stock 
order, an aggregated order handling report could be more of an 
indication of its client mix and the preferences of its clients than 
about the broker-dealer's performance.
    Even a customer comparing its own individual report to the 
aggregate report of its own broker-dealer might not be able to realize 
the potential benefit of making meaningful comparisons without knowing 
the specific nature, practices, and requests of the broker-dealer's 
other customers. In theory, a customer could ask its broker-dealers to 
explain how the customer's report fits into the aggregate report, which 
could allow the customer to make meaningful comparisons and receive the 
benefits of additional transparency. However, this would result in 
additional costs to broker-dealers and customers because the broker-
dealers would need to spend their time and resources to provide 
explanations to their customers regarding how individual reports fit 
into aggregated information. The greater these costs to the customers, 
the less likely they would be to use the reports.
    Further, a broker-dealer may not be willing to provide a lengthy 
explanation of its public aggregated report to an institutional or 
retail investor that is not its customer, significantly limiting the 
potential benefit to customers of comparing their broker-dealers to 
broker-dealers the customer does not have a business relationship with. 
This may also lead to public analyses and

[[Page 58420]]

commentary regarding order routing practices that are not informed by 
any meaningful understanding of the customer types and routing 
preferences included in aggregate reports.
    Even in the absence of public aggregated reports, consultants and 
providers of TCA for customers--particularly institutional customers--
could perform aggregate analysis, but in a much more meaningful and 
productive way by aggregating the data of customers that submit NMS 
stock orders on a not held basis with like trading characteristics. 
Consultants could collect information with the permission of such 
customers, aggregate the data of customers with like trading 
characteristics, and provide reports that would be more readily and 
meaningfully comparable across broker-dealers. Although using 
consultants might provide comparable reports to customers, it would 
result in monetary costs to customers in paying for the service of 
consultants.
    In addition to viewing the benefits to public aggregated reports in 
proposed Rule 606(c) to be somewhat more limited than those in the 
discussion in the Proposing Release, the Commission believes the 
aggregated reports would have the potential to result in additional 
costs for broker-dealers and their customers. In particular, customers 
could be confused to the extent that an aggregated public report 
suggests substandard order handling practices even if a broker-dealer 
is performing very competently. Broker-dealers would be at a 
disadvantage if the reports did not adequately summarize relevant 
information about the quality of customer service. Such a 
misinterpretation of the aggregate report could result in the customer 
sub-optimally switching broker-dealers. For example, a customer could 
use the aggregated public reports to compare its broker-dealer to other 
broker-dealers and could switch to another broker-dealer. If the new 
broker-dealer is performing worse than the previous broker-dealer, the 
customer could get worse order handling treatment. This would also 
result in costs to the original broker-dealer because of the loss of 
customers.
    Given the Commission's understanding of the limitations of the 
benefits and the addition of costs per the discussion of the public 
aggregated reports in the Proposing Release, the Commission believes 
that customers could alter their behavior in recognition of the 
limitations of the public report in the long-run if not in the short-
run. For example, communications with broker-dealers in explaining how 
the customer's data fits into the aggregate report could facilitate the 
customer's learning process, which could help customers potentially 
achieve some positive benefits from the reports and avoid responding in 
a manner that results in worse order handling for them. On the other 
hand, the customers could also manage this cost by deciding not to use 
the reports at all. Such a response would also result in no benefits 
from the report. In addition, under this alternative, broker-dealers 
would incur additional reporting costs because they would need to 
prepare public reports and disseminate the order routing information to 
the public regularly. As stated in the Proposing Release,\783\ the 
Commission estimated that the estimated total burden per year for all 
broker-dealers that route institutional orders to comply with the 
reporting requirement under the alternative would have been 
approximately 5,920 hours, resulting in a monetized cost burden of 
$1,046,640, plus an additional third-party service provider fee of 
$130,000.\784\
---------------------------------------------------------------------------

    \783\ See Proposing Release, supra note 1, at 49491.
    \784\ 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 $1,046,640 ($6,840 per broker-dealer that will create the 
reports itself x 135 such broker-dealers + $1,896 per broker-dealer 
that uses a third-party service provider to create the required 
reports x 65 such broker-dealers = $1,046,640). Also, $2,000 per 
broker-dealer that will use a third-party service provider to 
prepare its reports x 65 such broker-dealers = $130,000.
---------------------------------------------------------------------------

4. Automatic Provision of Customer-Specific Not Held Order Handling 
Report (Adopted Rule 606(b)(3))
    The Commission considered an alternative to adopted Rule 606(b)(3) 
that would not require that customers request customer-specific 
standardized reports on not held NMS stock 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. This 
alternative could reduce the cost to customers, compared to both the 
baseline and the amendment, of acquiring such order handling reports, 
because customers would not need to request the reports. At the same 
time, this alternative may not benefit customers compared to the 
adopted amendment, as discussed in the Proposing Release.\785\ In 
addition, as one commenter stated,\786\ to the extent that some 
institutional customers may request firm-specific customized reports 
and may not need the additional information in the order handling 
report, this alternative may not provide additional benefits compared 
to the rule as adopted.
---------------------------------------------------------------------------

    \785\ See Proposing Release, supra note 1, at 49501-02.
    \786\ See Fidelity Letter at 4-5.
---------------------------------------------------------------------------

    With respect to the costs to broker-dealers, the alternative would 
impose additional initial costs compared to the baseline, as 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 believes, 
however, that these initial costs likely would be minimal, because the 
alternative would involve slight modifications to the systems that 
produce the required order handling reports. Moreover, as discussed in 
the Proposing Release, the effect of this alternative on the costs to 
broker-dealers, compared to the cost of the rule as adopted, is 
unclear.\787\
---------------------------------------------------------------------------

    \787\ See id.
---------------------------------------------------------------------------

5. Submission to the Commission of Not Held NMS Stock Order Handling 
Reports (Adopted Rule 606(b)(3))
    The Commission considered an alternative to adopted Rule 606(b)(3) 
that would require these customer-specific order handling reports to be 
submitted to the Commission. With direct access to the reports under 
this alternative, the Commission could potentially use the reports, to 
investigate best execution concerns, assist in risk-based examination 
decisions, and/or conduct market analyses on order handling to promote 
data-driven rulemaking, which could benefit investors and the market in 
the form of enhanced investor protection and better informed 
rulemaking.\788\
---------------------------------------------------------------------------

    \788\ See Proposing Release supra note 1, at 49502.
---------------------------------------------------------------------------

    While providing some benefits, this alternative would also impose 
additional costs to broker-dealers to submit their reports to the 
Commission. Further, the Commission believes that acquiring the reports 
from each broker-dealer could impose burdens on Commission resources, 
though the magnitude of those burdens is unknown. Receiving customer-
specific order handling reports could impose further costs on the 
Commission, as the Commission would need to take steps to safeguard 
personally sensitive information, though it might be able to leverage 
its experience dealing with the receipt of sensitive information in 
other contexts to minimize those costs.

[[Page 58421]]

6. Categories of NMS Stocks for Rule 606(a)
    The Commission considered an alternative that would partition the 
report required by Rule 606(a)(1) by both listing markets and S&P 500 
index inclusion instead of by S&P 500 index inclusion alone. As 
discussed in Section V.C.2.e.i., the Commission staff's analysis 
indicates that partitioning by listing exchange could provide 
additional information to customers beyond the information contained in 
reporting by S&P 500 index inclusion. Therefore, this additional 
partition could allow customers to combine the Rule 606(a)(1) reports 
with the Rule 605 reports to help investors better judge the effect of 
broker-dealers' routing decisions on execution quality.
    This alternative could result in broker-dealers incurring 
additional reporting and compliance costs relative to the adopted rule, 
because broker-dealers would need to change the reporting format to 
include both S&P 500 index inclusion and listing markets information. 
Compared to the adopted rule, the benefits of such order reports could 
be limited to the extent that the Rule 606(a)(1) order reports divided 
by both listing markets and S&P 500 index are less clear for customers 
and the public to understand. As discussed in Section V.C.2.e.i., staff 
analysis showed that S&P 500 index and listing markets have distinct 
information that is correlated with execution quality. To the extent 
that customers may not understand the information content of the order 
reports divided by both listing markets and S&P 500 index, customers 
would not be able to better assess the order routing and execution 
quality under this alternative, which, in turn, could make it less 
efficient for the customers to evaluate and select broker-dealers.
7. Disclosure of Additional Information About Not Held NMS Stock Order 
Routing and Execution
    The Commission considered requiring additional measures to be 
included in adopted Rule 606(b)(3) reports for orders submitted on a 
not held basis. In particular, the Commission considered an alternative 
that would categorize orders by routing strategy in the reports and an 
alternative to report additional execution quality statistics.
    Currently, as such order handling 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, while other reports do not. Rule 606(b)(3) does not 
require the order handling report to be categorized by order routing 
strategy for each venue to which the broker-dealer routed the 
customer's orders submitted on a not held basis.
    The Commission considered the proposed categorization as an 
alternative to the adopted rule. Under the alternative, order routing 
strategies for such orders would 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 order; (2) a ``neutral order routing strategy,'' which is 
relatively neutral between the minimization of price impact and speed 
of execution of the entire order; and (3) an ``aggressive order routing 
strategy,'' which emphasizes speed of execution of the entire order 
over the minimization of price impact.
    This alternative could facilitate comparisons among broker-dealers 
by customers placing not held NMS stock orders 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.\789\ Similarly, a broker-dealer implementing passive order 
routing strategies may be able to place orders providing liquidity more 
often, thereby capturing more rebates.\790\ 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.
---------------------------------------------------------------------------

    \789\ See, e.g., Albert J. Menkveld, Bart Zhou Yueshen, and 
Haoxiang Zhu, Shades of Darkness: A Pecking Order of Trading Venues, 
124 Journal of Financial Economics, (2017). 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.
    \790\ 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 (1996).
---------------------------------------------------------------------------

    The alternative to differentiate the adopted disclosures into the 
three order routing strategy categories could 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.
    This alternative could also create unnecessary subjectivity, as 
broker-dealers may categorize similar routing strategies differently, 
which could limit the utility and comparability of the reports. 
Moreover, as several commenters stated,\791\ trading algorithms these 
days may use multi-layered methodologies that would fit into more than 
one of the adopted categories, which makes categorizing orders into 
three types too simplistic to adjust to changing market conditions or 
to reflect complex routing strategies. For these reasons, the 
Commission believes dividing order routing strategies into a fixed 
number of order routing categories would not provide a useful basis for 
comparison.
---------------------------------------------------------------------------

    \791\ See, e.g., Better Markets Letter at 5; Capital Group 
Letter at 5; Fidelity Letter at 5; FIF Letter at 4; ICI Letter at 8; 
Markit Letter at 2, 20-21; MFA Letter at 4; KCG Letter at 6-7; SIFMA 
Letter at 4.
---------------------------------------------------------------------------

    Moreover, this alternative could result in higher implementation 
costs relative to adopted Rule 606(b)(3), by requiring differentiating 
order routing strategies for not held NMS stock orders into three 
types. The Commission believes that broker-dealers would incur costs 
associated with creating their methodologies, assigning each order 
routing strategy for such orders into one of these three categories 
according to the methodologies, and promptly updating the assignments 
any time an existing strategy is amended or a new strategy is created.

[[Page 58422]]

    Furthermore, as adopted, customers remain able to negotiate with 
their broker-dealers for additional disclosures or categorizations that 
could address their interests better, such as categorizations by 
routing strategy. With this information, institutional customers could 
obtain information to evaluate and monitor their broker-dealers 
performance in order routing.
    The Commission considered another alternative that would require 
Rule 606(b)(3) reports to contain additional execution quality 
measures, such as realized spread and effective spread, price 
improvement statistics, the percentages of effective spreads and quoted 
spread percentages, time to execution, or implementation shortfall, 
which represent varying dimensions of execution quality. As several 
commenters stated, adding these statistics would increase the 
information content and the usefulness of the reports relative to Rule 
606(b)(3), and would provide execution quality statistics that would 
reflect changes in market structure.\792\ Additionally, relative to the 
execution quality measures under adopted Rule 606(b)(3), this 
alternative would enable customers to use different execution quality 
statistics that are more informative for their needs.
---------------------------------------------------------------------------

    \792\ See, e.g., Angel Letter at 5; Better Markets Letter at 5-
8; Capital Group Letter at 6; FSR Letter at 5-6; HMA Letter at 10; 
ICI Letter at 9; Markit Letter at 9-10; and Schwab Letter at 2.
---------------------------------------------------------------------------

    This alternative could result in higher implementation costs 
relative to adopted Rule 606(b)(3) by requiring additional execution 
quality statistics in the report. In addition, for some execution 
quality metrics, the computation costs would be larger than for others. 
Furthermore, as raised by a number of commenters,\793\ the volume 
disclosures could overwhelm retail and some institutional customers 
that would therefore not benefit from additional information on 
execution quality statistics. To the extent that customers are not 
familiar with certain execution quality metrics, additional execution 
quality measures more than required by the adopted rule may not be 
useful to investors to better compare broker-dealers and may not 
promote competition among broker-dealers along the execution quality 
dimensions provided in the reports.
---------------------------------------------------------------------------

    \793\ See, e.g., STA Letter at 3.
---------------------------------------------------------------------------

    Furthermore, if customers wish to obtain additional information on 
execution quality, customers could negotiate for additional execution 
quality statistics with their broker-dealers that could address 
customers' interests better. By doing so, customers could obtain 
relevant information to evaluate their broker-dealers performance in 
order routing.
8. Order Handling Reports at the Stock Level (Adopted Rule 606(b)(3))
    The Commission considered requiring the order handling information 
required by 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 Rule 606(b)(3) because the 
reports would be more detailed as discussed in the Proposing 
Release.\794\ Specifically, as one commenter stated, reporting at the 
individual stock level could provide additional information that 
reflects stock liquidity or market conditions that may affect broker-
dealers' order routing decisions, which could enable customers to 
better assess their broker-dealers.\795\
---------------------------------------------------------------------------

    \794\ See Proposing Release supra note 1, at 49503-04.
    \795\ See Capital Group Letter at 5.
---------------------------------------------------------------------------

    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 Rule 606(b)(3). However, 
as discussed in the Proposing Release, the Commission believes that any 
potential increase in costs of producing the reports would be 
negligible.\796\
---------------------------------------------------------------------------

    \796\ See Proposing Release supra note 1, at 49504.
---------------------------------------------------------------------------

9. Alternative to Three-Year Posting Period (Adopted Amendments to 
Rules 605(a)(2) and 606(a)(1))
    The Commission considered requiring broker-dealers and market 
centers to make the reports required by Rule 605(a) and 606(a)(1) 
available for a minimum length of time of less than three years or more 
than three years. If public reports are available for less than three 
years, then historical data might 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 adoption 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. Compared to the adopted three-year posting period, this 
alternative would reduce the execution quality of market centers and 
the transparency of broker-dealer routing decisions for customers 
placing orders covered by the reports required by Rule 605(a) and 
606(a)(1). A shorter minimum length of time would reduce the costs 
broker-dealers incur associated with posting reports relative to a 
three-year posting period. However, as discussed above, the Commission 
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 than it would be 
under 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 three years. However, the Commission 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. While some 
commenters stated similar benefits of keeping public reports for more 
than three years as discussed above, commenters also stated the out-of-
date information may lead to misleading analysis of past routing 
behavior of broker-dealers or past execution quality of market 
centers.\797\ As a result, keeping public records for an extended 
period compared to the adopted rule would not provide additional 
benefits to customers. The Commission also 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 believes the additional cost to be small.
---------------------------------------------------------------------------

    \797\ See Citadel Letter at 1; FIF Letter at 13; Markit Letter 
at 29.
---------------------------------------------------------------------------

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.\798\ Specifically, Exchange Act Section 
23(a)(2) prohibits the Commission from adopting any rule that will 
impose a burden on

[[Page 58423]]

competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act.\799\ 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.\800\ We consider these effects 
below.
---------------------------------------------------------------------------

    \798\ 15 U.S.C. 78c(f).
    \799\ See id.
    \800\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

1. Effects of Adopting Amendments on Efficiency and Competition
a. Amendments to Public Disclosures for Orders Covered by Rule 606(a) 
and 606(b)(1)
    The adopted amendments to Rule 606(a)(1) require broker-dealers 
that route non-directed orders in NMS stocks submitted on a held basis 
and non-directed orders that are customer orders in NMS securities that 
are options contracts to make public enhanced aggregated reports 
regarding such orders detailing 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 adopted amendments to Rules 606(a)(1) require those 
reports to be made available using an XML schema and associated PDF 
renderer on the Commission's website. Finally, the adopted amendment to 
Rule 606(a)(1) requires the public reports to be maintained on a 
website that is free and readily accessible to the public for a period 
of 3 years.\801\
---------------------------------------------------------------------------

    \801\ Consistent with the adopted amendments to Rule 606, the 
Commission is adopting amendments to Rule 605(a)(2) to require 
market centers to keep public execution reports required by the rule 
posted on an website that is free and readily accessible to the 
public for a period of three years from the initial date of posting 
on the website. The Commission 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 
adopted 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 believes the adopted requirement could 
enhance efficiency in the data collection process of those seeking 
to retrieve and analyze historical order execution information from 
different market centers.
---------------------------------------------------------------------------

    As explained in detail below, the Commission believes that the 
enhanced disclosures for orders covered by Rule 606(a)(1), 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 such orders, 
should promote competition and enhance efficiency.
    First, per the discussion above, the additional information 
required by the amendments relative to the information required by Rule 
606(a)(1) will allow customers to better assess the order routing and 
execution quality provided by their broker-dealers,\802\ which, in 
turn, will enable the customers to more efficiently evaluate and select 
broker-dealers.\803\ The adopted amendments to Rule 606(a) will require 
broker-dealers, for orders covered by Rule 606(a)(1), 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 orders, non-marketable limit orders, and other 
orders. As discussed in Sections V.C.2.b. through d., the Commission 
believes that this will allow customers and the public to better 
understand the potential conflicts of interest broker-dealers may face 
when routing such orders and to assess if and how well broker-dealers 
manage these potential conflicts of interest. This will enable 
customers to make a more informed decision as to which broker-dealers 
to use for such orders. The Commission believes that this will enhance 
the competition for such order flow between broker-dealers, which could 
improve order routing services and execution quality. Customers could 
use additional information to evaluate and retain the services of a 
broker-dealer or to discontinue the use of such services, and broker-
dealers may use the information required by the adopted amendments to 
Rule 606(a) as a means to evaluate and enhance their order routing and 
execution services, to compare their order routing and execution 
services to those of other firms, and to use such comparison in selling 
their services to customers. As a result, the Commission believes that 
competition between broker-dealers could provide better execution 
quality for such orders.
---------------------------------------------------------------------------

    \802\ See supra Section V.C.2.
    \803\ The adopted amendments to Rule 606(a)(1), which will no 
longer require reports to 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 adopted 
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 on the basis of the order routing and execution 
quality they provide.
---------------------------------------------------------------------------

    In addition, if broker-dealers change their routing behavior in 
response to the public reports required by adopted amendments to Rule 
606(a)(1), the Commission believes that competition between trading 
centers might be enhanced as trading centers could better compete for 
such order flow, which might result in better execution quality for 
such orders and innovation by existing or new trading centers. As 
discussed in Section V.C.1.b.i.1., one way a trading center can attract 
order flow is through innovation, thereby differentiating itself from 
other trading centers.
    Further, to the extent that the adopted amendments to Rule 606(a) 
lead to better execution quality provided by broker-dealers and trading 
centers, the Commission believes that the adopted amendments will 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 adopted amendments to Rule 
606(a) make the trading process more efficient by lowering trading 
costs, the Commission believes the adopted amendments will reduce 
market friction and therefore have a positive effect on the efficiency 
of prices.
    As discussed above, however, the adopted amendments to Rule 
606(a)(1) could result in costs that may have an effect on efficiency 
and competition. For example, the adopted amendments will impose 
certain costs on broker-dealers that currently route orders covered by 
Rule 606(a)(1) as well as on broker-dealers that would like to start 
routing such orders and will also have to comply with the adopted 
amendments to Rule 606(a)(1). To the extent that the costs for a 
broker-dealer entering the market for such orders are higher following 
the amendments to Rule 606(a)(1), these higher costs could lead to a 
higher barrier to entry and thereby reduce competition. However, the 
Commission believes that any difference in costs under amended Rule 
606(a)(1) would be relatively small and, alone, would not deter broker-
dealers from entering the market for routing such orders.

[[Page 58424]]

    Under the adopted amendments to Rule 606(a)(1), 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 negatively 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 believes that such a scenario is not likely as customers are 
likely to review the 606(a)(1) 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. Amendments to Disclosures for Orders Covered by 606(b)(1)
    The adopted amendments to Rule 606(b)(1) require a broker-dealer, 
upon customer request, to provide the disclosures set forth in Rule 
606(b)(1) for orders in NMS stock that are submitted on a held basis, 
and for orders in NMS stock that are submitted on a not held basis and 
for which the broker-dealer is not required to provide the customer a 
report under Rule 606(b)(3). In addition, the adopted amendments to 
606(b)(1) require those reports to be made available using an XML 
schema and associated PDF renderer on the Commission's website.
    The Commission believes that the adopted amendments to Rule 
606(b)(1), which require broker-dealers to provide, upon customer 
request, information relating to orders not covered by Rule 606(b)(3), 
should promote competition and enhance efficiency. As discussed in 
Section III.A.1.b.vi., Rule 606(b)(1) disclosures will allow customers 
to better assess the order routing and execution quality provided by 
their broker-dealers, which, in turn, will enable the customers to more 
efficiently evaluate and select broker-dealers. If requested, these 
disclosures provide the customer with information as to the venues to 
which its orders were routed, whether the orders were directed or non-
directed, and the time of any transactions that resulted from the 
orders. Rule 606(b)(1) cover held NMS stock orders and should provide 
customers that submit NMS stock orders on a held basis with disclosures 
designed to provide more transparency into potential financial 
inducements and potential conflicts of interest faced by broker-
dealers. The Commission believes that these disclosures provide 
information that is sufficient to provide a basis for the customer to 
engage in further discussions with its broker-dealer regarding the 
broker-dealer's order handling practices, should the customer so 
choose. As a result, the Commission believes that competition between 
broker-dealers could provide better execution quality for orders 
covered by Rule 606(b)(1).
    In addition, if broker-dealers change their routing behavior in 
response the customer-specific reports required by the adopted 
amendment to Rule 606(b)(1), the Commission believes that competition 
between trading centers might be enhanced as trading centers could 
better compete for such order flow, which might result in better 
execution quality for such orders and innovation by existing or new 
trading centers. As discussed in Section V.C.1.b.i.1., one way a 
trading center can attract order flow is through innovation, thereby 
differentiating itself from other trading centers.
    The Commission also believes that the adopted amendment to Rule 
606(b)(1) will provide additional benefits of better execution quality 
and reduced transaction costs, but acknowledges that these benefits are 
attainable only when customers request 606(b)(1) reports. To the extent 
that customers actually request Rule 606(b)(1) reports and the adopted 
amendments to Rule 606(b)(1) lead to better execution quality provided 
by broker-dealers and trading centers, the Commission believes that the 
adopted amendments will 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 
adopted amendments to Rule 606(b)(1) make the trading process more 
efficient by lowering trading costs, the Commission believes the 
adopted amendments will reduce market friction and therefore have a 
positive effect on the efficiency of prices.
    As discussed above, however, the adopted amendments to Rule 
606(b)(1) could result in costs that may have an effect on efficiency 
and competition. For example, the adopted amendments will impose 
certain costs on broker-dealers that currently route orders covered by 
Rule 606(b)(1), as well as on broker-dealers that would like to start 
routing such orders and will also have to comply with the adopted 
amendments to Rule 606(b)(1). To the extent that the costs for a 
broker-dealer entering the market for such orders are higher following 
the amendments to Rule 606(b)(1), these higher costs could lead to a 
higher barrier to entry and thereby reduce competition. However, the 
Commission believes that any difference in costs under amended Rule 
606(b)(1) would be relatively small and, alone, would not deter broker-
dealers from entering the market for routing such orders.
c. Adopted Rules for Disclosures for Not Held NMS Stock Orders
    For NMS stock orders submitted on a not held basis, Rule 606(b)(3), 
as adopted, will require broker-dealers that route such orders to 
provide detailed reports to customers that submit such orders upon the 
request of the customer, unless such broker-dealer is excepted from 
this requirement as provided in new Rules 606(b)(4) and (b)(5). In 
addition, these rules will require reports on such orders to be 
provided using an XML schema and associated PDF renderer published on 
the Commission's website. As discussed below, the Commission believes 
that these disclosures of order routing decisions by broker-dealers for 
such orders could promote competition and enhance efficiency.
    First, the disclosures required by Rule 606(b)(3) will inform 
customers as to the order routing practices of and the execution 
quality provided by a particular broker-dealer, as described in further 
detail above. As a result, customers will be able to use that 
information to compare the order routing and execution quality of their 
broker-dealers, on the basis of the orders submitted to those broker-
dealers as reported in the customer-specific reports required by Rule 
606(b)(3).
    These enhanced disclosures will better enable customers to analyze 
order routing and execution quality provided by broker-dealers, which 
will allow customers to more efficiently monitor, evaluate, and select 
broker-dealers. In addition, customers and broker-dealers will be able 
to evaluate execution quality of orders covered by Rule 606(b)(3) on 
different trading centers more efficiently.\804\ Customers also will be 
better informed as to the 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

[[Page 58425]]

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

    \804\ See supra Section V.C.1.
---------------------------------------------------------------------------

    Further, the Commission believes that Rule 606(b)(3), as adopted, 
might enhance competition between trading centers. First, if broker-
dealers change their routing decisions in response to the reports 
required by Rule 606(b)(3), trading centers will have an additional 
incentive to compete for order flow covered by Rule 606(b)(3). Second, 
the reports required by Rule 606(b)(3) 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, customers could compare the 
execution quality of all trading centers, which may again lead to 
enhanced competition among trading centers. The Commission 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 orders covered by Rule 
606(b)(3). As discussed in Sections V.C.2.b.i., V.C.2.c.i., and 
V.C.2.d.i., if a trading center were to lose order flow to other 
trading centers because of lower execution quality, it would have the 
incentive to innovate to improve its execution quality.
    To the extent that Rule 606(b)(3) leads to broker-dealers and 
trading centers providing better execution quality, the Commission 
believes that the rule might lead to lower transaction costs for orders 
covered by Rule 606(b)(3). As discussed above, lower transaction costs 
indicate enhanced efficiency in the trading process, and the Commission 
believes that, as a result, the adopting rules will reduce market 
friction and therefore have a positive effect on the efficiency of 
prices.
    In addition, the Commission believes that the requirement of 
standardized customer-specific order handling reports in Rule 606(b)(3) 
will enhance efficiency for customers in processing the information 
contained in the reports, as compared to the ad hoc reports customers 
may currently receive from their broker-dealers.\805\ Because the data 
will be presented in a standardized format, customers will be able to 
more efficiently aggregate, compare, and analyze the data than they 
could before adoption of this rule.
---------------------------------------------------------------------------

    \805\ See supra Section V.B.1. for a discussion of the ad hoc 
reports and Section V.C.4. for a discussion of the standardization 
and format for the reports required by adopted Rules 606(b)(3).
---------------------------------------------------------------------------

    In addition, as discussed above, the Commission understands that 
not held NMS stock orders are typically submitted by institutional 
customers and 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 the level of detail in the 
reports might depend on the size of an institutional customer. To that 
extent, larger institutional customers have an advantage over smaller 
institutional customers. Rule 606(b)(3), as adopted, will provide 
access to reports on order handling to all customers, regardless of 
their size, unless an exception in Rules 606(b)(4) or (b)(5) applies.
    The Commission notes that, even without the adoption of Rule 
606(b)(3), institutional and other customers could still request 
customized reports from their broker-dealers and broker-dealers would 
have an incentive to provide such reports in order to attract 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 believes that Rule 
606(b)(3), as adopted, mitigates the advantage of larger institutional 
customers in that respect, the Commission 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 
Rule 606(b)(3). The Commission believes that by reducing the 
informational advantage of larger institutional customers over smaller 
institutional customers, Rule 606(b)(3), as adopted, will improve 
information asymmetries between larger institutional customers and 
smaller investors will have more information than before regarding 
broker-dealers' routing behavior. Smaller institutional customers will 
be able to evaluate and select their broker-dealers with more 
efficiency, thereby increasing the efficiency of their investment 
process. The Commission believes that this will 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, Rule 606(b)(3) could result in certain 
costs to broker-dealers that currently route orders covered by Rule 
606(b)(3), as well as those who would like to start routing such orders 
and thus will have to comply with Rule 606(b)(3). These costs could 
lead to a higher barrier to entry and thereby reduce competition.
    However, the Commission believes that the costs associated with 
Rule 606(b)(3) 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 such orders. In addition, the Commission 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 Rule 606(b)(3).
    In addition, the adoption of Rule 606(b)(3) may cause broker-
dealers to change how they handle orders covered by Rule 606(b)(3) 
because customers' preferences could 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 adopted amendments. First, given that broker-dealers 
will be aware of the metrics to be used a priori, they may handle such 
orders in a manner that promotes a positive reflection on their 
respective services but that may be suboptimal for customers.\806\ 
Second, the order routing decisions that are indeed optimal for 
customers could also be viewed as suboptimal for the customers as 
reflected in the reports required by Rule 606(b)(3).
---------------------------------------------------------------------------

    \806\ The Commission believes that the set of metrics provide 
customers with a more 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 orders covered by Rule 
606(b)(3) 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. A customer that reviews the adopted 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 on the basis of 
factors

[[Page 58426]]

that might not be completely reflected in the adopted reports.\807\
---------------------------------------------------------------------------

    \807\ See id.
---------------------------------------------------------------------------

2. Effects of Adopting Amendments on Capital Formation
    The Commission believes that the amendments to Rules 600, 605, and 
606, as adopted, might have positive effects on capital formation, but 
predicting the magnitude of such effects is difficult, as the effects 
likely will be indirect rather than a direct result of the adopted 
amendments.
    As discussed, the Commission believes the adopted amendments to 
Rules 600, 605, and 606 will enhance competition among broker-dealers 
and trading centers resulting in better execution quality for customers 
that place both held or not held NMS stock orders and, to the extent 
that better execution quality will lead to lower friction in the 
trading process, the adopted amendments will 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 lead to more efficient investment decisions by 
customers that place orders with broker-dealers.\808\ For example, 
lower transaction costs could allow investors 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 will allow these firms to raise capital more easily.\809\
---------------------------------------------------------------------------

    \808\ Efficient investment allows capital to be allocated to 
firms with the most profitable projects, which ultimately will allow 
these firms to raise capital more easily. On the other hand, less 
efficient investment could result in funding being available for 
unprofitable projects, which erode capital.
    \809\ See supra Section V.B.9. for a discussion of how asset 
allocation can relate to capital formation.
---------------------------------------------------------------------------

    Another potential effect on capital formation could derive from the 
relation between and liquidity and cost of capital. In particular, the 
less liquid an asset is, e.g., the higher transaction costs are to buy 
or sell it, the higher the rate of return customers could demand as 
compensation.\810\ 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 will allow firms to 
raise capital at more favorable conditions. As noted above, the 
amendments might improve execution quality for some investors, which is 
akin to an improvement in liquidity and lower transaction costs. If 
these improvements are significant enough, issuers could experience a 
lower cost of capital, resulting in a positive impact on capital 
formation.
---------------------------------------------------------------------------

    \810\ See Yakov Amihud and Haim Mendelson, Asset Pricing and the 
Bid-Ask Spread, 17 Journal of Financial Economics 223 (1986).
---------------------------------------------------------------------------

VI. Regulatory Flexibility Certification

    The Regulatory Flexibility Act (``RFA'') \811\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. Section 603(a) \812\ of the Administrative Procedure 
Act,\813\ 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.'' \814\ 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.
---------------------------------------------------------------------------

    \811\ 5 U.S.C. 601 et seq.
    \812\ 5 U.S.C. 603(a).
    \813\ 5 U.S.C. 551 et seq.
    \814\ 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. 18452 (January 28, 1982), 47 FR 
5215 (February 4, 1982) (File No. S7-879).
---------------------------------------------------------------------------

    For purposes of Commission rulemaking in connection with the RFA 
\815\ 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,\816\ 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.\817\
---------------------------------------------------------------------------

    \815\ See id.
    \816\ 17 CFR 240.17a-5(d).
    \817\ See 17 CFR 240.0-10(c).
---------------------------------------------------------------------------

    The amendments to Rule 606 are discussed in detail in Sections II 
and III above. We discuss the economic impact, including the estimated 
compliance costs and burdens, of the amendments in Section IV 
(Paperwork Reduction Act) and Section V (Economic Analysis) and above. 
Based on the Commission's analysis of existing information relating to 
broker-dealers that would be subject to the amendments to Rule 606, the 
Commission believes that such broker-dealers do not fall within the 
definition of ``small entity,'' as defined above.\818\ Further, the 
amendments to Rule 605 to require reports to remain posted on a website 
for a specified period of time will not have a significant impact on 
any small entities affected by the Rule because the market centers to 
which Rule 605 applies do not fall within the definition of ``small 
entity,'' as defined above.\819\ The Commission received no comments 
regarding its initial Regulatory Flexibility Analysis.\820\ For the 
foregoing reasons, the Commission certifies that the amendments to 
Rules 600, 605, and 606 will not have a significant economic impact on 
a substantial number of small entities for the purposes of the RFA.
---------------------------------------------------------------------------

    \818\ The Commission considered FOCUS Report data in making this 
determination.
    \819\ See supra Section IV.D.5.
    \820\ See Proposing Release, supra note 1, at 59508.
---------------------------------------------------------------------------

VII. 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 is amending Sections 240.3a51-1, 
240.13h-1, 242.105, 242.201, 242.204, 242.600, 242.602, 242.605, 
242.606, 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 amending 
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,

[[Page 58427]]

78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 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. 1887, (2010); and secs. 503 and 
602, Pub. L. 112-106, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *


Sec.  240.3a51-1   [Amended]

0
2. In Sec.  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)(48)''.


Sec.  240.13h-1   [Amended]

0
3. In Sec.  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)(47)''.

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, 80a-23, 80a-29, and 
80a-37.


Sec.  242.105   [Amended]

0
5. Section 242.105 is amended:
0
a. In paragraph (b)(1)(i)(C) by 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) by removing the text ``Sec.  
242.600(b)(64)'' and adding in its place ``Sec.  242.600(b)(68)''.


Sec.  242.201  [Amended]

0
6. Section 242.201 is amended:
0
a. In paragraph (a)(1) by removing the text ``Sec.  242.600(b)(47)'' 
and adding in its place ``Sec.  242.600(b)(48)''.
0
b. In paragraph (a)(2) by removing the text ``Sec.  242.600(b)(22)'' 
and adding in its place ``Sec.  242.600(b)(23)''.
0
c. In paragraph (a)(4) by removing the text ``Sec.  242.600(b)(42)'' 
and adding in its place ``Sec.  242.600(b)(43)''.
0
d. In paragraph (a)(5) by removing the text ``Sec.  242.600(b)(49)'' 
and adding in its place ``Sec.  242.600(b)(51)''.
0
e. In paragraph (a)(6) by removing the text ``Sec.  242.600(b)(55)'' 
and adding in its place ``Sec.  242.600(b)(59)''.
0
f. In paragraph (a)(7) by removing the text ``Sec.  242.600(b)(64)'' 
and adding in its place ``Sec.  242.600(b)(68)''.
0
g. In paragraph (a)(9) by removing the text ``Sec.  242.600(b)(78)'' 
and adding in its place ``Sec.  242.600(b)(82)''.


Sec.  242.204   [Amended]

0
7. In Sec.  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)(68) of Regulation NMS (17 CFR 
242.600(b)(68))''.

0
8. Section 242.600 is amended by:
0
a. Redesignating paragraphs (b)(52) through (83) as paragraphs (b)(56) 
through (87);
0
b. Redesignating paragraphs (b)(49) through (51) as paragraphs (b)(51) 
through (53);
0
c. Adding new paragraphs (b)(50), (54), and (55);
0
d. Redesignating paragraphs (b)(1) through (48) as paragraphs (b)(2) 
through (b)(49);
0
e. Adding new paragraph (b)(1).
0
f. Amending newly redesignated paragraph (b)(5)(i) by removing the text 
``paragraph (b)(3)'' and adding in its place ``paragraph (b)(4)''; and
0
g. Revising newly redesignated paragraphs (b)(20) and (49).
    The additions and revisions 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.
* * * * *
    (20) Directed order means an order from a customer that the 
customer specifically instructed the broker or dealer to route to a 
particular venue for execution.
* * * * *
    (49) Non-directed order means any order from a customer other than 
a directed order.
* * * * *
    (50) Non-marketable limit order means any limit order other than a 
marketable limit order.
* * * * *
    (54) Orders providing liquidity means orders that were executed 
against after resting at a trading center.
    (55) 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:
0
a. In paragraph (a)(5)(i) by removing the text ``Sec.  242.600(b)(73)'' 
and adding in its place ``Sec.  242.600(b)(77)''; and
0
b. In paragraph (a)(5)(ii) by removing the text ``Sec.  
242.600(b)(73)'' and adding in its place ``Sec.  242.600(b)(77)''.

0
10. Section 242.605 is amended by removing the preliminary note, adding 
introductory text, and adding a sentence at the end of paragraph 
(a)(2).
    The additions read 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 customer orders.
    (a) * * *
    (2) * * * Every market center shall keep such reports posted on an 
internet website that is free and readily accessible to the public for 
a period of three years from the initial date of posting on the 
internet website.
* * * * *

0
11. Section 242.606 is amended by revising paragraphs (a) and (b) to 
read as follows:


Sec.  242.606   Disclosure of order routing information.

    (a) Quarterly report on 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 stocks that are submitted on a 
held basis and of non-directed orders that are customer orders in NMS 
securities that are option

[[Page 58428]]

contracts during that quarter broken down by calendar month and keep 
such report posted on an internet website that is free and readily 
accessible to the public for a period of three years from the initial 
date of posting on the internet website. Such report shall include a 
section for NMS stocks--separated by securities that are included in 
the S&P 500 Index as of the first day of that quarter and other 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 website for all reports required by this section. 
Each section in a report shall include the following information:
    (i) The percentage of total 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-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, for:
    (i) Orders in NMS stocks that are submitted on a held basis;
    (ii) Orders in NMS stocks that are submitted on a not held basis 
and the broker or dealer is not required to provide the customer a 
report under paragraph (b)(3) of this section; and
    (iii) Orders in NMS securities that are option contracts, 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. 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 
website 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) Except as provided for in paragraphs (b)(4) and (5) of this 
section, every broker or dealer shall, on request of a customer that 
places, directly or indirectly, one or more orders in NMS stocks that 
are submitted on a not held basis with the broker or dealer, disclose 
to such customer within seven business days of receiving the request, a 
report on its handling of such 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 website for all reports 
required by this section. For purposes of such report, the handling of 
a NMS stock order submitted by a customer to a broker-dealer on a not 
held basis includes the handling of all child orders derived from that 
order. Such report shall be divided into two sections: One for directed 
orders and one for non-directed orders. Each section of such report 
shall include, with respect to such order flow sent by the customer to 
the broker or dealer, the total number of shares 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 orders exposed by the broker or dealer 
through an actionable indication of interest; and the venue or venues 
to which orders were exposed by the broker or dealer through an 
actionable indication of interest, provided that, where applicable, a 
broker or dealer must disclose that it exposed a customer's order 
through an actionable indication of interest to other customers but 
need not disclose the identity of such customers. Each section of such 
report also shall include the following columns of information for each 
venue to which the broker or dealer routed such orders for the 
customer, in the aggregate:
    (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 order;
    (H) Percentage of total shares executed that were priced at the 
side of the spread more favorable to the order;
    (I) Total number of shares executed that were priced on the side of 
the spread less favorable to the order; and
    (J) Percentage of total shares executed that were priced on the 
side of the spread less favorable to the 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

[[Page 58429]]

    (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).
    (4) Except as provided below, no broker or dealer shall be required 
to provide reports pursuant to paragraph (b)(3) of this section if the 
percentage of shares of not held orders in NMS stocks the broker or 
dealer received from its customers over the prior six calendar months 
was less than five percent of the total shares in NMS stocks the broker 
or dealer received from its customers during that time (the ``five 
percent threshold'' for purposes of this paragraph). A broker or dealer 
that equals or exceeds this five percent threshold shall be required 
(subject to paragraph (b)(5) of this section) to provide reports 
pursuant to paragraph (b)(3) of this section for at least six calendar 
months (``Compliance Period'') regardless of the percentage of shares 
of not held orders in NMS stocks the broker or dealer receives from its 
customers during the Compliance Period. The Compliance Period shall 
begin the first calendar day of the next calendar month after the 
broker or dealer equaled or exceeded the five percent threshold, unless 
it is the first time the broker or dealer has equaled or exceeded the 
five percent threshold, in which case the Compliance Period shall begin 
the first calendar day four calendar months later. A broker or dealer 
shall not be required to provide reports pursuant to paragraph (b)(3) 
of this section for orders that the broker or dealer did not receive 
during a Compliance Period. If, at any time after the end of a 
Compliance Period, the percentage of shares of not held orders in NMS 
stocks the broker or dealer received from its customers was less than 
five percent of the total shares in NMS stocks the broker or dealer 
received from its customers over the prior six calendar months, the 
broker or dealer shall not be required to provide reports pursuant to 
paragraph (b)(3) of this section, except for orders that the broker or 
dealer received during the portion of a Compliance Period that remains 
covered by paragraph (b)(3) of this section.
    (5) No broker or dealer shall be subject to the requirements of 
paragraph (b)(3) of this section with respect to a customer that traded 
on average each month for the prior six months less than $1,000,000 of 
notional value of not held orders in NMS stocks through the broker or 
dealer.
* * * * *


Sec.  242.611   [Amended]

0
12. In Sec.  242.611, paragraph (c) is amended by removing the text 
``Sec.  242.600(b)(30)'' and adding in its place ``Sec.  
242.600(b)(31)''.


Sec.  242.1000  [Amended]

0
13. In Sec.  242.1000 the definition of Plan processor is amended by 
removing the text ``Sec.  242.600(b)(55)'' and adding in its place 
``Sec.  242.600(b)(59)''.

    By the Commission.

    Dated: November 2, 2018.
Brent J. Fields,
Secretary.
[FR Doc. 2018-24423 Filed 11-16-18; 8:45 am]
 BILLING CODE 8011-01-P