By Rodney F. Tonkovic, J.D.
By unanimous vote, the SEC has adopted amendments modernizing the disclosure requirements of Rule 605 of Regulation NMS. Significantly, the amendments expand the scope of entities subject to the rule requiring monthly execution quality reports to encompass larger broker-dealers. The amendments will also modify the categorization and content of order information reported under the rule to capture a larger range of data. Finally, market centers and broker-dealers will now be required to produce summary reports on execution quality. The amendments will be effective 60 days after publication in the Federal Register and the compliance date will be 18 months after that date (Disclosure of Order Execution Information, Release No. 34-99679, March 6, 2024).
Disclosure of order execution information. Since its adoption in 2000, Rule 605 of Regulation NMS has required market centers to disclose order execution quality statistics in national market System stocks. A ”market center” was defined in Rule 600 to include any exchange market maker, OTC market maker, alternative trading system, national securities exchange, or national securities association.
There have been no substantive changes to Rule 605 since its adoption. During the meeting, Chair Gensler observed that the Rule 605 reports resemble the numbers and symbols that make up the opening credits to "The Matrix." He quipped that there have been three sequels to "The Matrix" since 1999, so it's about time for a sequel to Rule 605.
Larger broker-dealers. The final rule amendments expand the scope of entities subject to Rule 605 to include larger broker-dealers that introduce or carry at least 100,000 customer accounts. The Commission's analysis found that approximately 85 larger broker-dealers combined handle over 98 percent of customer accounts and that this threshold will balance the benefits of having broker-dealers produce execution quality statistics with the costs of implementation and continued reporting.
Larger broker-dealers that are also market centers must produce separate reports for each function. This will allow interested parties to view the firm's execution quality from the perspective of how it operated in each role, the Commission says. The Commission also specified that NMS stock ATSs must report separately from their broker-dealer operators and adopted a separate reporting requirement for single-dealer platforms.
NMS Stock ATSs and single-dealer platforms will also be subject to reporting under the rule.
In a change from the proposal, the Commission will not require separate reports for orders that a market center receives for execution from a qualified auction. At the same time the amendments to Rule 605 were proposed, the Commission proposed an order competition rule that contemplates qualified auctions. Since the Commission is still considering this proposal, the qualified auctions do not yet exist.
Categories and content. The amendments will also change the scope and content of the execution quality reports. Rule 605's reporting is limited to "covered orders," and the definition of that term has been expanded to include certain orders submitted outside of regular trading hours (that become executable after the opening or reopening of trading during regular trading hours), certain orders submitted with stop prices, and non-exempt short sale orders, i.e., those where a short sale price test is not in effect.
The amendments change how orders are categorized both by size and type. Rule 605's existing order categories will now be based on both notional dollar value and whether an order is for a fractional share, for an odd-lot, or for a round lot or greater rather than number of shares. The Commission has also added four new order types and replaced three existing categories of non-marketable order types with four new categories. The information required to be reported under the rule has been amended to include: modified time-to-execution reporting categories; realized spread time horizons with new statistical measures of execution quality; and new statistical measures of execution quality.
Summary reports. Finally, the amendments require entities subject to the rule to make a publicly available summary report. The Commission noted that the detailed report contains a large volume of statistical data that many market participants will be unable to directly analyze. Summary reports will be more readily accessible and will provide "human-readable information" that any investor can assess without needing technical expertise or relying on an intermediary.
The release is No. 34-99679.