Group Co.
Therefore, I think the best way to interpret the Rule 606 reports is as a canary in a coal mine – if there is something toxic, these reports will likely help identify those. It may also be useful in those rare cases where a client routes a nearly identical set of flow to multiple brokers and then can use the reports to identify any interesting cross-broker differences. For example, a client who uses only VWAP orders and routes similar mixes of orders to different brokers can make apples-to-apples comparisons across brokers. It can help also help a buyside trader put their performance into better context. For example, suppose the buyside desk sees poor performance at Broker A. If Broker A has a relatively low proportion of passive fills as documented in a 606 report and the rebates earned are large when those fills occur, the buyside desk may decide to focus their attention on the routing behavior as a possible cause of the poor performance.
Takeaways
I think it is pretty safe to say that the change to Rule 606 will be a useful addition to the information set available to buyside traders. More importantly, though, the fact that brokers are required to gather and report these data may make them more willing to provide buyside trading desks with these data in other reports and/or perhaps even provisionally on FIX messages.
With that said, one could argue that clients can already do this to a large extent already. If a buyside desk receives the make-take information in a FIX tag (or they can estimate it the fill is a make or take execution), the desk can use this information along with publicly available fee schedules from the exchanges to approximate the fees earned by the broker. However, such a method is often incomplete because information on dark pool and ELP fees and rebates are generally not readily available. But if brokers are now forced to collect this information and report it in aggregate for the 606 reports, brokers may be less reluctant to make these data available to clients directly. But even if brokers remain reluctant to share this information, buyside desks could use their 606 reports to approximate these fees/rebates for each broker on their own.
I also think that the SEC’s focus on execution practices indirectly reinforces the importance of buyside firms not only receiving the information they need to execute more efficiently, but also acting on that information. More broadly, as the pendulum swings in favor of the buyside in terms of the availability of execution information, the buyside is better able to optimize its trading and improve performance. But this also means that buyside firms can no longer hide behind the excuse that the data aren’t available to them. The data are out there, and more is coming – both from the SEC-mandated reports as well as from brokers providing more and more information on request. It is now up to the buyside trading desks to execute (bad pun intended, sadly).
In sum, the modification to Rule 606 not only add to the information set available to trading desk. They could indirectly result in even greater information being made available to clients via other means. In this way, the modifications will make Rule 606 reports more than simply canaries for coal mines -- and hopefully much, much more.
[1] Technically, orders are categorized based on pricing relative to midpoint, i.e., less favorable, more favorable, or at the midpoint, as opposed to taking or providing liquidity.
[2] https://www.bacidore.com/post/can-rebates-help-align-broker-and-client-incentives.
[3] See “Can Brokers Have It All? On the Relation between Make-Take Fees and Limit Order Execution Quality” in the Journal of Finance, Volume 71, pp. 2193-2238.
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