The Securities and Exchange Commission (SEC) has adopted rule amendments that update the disclosure required under Rule 605 of Regulation NMS for order executions in national market system stocks (NMS stocks).
Rule 605 was adopted in 2000 to help the public compare and evaluate execution quality at different market centers.
Before Rule 605 was adopted, there was little publicly available information that investors could use to compare and evaluate execution quality among different market centers, according to SEC Commissioner Caroline A. Crenshaw.
She said that Rule 605 was designed to empower market forces to achieve a more competitive and efficient national market system for investors by increasing the visibility of order execution and routing practices.
“Rule 605 was designed to empower market forces to achieve a more competitive and efficient national market system for investors by increasing the visibility of order execution and routing practices,” she said in a statement.
The final amendments expand the scope of entities subject to Rule 605, modify the categorization and content of order information required to be reported under the rule, and require reporting entities to produce a summary report of execution quality, according to the SEC.
The amendments expand the scope of entities that must produce monthly execution quality reports to include broker-dealers with a larger number of customer accounts and single dealer platforms.
In addition, the amendments expand the definition of “covered order” to include certain orders submitted outside of regular trading hours, certain orders submitted with stop prices, and certain short sale orders.
The amendments will capture more relevant execution quality information for certain order types by requiring statistics to be reported from the time such orders become “executable.”
Further, the amendments change how orders are categorized by order size as well as how they are categorized by order type.
As part of the changes to the order size categories, the amendments modify Rule 605 to capture execution quality information for fractional share orders, odd-lot orders, and larger-sized orders.
The amendments also modify the time-to-execution categories and require average time to execution to be measured in increments of a millisecond or finer and to be calculated for all orders. In addition, the amendments modify the information required to be reported under the rule, including adding realized spread time horizons and requiring new statistical measures of execution quality, such as average effective divided by quoted spread (a percentage-based metric that represents how much price improvement orders received) and size improvement statistics. Finally, the amendments require all entities subject to Rule 605 to make a summary report publicly available.
“In the 24 years since Rule 605 was adopted, our equity markets have been transformed by ever-evolving technologies and business models,” said SEC Chair Gary Gensler.
“I am pleased to support this adoption because it will improve transparency for execution quality and facilitate investors’ ability to compare brokers, thereby enhancing competition in our markets,” he said.
The current amendments will increase the relevance and use of information contained in the rule’s reports by expanding the scope of reporting entities, modernizing the content of the reports, and broadening the reports’ accessibility, commented Commissioner Crenshaw.
“For the first time, the amendments would allow customers of larger broker-dealers, as well as other market participants, to have access to direct information about the aggregate execution quality achieved by their broker-dealers,” she said.
“Just like the disclosure regime for public companies, our disclosure regime for this information should be updated as markets innovate and change,” she added.
Finally, according to Commissioner Crenshaw, execution quality is also expected to increase as a result of the amendments requiring reporting entities to prepare human-readable summary reports, in addition to the more detailed machine-readable reports required under pre-existing Rule 605.
The summary report will provide an abbreviated overview of the more detailed Rule 605 report for interested parties to assess, and is expected to help independent analysts, consultants, broker-dealers, the financial press, and market centers in analyzing the disclosures and producing even more digestible information using data from the summary report, she said.
“This is important so that the broader public, including those that may not read the summary report, can benefit,” she added.
