\105\ As detailed below, the Commission is proposing new
disclosures in Rule 606 that would apply to institutional orders.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    \142\ See proposed Rule 606(b)(3).
---------------------------------------------------------------------------

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

broker-dealer trades against its institutional orders, and what order
routing strategies lead to this type of activity. The Commission
preliminarily believes that this data on the volume of institutional
orders interacting with the broker-dealer as principal could be
relevant to customers considering potential conflicts of interest their
broker-dealers face when trading as principal against their orders, and
their broker-dealers' compliance with best execution obligations.
---------------------------------------------------------------------------

    \143\ See proposed Rule 606(b)(3).
    \144\ See 17 CFR 240.10b-10. Further, the Commission
preliminarily believes that it would be more efficient to require
broker-dealers to include this as a line item in the proposed
institutional order handling report than for customers to obtain
information from the proposed reports, obtain information from Rule
10b-10 required disclosures, and combine the two to perform
necessary analysis to evaluate order handling quality.
---------------------------------------------------------------------------

    The Commission also proposes to require disclosure of the total
number of institutional orders exposed by the broker-dealer through
actionable IOIs as well as the venue or venues to which such orders
were exposed. The Commission preliminarily believes that transparency
into the method of exposing an institutional order through the use of
actionable IOIs would provide useful information to customers. As
discussed above, the Commission understands that broker-dealers may use
actionable IOIs to attract trading interest from external liquidity
providers. For example, before a broker-dealer routes an institutional
order to another trading center, the broker-dealer may send an
actionable IOI to select external liquidity providers to communicate to
such liquidity providers to send orders to the broker-dealer to trade
with the institutional order that is represented by the actionable IOI
at the broker-dealer. While the use of actionable IOIs in this manner
by broker-dealers may be beneficial in executing institutional orders,
actionable IOIs also may reveal information that could be detrimental
to the execution quality of the institutional order. The Commission
preliminarily believes that identifying the total number of
institutional orders exposed by a broker-dealer though actionable IOIs
in the order handling disclosures \145\ should give customers a more
complete view of how their broker-dealers handle their institutional
orders and allow them to better evaluate how their broker-dealer
manages information leakage.
---------------------------------------------------------------------------

    \145\ See proposed Rule 606(b)(3)(i)(B).
---------------------------------------------------------------------------

    The Commission also proposes that broker-dealers disclose the venue
or venues that were sent actionable IOIs. Venues that receive the
actionable IOIs, such as external liquidity providers that trade
proprietarily, could, but are not required to, respond to the
actionable IOI by sending an order to the broker-dealer to execute
against the trading interest represented by the actionable IOI. The
Commission preliminarily believes that disclosure of institutional
orders routed to a venue would not, alone, adequately capture a broker-
dealer's order handling practices. As such, the Commission
preliminarily believes that disclosure of the specific venue or venues
that a broker-dealer exposed an institutional order by an actionable
IOI would be useful for the customer to further assess the extent, if
any, of information leakage of their orders and potential conflicts of
interest facing their broker-dealers. Specifically, the Commission
preliminarily believes that such information will enable customers to
assess whether their broker-dealers are exposing their institutional
orders to select market participants with affiliations, business
relationships, or other incentives.
    The Commission seeks comment on the disclosure of the reporting
broker-dealer's information. In particular, the Commission solicits
comment on the following:
    44. Do commenters believe that disclosing the total number shares
sent to a broker-dealer would be useful to customers placing
institutional orders? Why or why not?
    45. Do commenters believe that disclosure of the total number of
shares executed by the broker-dealer as principal would facilitate
understanding the broker-dealer's ability to manage its best execution
obligations? Should additional or different information be required
regarding institutional orders that are executed by the broker-dealer
as principal? Please explain whether and how such additional or
different information would be useful.
    46. Do commenters believe that disclosure of the total number of
shares executed by the broker-dealer as principal would be useful to
customers for purposes of evaluating conflicts of interest? Why or why
not?
    47. Do commenters believe that the institutional order handling
report should disclose the total number of institutional orders exposed
through an actionable IOI? Is this data useful for customers to
evaluate their broker-dealers' institutional order handling practices?
Why or why not? Would such disclosure guide customers in better
understanding the potential of information leakage of their
institutional orders?
    48. Do commenters believe that broker-dealers should disclose the
venues to which it sends actionable IOIs? Would this information help
customers understand how financial incentives or business relationships
might impact their orders? Would this information help customers
evaluate the risk of information leakage?
    49. Do commenters believe there are other data points that would be
useful to customers that should be disclosed on institutional order
handling reports? If yes, please explain how such data would be useful
to customers.
b. Information on Order Routing
    Within the venue and order routing strategy segmentations described
above, the Commission proposes to require disclosure of information
with respect to order routing.\146\ The Commission preliminarily
believes that information regarding order routing and the size of
orders routed, both the aggregate and average order size, would be
useful for customers to understand where and how their institutional
orders are being routed or exposed to assess the risk of information
leakage and any potential conflicts of interest on the part of their
broker-dealers. The Commission proposes to require, within each venue
and strategy category, disclosure of: (1) Total shares routed; (2)
total shares routed marked immediate or cancel (``IOC''); \147\ (3)
total shares routed that were further routable; and (4) average order
size routed.\148\
---------------------------------------------------------------------------

    \146\ See proposed Rule 606(b)(3).
    \147\ An order marked IOC will execute immediately at a trading
center if liquidity is available at or better than the limit price
of the order or otherwise will be immediately canceled. See Concept
Release on Equity Market Structure, supra note 2, at 3607 n. 69.
    \148\ See proposed Rule 606(b)(3)(i).
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

on the side of the spread less favorable to the institutional
order.\158\
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    \154\ See proposed Rule 606(b)(3)(ii).
    \155\ Fill rate would be calculated by the shares executed
divided by the shares routed.
    \156\ Average fill size would be the average size, by number of
shares, of each order executed on the venue.
    \157\ The fee and rebate would be measured in cents per 100
shares, specified to four decimal places.
    \158\ See proposed Rule 606(b)(3)(ii).
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    Disclosing the total shares executed \159\ would provide customers
with the means to understand how much of its order flow was executed at
a particular venue and readily compare such information across venues.
In addition, since the institutional order handling report would also
be categorized by order routing strategy, disclosing the total shares
executed would provide customers with the means to understand how much
of its order flow was executed using passive, neutral, and aggressive
order routing strategies at each venue. Requiring broker-dealers to
disclose the total shares executed pursuant to order routing strategies
could provide customers with more detailed information than they may
currently receive from their TCA provider. Typically, third-party TCA
providers do not have access to routing information and therefore would
not be able to incorporate such information into their TCA offerings.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

seller receive price improvement over the best displayed price, and an
order at the midpoint generally has less impact on price since the
execution does not remove the best displayed price.\165\ Customers
would be able to examine when they receive midpoint price improvement
and at which venues. Coupled with the other required disclosures such
as the average net execution fee or rebate and fill rate, customers
could further assess the potential for conflicts of interest facing
their broker-dealers that may affect the broker-dealer's institutional
order routing practices. For example, if a broker-dealer routes a large
number of shares to a venue that provides a significant rebate for
orders executed but where the customer receives a low fill rate and a
low percentage of its shares executed at the midpoint, a customer may
seek to question the broker-dealer regarding the benefits of routing
such a large amount of order flow to that venue. As proposed, broker-
dealers would also be required to disclose the total number of shares
executed at the midpoint and the percentage of shares executed at the
midpoint by order routing strategy, which should allow customers
greater insights into which order routing strategies generate midpoint
executions and which venues are providing midpoint executions.
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    \163\ See proposed Rule 606(b)(3)(ii)(E)-(F). The midpoint would
be the price halfway between the national best bid and national best
offer.
    \164\ See, e.g., Rule 11.9(c)(9) of the Bats BZX Exchange, Inc.
(``Bats BZX'') (defining Midpoint Peg Order); Rule 4702(d) of The
NASDAQ Stock Market LLC (defining Midpoint Pegging); Robert P.
Bartlett, III and Justin McCrary, Dark Trading at the Midpoint:
Pricing Rules, Order Flow and Price Discovery (February 12, 2015)
(``Bartlett and McCrary Paper''), available at http://www.stern.nyu.edu/sites/default/files/assets/documents/2%20Bartlett%20and%20McCrary%20Shall%20We%20Haggle.pdf (describing
midpoint trading on non-exchange venues).
    \165\ See, e.g., Bartlett and McCrary Paper, supra note 164
(stating that midpoint of the NBBO is a form of trading that is
generally considered to have significant benefits for institutional
investors).
---------------------------------------------------------------------------

    The report would also require disclosure of the total number and
percentage of shares executed that were priced on the side of the
spread more favorable to the institutional order and the total number
and percentage of shares executed that were priced on the side of the
spread less favorable to the institutional order.\166\ Information with
respect to which side of the spread orders executed on would help
customers assess the execution quality their institutional orders
received, which in connection with the order routing strategy
disclosures and the fees and rebates disclosures, would allow customers
to better evaluate the performance of its broker-dealers. For example,
if the customer's strategy is to be passive, but its broker-dealer is
frequently routing orders to a venue or venues that are taking
liquidity at the side of the spread less favorable to the institutional
order, then the customer could further inquire about the broker-
dealer's rationale for routing to such venue. The Commission
preliminarily believes that requiring these granular details of how
institutional shares are executed should provide customers with more
information to evaluate the quality of their broker-dealers' order
handling services.
---------------------------------------------------------------------------

    \166\ See proposed Rule 606(b)(3)(ii)(G)-(J).
---------------------------------------------------------------------------

    Comment is generally requested on order execution information as
proposed in Rule 606(b)(3)(ii). In particular, the Commission solicits
comment on the following:
    53. Should any of the terms in proposed Rule 606(b)(3)(ii) be
defined? Should the information proposed to be required be modified in
any way, should additional information related to order execution be
required, or should any proposed requirement be omitted? Please
explain.
    54. Do commenters believe that the required order execution
information would be useful to institutional customers? Please explain
with respect to each of the proposed institutional order disclosure
categories.
    55. Do commenters believe that disclosures regarding fill rates and
average fill size would assist institutional customers in understanding
how much of their orders are executed at a venue versus routed on to
another venue? Are there other data that would be useful in analyzing
order execution?
    56. Would disclosures related to execution fees and rebates be
useful to institutional customers? Would this information support an
evaluation of a broker-dealer's potential economic incentives and/or
conflicts of interest to route and/or execute orders at a particular
venue? Please provide support for your arguments.
    57. Do commenters believe that the total number and percentage of
shares executed at the midpoint indicate higher quality executions?
Would this information be useful to customers interested in examining
their institutional order execution quality? Please explain.
    58. Do commenters believe that information on the shares executed
on the side of the spread favorable or less favorable to the
institutional order would be useful to institutional customers in
analyzing their broker-dealer's order handling practices? What other
order execution data, if any, would be useful to customers? Would
information on shares executed against displayed or undisplayed
liquidity be useful? Should any of the proposed requirements be
modified or eliminated? If so, which ones and why? Please provide
support for your arguments.
    59. Do commenters believe that the proposed data points outlined
above would provide customers with meaningful information? Would the
proposed disclosures allow customers to better assess the execution
quality of their broker-dealer? Would the report further permit
customers to compare execution quality among multiple broker-dealers
across the market? Would the report, as proposed, allow customers to
more easily monitor for best execution?
d. Information on Orders That Provided Liquidity
    In addition to the order routing and execution data detailed above,
the Commission proposes to require disclosure of information on
institutional orders that provided liquidity within the venue and order
routing strategy segmentations described above.\167\ In connection with
this new requirement, the Commission proposes to define the term
``orders providing liquidity'' to mean ``orders that were executed
against after resting at a trading center.'' \168\ Generally, orders
providing liquidity are submitted as non-marketable limit orders and
are kept in a limit order book awaiting execution. The Commission
preliminarily believes that by defining ``orders providing liquidity''
and ``orders removing liquidity'' (described in more detail below),
broker-dealers would be able to classify orders pursuant to a
standardized description for disclosure purposes.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

whether the broker-dealer is implementing their order instructions? If
so, please explain and provide data to support your argument.
    64. Do commenters believe that disclosing the average net execution
rebate or fee for shares of orders providing liquidity at each venue
and by order routing strategy would be useful in assessing potential
conflicts of interest broker-dealers may face with regard to routing
venues and the order routing strategies that use those venues?
    65. Do commenters believe that specifying the average net execution
fee or rebate to four decimal places is appropriate? If not, to what
level of precision should the fee or rebate be specified? Please
explain and provide data for your argument.
e. Information on Orders That Removed Liquidity
    Similarly to orders that provided liquidity, the Commission
proposes to require the disclosure of information on institutional
orders that removed liquidity within the venue and order routing
strategy segmentations described above.\176\ Related to this new
disclosure, the Commission proposes to define the term ``orders
removing liquidity'' to mean ``orders that executed against resting
trading interest at a trading center.'' \177\ Generally, orders that
remove liquidity are marketable orders that are immediately executable
when routed to a venue and execute against and remove orders that are
resting on a trading center's order book. The Commission preliminarily
believes that the defined term should reduce any potential broker-
dealer confusion when distinguishing orders for reporting purposes and
would allow all broker-dealers to more consistently designate certain
orders as orders removing liquidity.
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    \176\ See proposed Rule 606(b)(3)(iv).
    \177\ See proposed Rule 600(b)(56).
---------------------------------------------------------------------------

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

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

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

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

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

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

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

handling practices of broker-dealers, which could, in turn, allow for
more efficient and effective comparisons of the quality of services
offered by broker-dealers. As noted above, in today's complex equity
markets, it may be difficult for customers to assess the order handling
services of multiple broker-dealers without standardized order handling
disclosures, particularly the services of broker-dealers with which
they do not have a relationship.
    The Commission preliminarily believes that aggregated public
disclosure of the information contained in the customer-specific
institutional order handling reports, described above, would be useful
to institutional customers and other market participants to determine
whether to engage the services of a broker-dealer as well as the
ability to gauge the adequacy of the services performed by a broker-
dealer. The public disclosure by broker-dealers of aggregated
institutional order handling information should promote competition as
broker-dealers may seek to differentiate their services and expertise
in an effort to retain current customers and attract the business of
prospective customers. Indeed, the Commission preliminarily believes
that public disclosure of institutional order handling information by
each broker-dealer would provide market participants with useful
information and could bring competitive forces to bear on broker-dealer
institutional order handling services. Accordingly, the Commission
preliminarily believes that aggregated public institutional order
handling reports would increase the overall transparency of
institutional order handling practices to the benefit of customers and
the marketplace as a whole.
    The Commission proposes to require a broker-dealer that receives
institutional orders to make publicly available \181\ a report that
aggregates the information required for customer-specific institutional
order handling reports, described above, for all institutional orders
it receives.\182\ Broker-dealers would be required to make such report
publicly available for each calendar quarter, broken down by calendar
month, within one month after the end of the quarter.\183\ This public
aggregated institutional order handling report would be mandatory for
all of the institutional orders that a broker-dealer handles within a
calendar quarter regardless of whether any of its customers request
customer-specific institutional order handling reports.
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    \181\ The Commission notes that ``make publicly available'' is
defined in Rule 600(b)(36) of Regulation NMS to mean ``posting on an
Internet Web site that is free and readily accessible to the public,
furnishing a written copy to customers on request without charge,
and notifying customers at least annually in writing that a written
copy will be furnished on request.'' See 17 CFR 242.600(b)(36).
    \182\ See proposed Rule 606(c).
    \183\ See id.
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    Similar to the customer-specific institutional order handling
reports required under proposed Rule 606(b), the public aggregated
institutional order handling report would be made available using an
XML schema and associated PDF renderer to be published on the
Commission's Web site.\184\ The Commission preliminarily believes that
requiring the public aggregated institutional order handling reports be
provided in this format would be useful to customers as it would allow
them to more easily analyze and compare the data provided in both types
of reports, for the reasons discussed above, and would allow market
participants generally to analyze and compare broker-dealer
institutional order handling practices.\185\
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    \184\ See supra Section II.A.3.
    \185\ See id.
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    In addition, the Commission proposes to require that broker-dealers
keep such public aggregated institutional order handling reports posted
on an Internet Web site that is free and readily accessible to the
public for a period of three years from the initial date of posting on
the Internet Web site.\186\ The Commission preliminarily believes that
making this historical data available to customers and the public
generally will be useful to those seeking to analyze past order
handling behavior of a broker-dealer or across multiple broker-dealers.
To further support customers' usage of the public aggregated
institutional order handling reports, the Commission notes that it
would be incumbent upon the broker-dealer to maintain accurate order
handling data during the three year period.
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    \186\ The Commission notes that it is proposing similar
reporting format and accessibility requirements for quarterly
reports on retail order routing in Rule 606(a)(1), which is
discussed in more detail in Section III.B.4. below.
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    The Commission recognizes that broker-dealers have proprietary
methods for order handling, and is cognizant of the sensitive nature of
such business practices and intellectual property. The Commission
preliminarily believes that the risk of exposing sensitive proprietary
information on the broker-dealers' order handling techniques would be
minimal due to the structure of the proposed report and by aggregating
the information to be publicly disclosed. Like the proposed customer-
specific institutional order handling reports, the proposed public
aggregated institutional order handling report would aggregate a
broker-dealer's order handling information for all NMS stocks for the
reporting period, and, therefore, the Commission preliminarily believes
other market participants would not be able to ascertain which
particular securities were routed during the reporting period.
Additionally, as routing decisions are generally dependent on the
market for the particular security at the time of routing, the
Commission preliminarily believes that public aggregated institutional
order handling reports for the prior calendar quarter would not provide
other market participants, including a broker-dealer's competitors,
sensitive information about a broker-dealer's order handling
techniques.
    Further, while the public aggregated institutional order handling
report would provide information on the venues to which a broker-dealer
routed its institutional order flow as well as the three categories of
order routing strategies used to route those orders, the report would
not provide any information about the manner or sequence in which those
orders were routed to the venues. For example, the report would not
disclose whether the broker-dealer routed orders sequentially or
simultaneously to multiple trading centers in order to fully execute an
institutional order, or the sequence in which such orders were routed
to trading centers. Because such information is essential to
effectively reverse engineer an order routing algorithm, the Commission
preliminarily believes that the proposed public aggregated
institutional order handling information would not provide other market
participants with the information to reverse engineer a broker-dealer's
proprietary order handling techniques, regardless of the number of
orders a broker-dealer routes or the number of institutional customers
for which a broker-dealer routes orders during the reporting period.
Accordingly, the Commission preliminarily believes that information
contained in the proposed public aggregated institutional order
handling report should provide appropriate safeguards for broker-
dealers' current business practices, while, at the same time, providing
meaningful information for customers and others to compare broker-
dealers' order routing services.
    The Commission also preliminarily believes that the risk of
exposing sensitive customer-specific information would be minimal due
to the structure of the proposed report and by aggregating the
information to be

publicly disclosed. As noted above, the proposed public aggregated
institutional order handling report would aggregate order handling
information for all NMS stocks for the reporting period and would not
disclose the customers of the broker-dealer. To the extent a broker-
dealer only had one or a few institutional customers to which it
provided routing services, market participants could presume a
customer's orders were included in the public aggregated institutional
order handling report, but only to the extent the market participants
knew of the routing relationship. However, even if a market participant
is aware of such routing relationship, because the proposed public
aggregated institutional order handling report would not disclose the
specific securities routed and the historical data would reflect only
previous calendar quarters, the Commission preliminarily believes that
public disclosure would not expose sensitive information of the
institutional customers.
    The Commission understands that many customers currently request
information about a broker-dealer's order handling practices before
engaging its services.\187\ Generally, these requests are
questionnaires regarding order routing strategies used by the broker-
dealer and the venues to which the broker-dealer routes orders.\188\
The Commission understands that the information requested in the
questionnaires and the responses provided are generally not uniform,
and, therefore, not readily comparable across multiple broker-dealers.
While customers would continue to be able to use their specific
questionnaires, the Commission preliminarily believes that a
standardized report reflecting the order handling information for all
of a broker-dealer's institutional orders for the past calendar quarter
would greatly enhance their ability to understand how the broker-dealer
routes and executes institutional orders and would also allow them to
compare the execution quality of their orders against the execution
quality of all of a broker-dealer's institutional orders. In addition,
the standardized structure of the public aggregated institutional order
handling report would provide all customers, regardless of size or
sophistication, with the means to compare and contrast how broker-
dealers implement passive, neutral, and aggressive order routing
strategies, and the quality of executions received with respect to such
strategies.
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    \187\ See TM Memo re Morgan Stanley I, supra note 43.
    \188\ See id.
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    Moreover, the public disclosure of aggregated institutional order
handling information would provide academics and others, including
third-party vendors offering analytical services, access to order
routing and execution information that would not otherwise be
available.
    Finally, the Commission notes that the proposed public aggregated
institutional order handling reports differ from the current reports on
retail order routing required pursuant to Rule 606(a).\189\ The
Commission preliminarily believes that such distinction is appropriate
because institutional orders are generally large and may be complex, in
contrast to retail orders that are of smaller size, utilize different
routing strategies, and which typically have less impact on the market.
Specifically, due to the large size of institutional orders, it may be
difficult to fully fill the orders by executing against displayed bids
or offers resting on a trading center. Instead, institutional orders
are often broken up into child orders, routed to multiple trading
centers, and filled at multiple price levels which may result in
potential information leakage \190\ and unfavorable price movement to
the institutional order.\191\ As such, broker-dealers often employ more
complex order routing strategies when handling institutional orders to
reduce the potential information leakage and unfavorable price
movement.\192\ Conversely, marketable retail orders are generally
internalized by broker-dealers at prices at or slightly better than the
NBBO, with very little risk of information leakage and impact on the
market. If not internalized, retail orders, due to their smaller size
are typically routed to a single trading center and fully executed.
While the potential for information leakage of a retail order is low,
even if order information is exposed, there is little influence on the
retail order as it would likely already be fully executed. Due to these
differences, the Commission preliminarily believes that because retail
orders are not subjected to similar risks of potential information
leakage and disadvantageous price impact as with institutional orders,
the use of the proposed aggregated reporting of information for
institutional orders--including order routing and execution and orders
providing and removing liquidity--to among other things, monitor
broker-dealers' management of these risks would not be pertinent for
retail orders.
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    \189\ Rule 606(a) currently requires the reporting of the
percentage of total orders that were non-directed orders, and the
percentages of total non-directed orders that were market orders,
limit orders, and other orders, the percentages of such orders
routed to the Specified Venue, and a discussion of the material
aspects of the broker-dealer's relationship with each Specified
Venue (including a description of any arrangement for payment for
order flow and any profit-sharing relationship). See 17 CFR
242.606(a)(1).
    \190\ See Bunge Article, supra note 69.
    \191\ See Bartlett and McCrary Paper, supra note 164, at 5
(discussing order size and its relation to price impact).
    \192\ See Concept Release on Equity Market Structure, supra note
2, at 3602.
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    The Commission requests comments on information contained in the
public aggregated institutional order handling reports by broker-
dealers. In particular, the Commission solicits comment on the
following:
    71. Do commenters believe that aggregated institutional order
handling information being publicly disclosed would be useful to
institutional customers and other market participants? Who would it be
useful to and in what ways?
    72. Do commenters believe that the aggregated institutional order
handling information proposed by Rule 606(c) should be disclosed for
both retail and institutional orders, rather than only for
institutional orders as proposed? Why or why not? Please provide
support for your argument.
    73. Should the public aggregated institutional order handling
report include all the data points enumerated in proposed Rule
606(b)(3)(i)-(iv)? Why or why not? If not, which data points should be
excluded or modified? Are there other data points the Commission should
consider that would be useful to customers and the public? Please
explain and provide data, if possible.
    74. Do commenters believe that broker-dealers should be required to