which to come into compliance with Rule 605's reporting requirements.
The three-month grace period would afford a broker-dealer adequate time
to develop the systems and processes and organize the resources
necessary to generate the reports pursuant to Rule 605, while still
requiring the broker-dealer to begin reporting without an overly long
delay. At the same time, should a broker-dealer subsequently fall below
the customer reporting threshold, the Commission preliminarily believes
that the broker-dealer should already have the necessary systems and
processes in place and therefore a grace period would not be necessary
if that broker-dealer again meets or exceeds the customer account
threshold and becomes subject to Rule 605's requirements. The
Commission notes that Rule 606 similarly provides for a three-month
grace period for brokers or dealers subject to Rule 606(b)(3)'s
reporting requirements for the first time only.\187\
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    \186\ See proposed Rule 605(a)(7). After the three calendar
month grace period, the Reporting Period would begin on the first
calendar day of the fourth calendar month after the broker or dealer
has met or exceeded the customer account threshold. See id. As
described above, a broker-dealer that meets or exceeds the customer
account threshold would be required to produce Rule 605 reports for
at least a Reporting Period. See supra notes 183-184 and
accompanying text. Therefore, a broker-dealer that crosses the
customer account threshold for the first time would be required to
comply with the reporting requirements of Rule 605 for at least a
Reporting Period, even if that broker-dealer falls below the
customer account threshold during the grace period.
    \187\ See 17 CFR 242.606(b)(4).
---------------------------------------------------------------------------

    Rule 605 requires that reporting entities calculate certain
statistics based on the time of order receipt.\188\ Moreover,
Regulation NMS defines ``time of order receipt'' based on the time an
order was received by a market center for execution.\189\ In
conjunction with the proposed expansion of Rule 605 to cover larger
broker-dealers, it is necessary to modify this definition to specify
how broker-dealers that are not acting as market centers would be
required to calculate ``time of order receipt.'' The Commission has
considered requiring broker-dealers to calculate the ``time of order
receipt'' based on the time that the broker-dealer received the order
or on the time that the broker-dealer transmitted the order to a market
center for execution. Measuring ``time of order receipt'' based on when
a broker-dealer received the order would provide a view of how that
broker-dealer handled that order from the time the order was within its
control, rather than limiting that view to what happened after the
broker-dealer sent the order to a particular market center for
execution. In this way, calculating execution quality statistics based
on the time that a broker-dealer received the order could provide
information about whether a broker-dealer's delay in sending the order
to a market center for execution may have affected the execution
quality obtained for that order, because the execution quality
statistics would be measured based on the prevailing market prices at
that time.\190\ Accordingly, the Commission is proposing to modify the
definition of ``time of order receipt'' to specify that, in the case of
a broker or dealer that is not acting as a market

center, the time of order receipt is the time that the order was
received by the broker or dealer for execution.\191\
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    \188\ See, e.g., 17 CFR 242.605(a)(1)(ii)(D) (measuring, for
shares executed with price improvement, the share-weighted average
period from the time of order receipt to the time of order
execution).
    \189\ See 17 CFR 242.600(b)(92). See also Adopting Release, 65
FR 75414 (Dec. 1, 2000) at 75423 (``The definition [of `time of
order receipt'] is intended to identify the time that an order
reaches the control of the market center that is expected, at least
initially, to execute the order.''). The Commission is proposing to
renumber the definition of ``time of order receipt'' as proposed
Rule 600(b)(109).
    \190\ When adopting Rule 605, the Commission stated that a
market center will use the time and consolidated BBO at the time it
received the order, rather than the time and consolidated BBO when
the venue to which an order was forwarded received the order, to
calculate the required statistics. See Adopting Release, 65 FR 75414
(Dec. 1, 2000) at 75423. The Commission stated that a market center
should be held accountable for all orders that it receives for
execution and should not be given an opportunity to exclude
difficult orders by routing them to other venues, and that from the
customer's perspective the fact that a market center chooses to
route the order elsewhere does not reduce the customer's interest in
a fast execution that reflects the consolidated BBO as close to the
time of order submission as possible. See id. This same reasoning
applies to orders that a broker-dealer receives and then routes to
another venue for execution, and supports measuring the time of
order receipt from the time that the broker-dealer receives the
order.
    \191\ See proposed Rule 600(b)(109). The time that the order is
received by the market center for execution should be the same as
the time that the order is received by the broker-dealer for
execution when the broker-dealer also acts as a market center for
that order.
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    The Commission is mindful that some of Rule 605's execution quality
statistics may as a general matter differ for the larger broker-
dealers, as compared to market centers, to the extent that some of
these larger broker-dealers generally or exclusively route orders away.
However, it is appropriate for broker-dealers to report on the same
execution quality statistics as market centers because the reported
statistics can be understood in the context of the specific reporting
entity, and the detailed execution quality statistics would allow
customers and other market participants to parse the differences among
the statistics for each reporting entity. For example, Rule 605
requires statistics for the number of shares executed at the receiving
market center and the number of shares executed at any other
venue.\192\ As discussed above, broker-dealers that generally route the
orders that they receive to other venues for execution, and thereby
would report these shares as being executed at another venue, may
execute certain portions of their order flow internally (e.g.,
fractional shares).\193\ While the Commission considered whether or not
broker-dealers should be required to provide execution quality
statistics for both shares executed at the receiving broker-dealer and
shares executed at any other venue, the Commission decided to propose
to keep both of these statistics in the Rule 605 reporting requirements
for broker-dealers so as to capture all orders that broker-dealers
receive for execution as part of their customer-facing broker-dealer
function.\194\ Further, differences in certain statistics for broker-
dealers as compared to market centers may be more reflective of
differences in business models rather than effectiveness in achieving
execution quality for covered orders because of differences in order
handling practices. The Commission understands that these differences
are well-known and are taken into account by market participants when
evaluating execution quality statistics. For example, broker-dealers
that route customer orders may have consistently longer time to
executions as compared to market centers for similar orders, because of
the time it takes to route these orders, but this difference is well
understood by market participants.
---------------------------------------------------------------------------

    \192\ See 17 CFR 242.605(a)(1)(i)(D) and (E). As discussed
herein, the Commission is proposing to modify Rule 605(a)(1)(i)(D)
to also cover the number of shares executed at the receiving broker
or dealer. See supra note 155 and accompanying text.
    \193\ See supra note 34 and accompanying text.
    \194\ If a broker-dealer does not execute any covered orders
internally, then that broker-dealer's Rule 605 report would not
reflect any shares executed at the receiving broker-dealer. For
discussion of what orders broker-dealers that are market centers
would include in their reports pertaining to their market center
function, see supra notes 178-180 and accompanying text.
---------------------------------------------------------------------------

    The Commission is also mindful that, for orders routed to other
venues for execution, broker-dealers may not have all of the
information needed to calculate the proposed statistics at the time of
order execution. However, these broker-dealers should be able to obtain
the needed information in time to prepare the required reports. Broker-
dealers would need to calculate their execution quality statistics, or
engage a vendor to calculate the statistics on their behalf, on a
monthly basis. At the time that the broker-dealer or its vendor would
need to calculate the execution quality statistics, the broker-dealer
would have received any needed information about the order's execution
from the execution venue and be able to obtain any needed historical
price information from publicly available data sources, such as the
exclusive plan processors (``exclusive SIPs'').\195\ For example, a
broker-dealer that routed an order away for execution would receive
time of order execution and execution price as part of the trade
confirmation provided by the execution venue. The broker-dealer could
then use historical price information available via the exclusive SIPs
to determine the NBBO at the time of order receipt and at the time of
order execution, the number of shares displayed at the NBBO, and the
best available displayed price, if such price is being disseminated,
and use this data to calculate the required execution quality
statistics.\196\
---------------------------------------------------------------------------

    \195\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at
18598-99 (describing that the exclusive SIPS, among other things,
disseminate core data, which currently consists of: (1) the price,
size, and exchange of the last sale; (2) each exchange's current
highest bid and lowest offer and the shares available at those
prices; and (3) the NBBO). A securities information processor
(``SIP'') is defined in section 3(a)(22)(A) of the Exchange Act. See
15 U.S.C. 78c(a)(22)(A). Further, an ``exclusive processor'' (also
known as an exclusive SIP) is defined in section 3(a)(22)(B) of the
Exchange Act. See 15 U.S.C. 78c(a)(22)(B).
    \196\ With respect to NMLOs, the broker-dealer could also use
this historical price information available via the exclusive SIPs
to determine when the order became executable, based on when the
NBBO first reached the order's limit price.
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment generally on the proposed expansion of
Rule 605 reporting requirements to include larger broker-dealers that
meet or exceed the customer account threshold, as well as the other
proposed changes to Rule 605 and Rule 600(b) discussed above. In
particular, the Commission solicits comment on the following:
    1. Should Rule 605 be expanded to apply to broker-dealers? Why or
why not? Do commenters agree that it would be useful for customers of
certain broker-dealers to be able to access execution quality
statistics that are specific to those broker-dealers, rather than
needing to rely on the execution quality statistics reported by the
market centers to which the broker-dealers route? Do commenters agree
that market centers may provide different execution quality to orders
based on the routing broker-dealer? Please explain and provide data.
    2. Do commenters agree that it would be useful for broker-dealers
that are also market centers to produce separate reports pertaining to
each function? Why or why not? Do commenters agree that broker-dealers
that are also market centers should be required to include in the
report pertaining to their market center function all covered orders
for which they act as a market center, including as an OTC market
maker, rather than only those covered orders executed at the market
center? Do commenters agree that broker-dealers that are also market
centers should be required to include in the report pertaining to their
broker-dealer function all of the covered orders in NMS stocks that
they received for execution from any customer, rather than only those
orders that do not pertain to their market center function (i.e., those
orders for which they do not act as a market center)? Would broker-
dealers that are also market centers encounter any specific
difficulties when determining which orders to include in each report?
Please explain.
    3. Is a numerical customer account threshold the proper criterion
for determining whether a broker-dealer should be subject to the Rule
605 reporting requirements? If so, is 100,000 or more customer accounts
the appropriate amount? Why or why not? If not, should be it higher or
lower (e.g., 500,000 or more customer accounts or 10,000 or more
customer accounts)? If so, by what amount? Is it appropriate to
consider both the number of customer accounts that the broker-dealer
carries and the number of customer accounts

that the broker-dealer introduces? Why or why not? Do commenters
believe that it would be more useful to consider the trading volume,
either based on share volume or notional volume, or both, of a broker-
dealer's customers when setting the reporting threshold? Why are why
not? Please explain and provide data to support your argument. Are
there alternative approaches that the Commission should adopt in
expanding Rule 605's reporting requirements to broker-dealers? If so,
please explain the approach in detail, including the benefits and costs
of the approach.
    4. Should the Commission require all broker-dealers to report
pursuant to Rule 605 irrespective of the number of customer accounts
that the broker-dealer carries or introduces? Or should such a
requirement be subject to a de minimis exclusion? Why or why not? If
so, what would be an appropriate de minimis exclusion? Please explain
and provide data, if possible.
    5. Is three months an appropriate timeframe to use for the
Reporting Period, i.e., the minimum length of time for which a broker-
dealer would need to comply with Rule 605's reporting requirements once
its number of customer accounts meets or exceeds the customer account
threshold? Would a shorter or longer time period (e.g., one, two or six
months) be more appropriate? If so, by what amount? Does whether or not
a broker-dealer uses or could use an outside vendor to prepare reports
pursuant to Rule 605 affect this answer? Please explain.
    6. Is three months an appropriate grace period from Rule 605's
reporting requirements for a broker-dealer that has met or exceeded the
customer account threshold for the first time? Would a shorter or
longer time period be more appropriate (e.g., one month, two months, or
six months)? Do commenters agree that a grace period would not be
necessary for broker-dealers that have previously equaled or exceeded
the customer account threshold, but subsequently have fallen below the
threshold and stopped reporting and then need to restart reporting? If
not, what grace period do commenters think would be appropriate? Would
one month be sufficient in this context? Are there any other
circumstances in which a broker-dealer that has met or exceeded the
customer account threshold would need an additional grace period from
Rule 605's reporting requirements? Please explain.
    7. Should a broker-dealer that is not a market center be required
to calculate time of order receipt based on when that broker-dealer
received the order? Why or why not? Would it be more useful to
customers or other market participants for a broker-dealer that
generally routes customer orders to calculate time of order receipt
based on when that broker-dealer sent the order to a market center for
execution? Please explain and provide data, if possible.
    8. Should broker-dealers be required to produce all of the detailed
execution quality statistics set forth in Rule 605? Why or why not? Do
commenters agree that broker-dealers' customers and other market
participants would be able to interpret differences in these execution
quality statistics among reporting entities that may be attributable to
the context of their different types of business? Do commenters believe
that there are any additional execution quality statistics that would
be useful to require of broker-dealers? Please explain and provide
data, if possible.
    9. Would it be difficult for broker-dealers to obtain any of the
information needed to calculate the Rule 605 statistics? Why or why
not? If so, which statistics in particular? Would broker-dealers have
some or all of the information needed to calculate their Rule 605
statistics already, including to meet their obligations to assess
whether they are providing best execution for these orders? Do
commenters agree that broker-dealers would be able to obtain needed
information from the execution venues to which they routed the orders
or publicly available sources? Should the Commission exclude certain
proposed execution quality statistics that are specific to certain
order types, such as executable NMLOs? Why or why not? Please explain.

B. Qualified Auction Mechanisms

    Separately, the Commission is proposing rules that generally would
require that individual investor orders be exposed to order-by-order
competition in fair and open auctions designed to obtain the best
prices before such orders could be internalized by wholesalers or any
other type of trading center that restricts order-by-order
competition.\197\ Under those proposed rules, a restricted competition
trading center would not be allowed to execute internally a segmented
order for an NMS stock until after a broker or dealer has exposed such
order to competition at a specified limit price in a qualified auction
that meets certain requirements and is operated by an open competition
trading center.\198\ An ``open competition trading center'' would be a
national securities exchange or NMS Stock ATS that meets certain
requirements, including being transparent and having a substantial
trading volume in NMS stocks independent of qualified auctions.\199\ A
``qualified auction'' would be an auction operated by an open
competition trading center pursuant to specified requirements that are
designed to achieve competition.\200\
---------------------------------------------------------------------------

    \197\ For a full description and discussion of the order
competition rule proposal, see Securities Exchange Act Release No.
96495 (Dec. 14, 2022) (File No. S7-31-22) (Order Competition Rule)
(``Order Competition Rule Proposal''); proposed Rule 615.
    \198\ See Order Competition Rule Proposal; proposed Rule
600(b)(87) (defining ``restricted competition trading center'');
proposed Rule 600(b)(91) (defining ``segmented order''); proposed
Rule 615(a) (describing the order competition requirement).
    \199\ See Order Competition Rule Proposal; proposed Rule
600(b)(64) (defining ``open competition trading center'').
    \200\ See Order Competition Rule Proposal; proposed Rule
600(b)(81) (defining ``qualified auction''); proposed Rule 615(c)
(setting forth requirements for operation of a qualified auction).
---------------------------------------------------------------------------

    If the Commission adopts the Order Competition Rule Proposal and a
national securities exchange or NMS Stock ATS that serves as an open
competition trading center is required to prepare execution quality
reports under current Rule 605, that national securities exchange or
NMS Stock ATS would be required to include covered orders that it
received for execution in a qualified auction within its blended
executing quality statistics, which also would include trading activity
outside of the qualified auctions.\201\
---------------------------------------------------------------------------

    \201\ As discussed further below, the Commission is proposing to
eliminate the separate reporting categories for inside-the-quote
limit orders, at-the-quote limit orders, and near-the-quote limit
orders, and create new reporting categories for executable NMLOs and
beyond-the-midpoint limit orders. See infra sections IV.B.2.(a) and
IV.B.2.(b). While, as proposed, orders submitted to qualified
auctions may in many instances be classified as beyond-the-midpoint
limit orders, this reclassification would not resolve the
Commission's concern about blending execution quality statistics for
orders executed in qualified auctions with orders executed outside
of these auctions.
---------------------------------------------------------------------------

    The Commission is concerned that there may be differences in
execution quality for orders executed within proposed qualified
auctions, as compared to other orders executed by market centers
outside of these qualified auctions, that would not be apparent in
blended execution quality statistics. For example, orders submitted to
a qualified auction may be more or less likely to receive price
improvement, and may have systematically different fill rates, as
compared to similar orders executed in other trading mechanisms. In
addition, the Order Competition Rule Proposal would propose both a
minimum and maximum time period for

the qualified auction.\202\ Therefore, the time to execution statistics
for orders submitted to a qualified auction may be systematically
different from the time to execution statistics of other orders
executed at a market center. Further, if a market center receives
covered orders for execution in a qualified auction, then that market
center would not have discretion about whether to submit these orders
into a qualified auction and therefore the distinction between orders
executed by the market center within and outside of a qualified auction
would not reflect any decision-making on the part of the market center.
Thus, it would be more useful for market participants to be able to
review execution quality statistics that are specific to covered orders
submitted to a qualified auction.
---------------------------------------------------------------------------

    \202\ See Order Competition Rule Proposal; proposed Rule
615(c)(2).
---------------------------------------------------------------------------

    Accordingly, the Commission is proposing to amend Rule 605(a)(1) to
state that market centers that operate a qualified auction must prepare
a separate report pursuant to Rule 605 pertaining only to covered
orders that the market center receives for execution in a qualified
auction.\203\ This proposed requirement for separate reports is limited
to market centers that operate proposed qualified auctions, and would
not extend to market centers or broker-dealers that route orders away
for execution in a qualified auction. Therefore, a market center or
broker-dealer that routes covered orders to an open competition trading
center for execution within a proposed qualified auction would not be
required to separately report on or otherwise distinguish orders routed
to qualified auctions from other types of orders routed away for
execution in its Rule 605 reports.\204\ In this way, the proposal would
follow current Rule 605's focus on the overall execution quality that
the reporting entity provided to all covered orders that it received
for execution.\205\ Having market centers and broker-dealers report on
the execution quality provided to orders, regardless of where they are
executed, would inform market participants and other observers about
overall execution quality that the market center or broker-dealer is
able to obtain, including when the market center or broker-dealer
decides whether and where to route orders to receive such executions.
Further, distinctions between whether an order was routed to a
qualified auction or not may depend on the characteristics of the
order, such as whether it is a segmented order, rather than the
performance of the market center or broker-dealer that routed the
order. As such, it would be of more limited utility to have a market
center or broker-dealer that routes orders to a qualified auction to
produce a separate Rule 605 report specific to such orders.
---------------------------------------------------------------------------

    \203\ See proposed Rule 605(a)(1).
    \204\ If a larger broker-dealer is also a market center and its
market center operates a qualified auction mechanism, that aspect of
the market center would be subject to the separate reporting
requirement.
    \205\ For example, currently Rule 605 does not require market
centers to distinguish among covered orders routed to particular
types of away market centers. Instead, a market center's execution
quality statistics are blended statistics pertaining to all covered
orders that the market center received for execution, with the
limited exception of the statistics for cumulative number of shares
of covered orders executed at the receiving market center and at any
other venue. See 17 CFR 242.605(a)(1).
---------------------------------------------------------------------------

    Although market centers and broker-dealers would not be required to
produce a separate Rule 605 report pertaining to orders that they route
to a qualified auction, Rule 606 requires routing broker-dealers to
disclose certain regularly-used execution venues to which they route
orders, and a report prepared by a broker-dealer pursuant to Rule 606
would be required to indicate that orders were routed to a particular
qualified auction.\206\ A customer of a broker-dealer could then
analyze whether and to what extent the broker-dealer routes to a
particular market center's qualified auctions (using reports prepared
pursuant to Rule 606), and evaluate the execution quality provided by
that market center's qualified auctions (using reports prepared
pursuant to Rule 605).
---------------------------------------------------------------------------

    \206\ See 17 CFR 242.606(a)(1). For example, if a broker-dealer
operates an ATS and that ATS has qualified auctions and a continuous
order book, the broker-dealer's Rule 606 report would be required to
disclose information about orders that were routed to the ATS's
qualified auctions separately from orders that were sent directly to
the ATS's continuous order book.
---------------------------------------------------------------------------

    The Commission considered extending the proposed requirement for
separate Rule 605 reports beyond proposed qualified auctions to include
orders submitted to any trading mechanism that seeks to provide
liquidity to the orders of individual investors. For example, several
national securities exchanges operate retail liquidity programs.\207\
However, in the Order Competition Rule Proposal the Commission is
proposing a prohibition on certain facilities that are limited, in
whole or in part, to the execution of segmented orders and this
prohibition would apply to many of the retail liquidity programs
currently operated by national securities exchanges.\208\
---------------------------------------------------------------------------

    \207\ Retail liquidity programs are programs for retail orders
seeking liquidity that allow market participants to supply liquidity
to such retail orders by submitting undisplayed orders priced at
least $0.001 better than the exchange's protected best bid or offer.
Each program results from a Commission approval of a proposed rule
change made on Form 19b-4 combined with a conditional exemption,
pursuant to section 36 of the Exchange Act, from 17 CFR 242.612 (the
``Sub-Penny Rule'') to enable the exchange to accept and rank (but
not display) the sub-penny orders. See, e.g., Securities Exchange
Act Release Nos. 85160 (Feb. 15, 2019), 84 FR 5754 (Feb. 22, 2019)
(SR-NYSE-2018-28) (approving the NYSE retail liquidity program on a
permanent basis and granting the exchange a limited exemption from
the Sub-Penny Rule to operate the program); 86194 (June 25, 2019),
84 FR 31385 (July 1, 2019) (SR-BX-2019-011) (approving Nasdaq BX,
Inc.'s retail price improvement program on a permanent basis and
granting the exchange a limited exemption from the Sub-Penny Rule to
operate the program).
    \208\ See Order Competition Rule Proposal. The Commission
discusses a number of alternatives in the Order Competition Rule
Proposal. See id. To the extent that any retail liquidity program is
retained, separate execution quality statistics specific to orders
submitted to those programs may be useful to investors.
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment on the proposal to require a market
center that operates a qualified auction to prepare a separate report
under Rule 605 for covered orders that were submitted to a qualified
auction if the Order Competition Rule Proposal is adopted. In
particular, the Commission solicits comment on the following:
    10. Should market centers that operate a proposed qualified auction
be required to prepare a separate Rule 605 report for covered orders
that are submitted to their qualified auctions? Why or why not? Do
commenters agree with limiting this separate reporting requirement to
market centers that operate a proposed qualified auction, and not to
either broker-dealers that are not market centers or market centers
that do not operate a qualified auction? Please explain.
    11. Should this separate reporting requirement be limited to a
trading mechanism that meets the proposed requirements for a
``qualified auction''? Would it be more useful if a market center
prepared a separate report for covered orders submitted to any trading
mechanism that seeks to provide liquidity to the orders of individual
investors (e.g., a national securities exchange's retail liquidity
program), whether or not that trading mechanism operates a ``qualified
auction''?
    12. Do commenters believe that there are any additional execution
quality statistics that would be useful to require of a market center
that operates a proposed qualified auction to facilitate comparison
among different qualified auctions? For example, would it be useful for
a market center that operates a proposed qualified auction to provide
data on any price improvement provided in the qualified auction as

measured in relation to any additional price matching offered by the
wholesaler that routed the order to the qualified auction? Please
explain and provide data, if possible.

C. ATSs and Single-Dealer Platforms

    Currently under Rule 605, firms that operate two separate markets
must prepare separate reports for each market center.\209\ For example,
for a firm that acts both as an exchange market maker and as an OTC
market maker, each function would be considered a separate market
center and Rule 605 requires the firm to prepare separate reports. The
requirement to produce separate Rule 605 reports for separate markets
allows market participants to assess the execution quality of each
market individually, and prevents differences in the nature of each
market from obscuring information about execution quality.
---------------------------------------------------------------------------

    \209\ See 17 CFR 242.605(a)(1) (requiring ``every'' market
center to produce a report). See also Plan, at n.1 (``An entity that
acts as a market maker in different trading venues (e.g., as
specialist on an exchange and as an OTC market maker) would be
considered as a separate market center under the Rule for each of
those trading venues. Consequently, the entity should arrange for a
Designated Participant for each market center/trading venue (e.g.,
an exchange for its specialist trading and an association for its
OTC trading).''). For a description of ``Designated Participant'' as
defined in the Plan, see supra note 47.
---------------------------------------------------------------------------

    Regulation ATS requires each ATS to register as a broker-
dealer.\210\ Many broker-dealers that operate NMS Stock ATSs have
separate lines of business that are distinct from their ATSs, yet also
relate to the trading of NMS stocks.\211\ In addition, one EMSAC
panelist suggested that the Commission require all ATSs and dark pools
(i.e., ATSs that do not publish quotations) to report separately from
their affiliated broker-dealers under Rule 605.\212\ The Commission
believes there is a need to address directly what Rule 605 requires
with respect to reporting by firms that operate ATSs. By specifying
that a broker-dealer that operates an ATS must produce Rule 605 reports
that are specific to the ATS and separate from the broker-dealer
operator's other trading activity, the Commission intends to increase
transparency and regulatory compliance. Accordingly, the Commission
proposes to specify in Rule 605(a)(1) that ATSs (as defined in
Regulation ATS \213\) shall prepare reports separately from their
broker-dealer operators, to the extent such entities are required to
prepare reports.\214\
---------------------------------------------------------------------------

    \210\ See 17 CFR 242.301(b)(1). 17 CFR 242.301 through 17 CFR
242.304 is generally known as ``Regulation ATS.''
    \211\ See, e.g., Securities Exchange Act Release No. 83663 (July
18, 2018), 83 FR 38768, 38771 (Aug. 7, 2018) (Regulation of NMS
Stock Alternative Trading Systems) (stating that ATSs that trade NMS
stocks are increasingly operated by multi-service broker-dealers
that engage in significant brokerage and dealing activities in
addition to operation of their ATS, and that, for instance, the
broker-dealer operator of an NMS Stock ATS may also operate an OTC
market making desk or principal trading desk, or may have other
business units that actively trade NMS stocks on a principal or
agency basis in the ATS or at other trading centers).
    \212\ See Healthy Markets II at 2. See also Healthy Markets III
at 4 (recommending that the Commission modernize and mandate Rule
605 disclosure for all NMS ATS operators separate and distinct from
any affiliated broker-dealer). Additionally, a commenter to the
Concept Release on Equity Market Structure recommended that the
Commission require all ATSs and dark pools to report under Rule 605.
See KOR Group I at 3.
    \213\ 17 CFR 242.300 et seq.
    \214\ See proposed Rule 605(a)(1).
---------------------------------------------------------------------------

    Some OTC market makers, such as wholesalers, operate SDPs through
which they execute institutional orders in NMS stocks against their own
inventory.\215\ Institutional customers often communicate their trading
interest using immediate-or-cancel orders (``IOCs'') or IOIs on
SDPs.\216\ SDPs account for a nontrivial amount of trading volume
overall (for example, SDPs accounted for approximately 4% of total
trading volume in Q1 2022) and a significant portion of trading volume
executed by wholesalers.\217\ Co-mingling SDP activity with other
market center activity in Rule 605 reports may obscure differences in
execution quality or distort the general execution quality metrics for
the market center.\218\ It would be useful if SDPs reported execution
quality statistics separately from those of their associated broker-
dealer under Rule 605, so that their customers and other market
participants would be able to distinguish SDP activity from more
traditional dealer activity. Separate statistics may be particularly
useful if a dealer provides an SDP (i.e., a separate routing
destination for the execution of orders) for a particular group of
customers or type of orders. Therefore, the Commission is proposing to
require in Rule 605(a)(1) that any market center that provides a
separate routing destination that allows persons to enter orders for
execution against the bids and offers of a single dealer shall produce
a separate report pertaining only to covered orders submitted to such
routing destination.\219\
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    \215\ Wholesalers and other OTC market makers either execute
orders themselves or instead further route the orders to other
venues. An SDP always acts as the counterparty to any trade that
occurs on the SDP. See, e.g., Where Do Stocks Trade?, FINRA.org
(Dec. 3, 2021), available at https://www.finra.org/investors/insights/where_do_stocks_trade for further discussion.
    \216\ See infra note 615 and accompanying text.
    \217\ See infra notes 618 and 769 and accompanying text.
    \218\ For example, IOC orders typically have different execution
profiles than other types of orders, including lower fill rates, and
therefore including orders submitted to a market center's SDP with
its other orders will effect a downwards skew on the market center's
fill rates. See infra note 723 and accompanying text; Table 6.
    \219\ See proposed Rule 605(a)(1). To the extent that a
reporting firm produces more than one Rule 605 report, the firm
could label each report with the type of business reflected on the
report. As discussed above, the Commission proposes to expand the
scope of Rule 605 to include larger broker-dealers. See supra
section III.A. It is possible that firms would need to prepare
several Rule 605 reports if they are both a larger broker-dealer and
a market center and need to prepare more than one report as a market
center, pursuant to proposed Rule 605(a)(1).
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment on the proposal to specify that an ATS
must produce reports separately from its broker-dealer operator, and to
require that any market center that provides a separate routing
destination that allows persons to enter orders against the bids and
offers of a single dealer must produce separate reports pertaining to
orders submitted to that routing destination. In particular, the
Commission solicits comment on the following:
    13. Is it useful for an ATS to produce reports pursuant to Rule 605
that are specific to covered orders submitted to the ATS and separate
from orders submitted in connection with other trading activity of its
broker-dealer operator? Why or why not?
    14. Should a broker-dealer operating an SDP be required to produce
reports pursuant to Rule 605 that are specific to orders sent to that
routing destination and separate from other trading activity by that
dealer, as proposed? Why or why not? Do commenters agree that the
description of ``a market center that provides a separate routing
destination that allows persons to enter orders for execution against
the bids and offers of a single dealer'' accurately describes SDPs? If
not, what is a more accurate description of an SDP? Please explain.

IV. Proposed Modifications to Scope of Orders Covered and Required
Information

    Rule 605 reports group orders by both order size and order type,
and require certain standardized information for all types of orders
and additional information for market orders and marketable limit
orders. The Commission is proposing to modify the order size and order
type groupings, and is proposing to make changes to the required
information for: all types of orders; market and marketable limit

order types; and nonmarketable order types. The modifications described
below would apply to Rule 605 reports produced by all reporting
entities, including larger broker-dealers.

A. Covered Order

    The Commission proposes to expand the definition of ``covered
order'' in a number of ways.\220\ The Commission proposes to include
certain orders received outside of regular trading hours and orders
submitted with stop prices. Additionally, the Commission is addressing
whether Rule 605 requires non-exempt short sale orders to be
incorporated into Rule 605 reporting when a price test restriction is
in effect for the security.
---------------------------------------------------------------------------

    \220\ See proposed Rule 600(b)(30).
---------------------------------------------------------------------------

1. Orders Submitted Pre-Opening/Post-Closing
    Currently, Rule 605 reports are required to include only orders
received during regular trading hours \221\ at a time when an NBBO is
being disseminated. The Commission excluded orders submitted during the
pre-opening or after the close, among other order types, from the scope
of reporting because nearly all of Rule 605's statistical measures
required the availability of the NBBO at the time of order receipt as a
benchmark.\222\ At the time of adoption, the Commission stated that
there are substantial differences in the nature of the market between
regular trading hours and after-hours, and orders executed at these
times should not be blended together in the same statistics.\223\
Similarly, orders for which customers requested special handling,
including orders to be executed at a market opening price, are excluded
from Rule 605 reports because their inclusion would skew the general
statistics.\224\
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    \221\ ``Regular trading hours'' is defined as the time between
9:30 a.m. and 4:00 p.m. Eastern Time, or such other time as is set
forth in the procedures established pursuant to 17 CFR
242.605(a)(2). See 17 CFR 242.600(b)(77). The Commission is
proposing to renumber the definition of ``regular trading hours'' as
proposed Rule 600(b)(91).
    \222\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75421.
    \223\ See id., text accompanying note 39. Specifically, the
Commission stated that the average quoted spread, average effective
spread, and trade price volatility increased significantly for
certain securities after the close of regular trading hours. See id.
at n.39.
    \224\ See id. at 75421.
---------------------------------------------------------------------------

    Market participants submit limit orders prior to market open, and
these orders are not captured in current Rule 605 reports.\225\
Although NMLOs submitted outside of regular trading hours may represent
a relatively small percentage of NMLO orders overall, pre-open NMLO
submission volume includes a higher concentration of individual
investor orders.\226\ In order to provide increased visibility into
execution quality for individual investor orders, including those
submitted outside of regular trading hours, the Commission proposes to
expand the scope of Rule 605 reporting to include certain NMLOs
submitted outside of regular trading hours if they become executable
after the opening or reopening of trading during regular trading
hours.\227\ The Commission is proposing to expand the definition of
``covered order'' to include any NMLO received by a market center,
broker, or dealer outside of regular trading hours or at a time when a
national best bid and national best offer is not being disseminated
and, if executed, is executed during regular trading hours.\228\ As
discussed below, the Commission is proposing that NMLOs would be
benchmarked from the time they become executable rather than the time
of order receipt.\229\ The executability of limit orders that are
received while an NBBO is not being disseminated would be determined
with reference to the opening or re-opening price of the security. This
would allow market participants to evaluate execution performance for
NMLOs submitted outside of regular trading hours if they become
executable during regular trading hours.
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    \225\ See supra notes 123-125 and accompanying text (commenter
to 2018 Rule 606 Amendments and petitioner for rulemaking
recommending inclusion of orders submitted prior to market open).
    \226\ Analysis of CAT data found that NMLOs submitted prior to
open and designated as only able to execute during regular hours
make up only a small percentage of order flow when compared to a
sample 10-minute window of NMLOs submitted during regular hours.
However, the analysis shows that individual investor orders are
relatively concentrated in order flow submitted outside of regular
market hours. Specifically, pre-open submission volume contains a
larger percentage of individual investor shares than the sample time
window during regular trading hours, at least for off-exchange
market centers. See infra notes 672-673 and accompanying text.
    \227\ See proposed Rule 600(b)(20) (defining ``categorized by
order type'' to include executable NMLOs and executable orders
submitted with stop prices).
    \228\ See proposed Rule 600(b)(30).
    \229\ See infra section IV.B.2.(a).
---------------------------------------------------------------------------

    The Commission proposes to amend the definition of ``marketable
limit order'' to specify that the marketability of an order received
when the NBBO is not being disseminated would be determined using the
NBBO that is first disseminated after the time of order receipt.
Specifically, the Commission proposes that an order received at a time
when a national best bid and national best offer is not being
disseminated would be a marketable limit order if it is a buy order
with a limit price equal to or greater than the national best offer at
the time that the national best offer is first disseminated during
regular trading hours after the time of order receipt, or if it is a
sell order with a limit price equal to or less than the national best
bid time at the time that the national best bid is first disseminated
during regular trading hours after the time of order receipt.\230\
---------------------------------------------------------------------------

    \230\ See proposed Rule 600(b)(57).
---------------------------------------------------------------------------

    Any limit order received outside of regular trading hours or during
a trading halt that is marketable based on the first disseminated NBBO
during regular trading hours after the time of order receipt would not
be a covered order for purposes of Rule 605.\231\ The Commission's
proposed definition excludes market orders and marketable limit orders
submitted prior to open or during a trading halt because such orders
would generally execute at the opening or re-opening price. Therefore,
their inclusion in general market and marketable limit order statistics
would skew both time to execution statistics and other measures of
execution quality if aggregated with market and marketable limit orders
received during regular trading hours. While including market and
marketable limit orders submitted prior to open or during a trading
halt within the definition of covered order and requiring that the
execution statistics for these types of orders be reported as a
separate order type category would avoid the concern about skewed
statistics, it would add to the complexity of the report.
---------------------------------------------------------------------------

    \231\ For example, a market or marketable limit order that is
not received by a market center or broker-dealer during regular
trading hours at a time when the NBBO is being disseminated would
not be a covered order under proposed Rule 600(b)(30). In addition,
the covered order definition would continue to exclude any order for
which the customer requests special handling for execution,
including orders to be executed at a market opening price, see
proposed Rule 600(b)(30), and therefore market-on-open (``MOO'')
orders and limit-on-open (``LOO'') orders would be excluded.
---------------------------------------------------------------------------

    The current definition of covered order includes orders received
during regular trading hours while an NBBO is being disseminated but
before the primary listing market has disseminated its first quotations
in the security. Prior to a primary listing market disseminating its
first quotations in a security, disseminated quotations often reflect
spreads that vary significantly from the norm.\232\ To prevent such
quotations from skewing the execution quality statistics, the
Commission exempted orders from inclusion in Rule

605 reports that are received prior to the dissemination of the primary
listing market's first firm, uncrossed quotations for a trading day
(``Opening Exemption'').\233\ With respect to orders received during
regular trading hours but before the primary listing market has
disseminated its first firm, uncrossed quotation, the Commission
continues to believe, for the same reasons it granted this exemption,
that including such orders could distort execution quality statistics.
Therefore, the Commission is proposing to incorporate this exemptive
relief into the proposed definition of covered order with respect to
market or limit orders received during regular trading hours at a time
when an NBBO is being disseminated.\234\ However, pursuant to the
proposed amendments to Rule 605, NMLOs (including orders submitted with
stop prices) received outside of regular trading hours or at a time
when an NBBO is not being disseminated could be considered covered
orders, provided the NMLOs were not executed outside of regular trading
hours.\235\ Inclusion of these orders in Rule 605 reports would be
useful to market participants, even though such orders necessarily
would be received before the primary listing market has disseminated
its first firm, uncrossed quotation and thus fall within the scope of
the Opening Exemption. Because the Commission is proposing to
incorporate the exemptive relief reflected in the Opening Exemption
into the Rule with respect to market or limit orders received during
regular trading hours, but believes it would be useful to include the
NMLOs described above in Rule 605 reports, the Commission is also
proposing to rescind the Opening Exemption.\236\
---------------------------------------------------------------------------

    \232\ See Letter from Annette L. Nazareth, Director, Division of
Market Regulation to Theodore Karn, President, Market Systems, Inc.,
dated June 22, 2001 (``Market Systems Exemptive Letter'') at 2.
    \233\ See id. (exemption from reporting under Rule 11Ac1-5, the
predecessor to Rule 605). In addition to the Opening Exemption, the
Market Systems Exemptive Letter included a separate exemption from
the Rule for orders received during a time when the consolidated BBO
reflects a spread that exceeds $1 plus 5% of the midpoint of the
consolidated BBO (``Spread Width Exemption'').
    \234\ See proposed Rule 600(b)(30).
    \235\ See id.
    \236\ Because the Spread Width Exemption is not inconsistent
with the proposed amendments to Rule 605, the Commission would not
rescind the Spread Width Exemption. The Commission continues to
believe that orders received during a time when the consolidated BBO
reflects a spread that exceeds $1 plus 5% of the midpoint of the
consolidated BBO ``could be the result of potentially erroneous
quotes or of abnormal trading conditions'' and their inclusion
``could significantly affect the comparability and reliability of
the execution quality measures in market center monthly reports.''
Market Systems Exemptive Letter at 2. The Commission may adopt an
updated or modified exemption under Rule 605(b) to further refine
the exemption if, for example, additional factors could be
considered reliable indicators of orders that could be the result of
erroneous quotes or abnormal trading conditions. See 17 CFR
242.605(b).
---------------------------------------------------------------------------

    As a result of the proposed inclusion of limit orders submitted
after closing and the proposed changes to the categorization of NMLOs
described in section IV.B.2, limit orders could be received for
execution and fall within the scope of Rule 605 on a day other than the
day of order receipt. Under current Rule 605(a)(1), a reporter must
prepare a monthly report on the covered orders in NMS stocks that it
received for execution from any person. In order to address this
scenario, the Commission proposes that a covered order would be
required to be included in the report for the month in which it becomes
executable if the day of receipt and the day it initially becomes
executable occur in different calendar months. Therefore, the
Commission proposes to amend Rule 605(a)(1) to require a market center,
broker, or dealer to include in its monthly report, in addition to the
covered orders in NMS stocks that it received for execution from any
person, those covered orders in NMS stocks that it received for
execution in a prior calendar month but which remained open.\237\
---------------------------------------------------------------------------

    \237\ See proposed Rule 605(a)(1).
---------------------------------------------------------------------------

2. Stop Orders
    The definition of ``covered order'' excludes orders with special
handling instructions, including orders submitted with stop
prices.\238\ Therefore, orders submitted with stop prices are excluded
from Rule 605 reports.
---------------------------------------------------------------------------

    \238\ See 17 CFR 242.600(b)(22). Generally, a limit order
submitted with a stop price becomes a market order when the stop
price is reached. A stop order to buy becomes a market order when
the security is bid or trades at or above the specified stop price;
a stop order to sell becomes a market order when the security is
offered or trades at or below the specified stop price.
---------------------------------------------------------------------------

    The Commission preliminarily understands that market centers and
broker-dealers may differ in how they handle stop orders, and the
current lack of consistent information regarding executions of such
orders may prevent investors from comparing the execution quality of
such orders. Further, stop orders are likely to hit their stop prices,
and are often executed, during periods of price volatility or downwards
market momentum, which may entail less than favorable execution
conditions. Given the potential for variation across market centers and
broker-dealers, as well as the market conditions under which stop
orders may execute, the Commission believes including stop orders
within the scope of the Rule would benefit market participants by
allowing them to analyze these variations in execution quality.
Further, as stated by the petitioner, including stop orders within the
Rule's scope would provide a more complete view of the orders certain
broker-dealers may use when assessing the execution quality market
centers provide.\239\
---------------------------------------------------------------------------

    \239\ See supra note 123 and accompanying text.
---------------------------------------------------------------------------

    Orders submitted with stop prices are often submitted well before
their stop prices are reached. In order to provide an ``apples-to-
apples'' comparison of stop orders, the Commission is proposing to
measure the execution quality of orders submitted with stop prices from
the time their stop prices are reached, i.e., when such orders become
executable. As part of the proposed definition of ``executable,'' the
Commission is proposing to specify that executable means, for any buy
order submitted with a stop price, that the stop price is equal to or
greater than the national best bid during regular trading hours, and,
for any sell orders submitted with a stop price, that the stop price is
equal to or less than the national best offer during regular trading
hours.\240\ Incorporation of the ``executable'' concept would have two
effects. First, stop orders would be reported as part of a Rule 605
report only if they become executable.\241\ Second, the point that a
stop order first becomes executable would be used as a benchmark for
several execution quality metrics, including average effective spread,
average effective over quoted spread, average realized spread, and
average time to execution statistics.\242\ The Commission is proposing
to use the time an order becomes executable rather than the time of
order receipt based on the understanding that customers, at least for
purposes of evaluating execution quality of stop orders, would
generally expect such orders to be executed close in time to when their
stop prices are triggered. Including executable orders submitted with
stop prices within the scope of the Rule would help investors compare
the performance of market centers and broker-dealers from a point in
time when such orders could reasonably be expected to execute.
Accordingly, the Commission proposes to rescind the exclusion of orders
submitted with stop prices within the definition of covered

order.\243\ As proposed, these orders would comprise a separate order
type category to help ensure comparability of execution quality
statistics since, as stated above, stop orders more often may execute
under volatile or downward-trending market conditions.\244\
---------------------------------------------------------------------------

    \240\ See proposed Rule 600(b)(42). See also infra note 303 and
accompanying text (discussing the definition of ``executable'' as it
relates to other non-marketable order types).
    \241\ See proposed Rule 600(b)(20) (defining ``categorized by
order type'' to include a category for ``executable orders submitted
with stop prices'') (emphasis added).
    \242\ For further discussion of these metrics, see infra
sections IV.B.3, IV.B.4.(a), IV.B.4.(b), IV.B.4.(d), and IV.B.6.
    \243\ See proposed Rule 600(b)(30) (eliminating the express
carve out of orders submitted with stop prices from the definition
of ``covered order'').
    \244\ See also infra section IV.B.2.a below for more detailed
description of the changes to categorization by order type,
including a new category for executable orders with stop prices.
---------------------------------------------------------------------------

3. Non-Exempt Short Sale Orders
    Commission staff has taken the position that staff would view all
short sale orders that are not marked ``short exempt'' (``non-exempt
short sale orders'') as special handling orders and, in the staff's
view, these orders may be excluded from the definition of ``covered
order'' in Rule 600(b)(15).\245\ Non-exempt short sale orders are
subject to a price test under Rule 201 of Regulation SHO (``Rule 201'')
that sets forth a short sale circuit breaker that is triggered in
certain circumstances, after which time a price restriction will apply
to short sale orders in that security for that day and the following
day.\246\ In 2013, Commission staff stated that because in certain
circumstances non-exempt short sale orders are subject to a price test
under Rule 201, and the circumstances could vary for different
securities and different days throughout the month, staff would view
all non-exempt short sale orders as subject to special handling.\247\
---------------------------------------------------------------------------

    \245\ 17 CFR 242.600(b)(15). See ``Responses to Frequently Asked
Questions Concerning Rule 605 of Regulation NMS'' (Feb. 22, 2013)
(``2013 FAQs'').
    \246\ 17 CFR 242.201. Rule 201 generally requires trading
centers to establish, maintain, and enforce written policies and
procedures that are reasonably designed to prevent the execution or
display of a short sale at an impermissible price when a stock has
triggered a circuit breaker by experiencing a price decline of at
least ten percent in one day. Once the circuit breaker in Rule 201
has been triggered, the price test restriction will apply to short
sale orders in that security for the remainder of the day and the
following day, unless an exception applies. See 17 CFR
242.201(b)(1). One exception is for the execution or display of a
short sale order marked ``short exempt.'' See 17 CFR
242.201(b)(1)(iii)(B); 17 CFR 242.201(c).
    \247\ See 2013 FAQs.
---------------------------------------------------------------------------

    The Commission preliminarily believes that for purposes of this
proposal, not all non-exempt short sale orders should be excluded from
the scope of Rule 605 reporting. When a non-exempt short sale order is
subject to a price test restriction under Rule 201 of Regulation SHO, a
trade may only take place at least one tick above the national best
bid.\248\ These tick-sensitive orders could be ``orders to be executed
only on a particular type of tick or bid,'' which is one of the types
of special handling orders specified in the definition of covered
order.\249\ However, excluding all non-exempt short sale orders from
Rule 605 reporting, regardless of whether or not a Rule 201 price test
restriction is in effect, excludes a significant portion of short sale
orders that are not tick-sensitive. Non-exempt short sale orders do not
appear to be tick-sensitive the majority of the time because they are
infrequently subject to a price test restriction. Analysis shows that,
between April 2015 and March 2022, an event that triggered the Rule 201
circuit breaker only occurred on 1.7% of trading days for an average
stock.\250\ The analysis also found that around 18% of trigger events
occurred the day after a previous trigger event, and around 46% of
trigger events occurred within a week after a previous trigger event,
implying that these trigger events tend to be relatively infrequent and
clustered around a small number of isolated events. Moreover, because
non-exempt short sale orders are not tick sensitive when a short sale
price test is not in effect, the inclusion of these orders would not
skew execution quality statistics.\251\
---------------------------------------------------------------------------

    \248\ See 17 CFR 242.201(b)(1)(i).
    \249\ See 17 CFR 242.600(b)(22).
    \250\ See infra note 662 and accompanying text.
    \251\ In adopting Rule 605, the Commission stated that the
definition of covered order excludes orders (including short sales
that must be executed on a particular tick or bid) for which the
customer requested special handling for execution and that, if not
excluded, would skew general statistical measures of execution
quality. See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75421.
---------------------------------------------------------------------------

    In addition, including non-exempt short sale orders for which a
price test restriction is not in effect for the security within Rule
605 statistics would lead to a more complete picture of reporting
entities' execution quality, because there is evidence that short sales
compose a large segment of trades, and likely also order flow. Analysis
of short volume data shows that, between August 2009 and February 2021,
short selling constituted an average of 47.3% of trading volume for
non-financial common stocks.\252\ As discussed further below, evidence
suggests that hedge funds make up the majority of the short selling
market, while an academic working paper found that, between January
2010 and December 2016, around 10.92% of retail trading was made up of
short sales.\253\
---------------------------------------------------------------------------

    \252\ See infra note 820 and accompanying text.
    \253\ See infra notes 821-827 and accompanying text. See also
supra note 123 and accompanying text (petitioner recommending
inclusion of short sales in Rule 605).
---------------------------------------------------------------------------

    Therefore, under the proposal, non-exempt short sale orders would
not be considered special handling orders unless a price test
restriction is in effect for the security. Unless another exclusion
applies, non-exempt short sale orders would fall within the definition
of covered order and thus within the scope of Rule 605 reporting.\254\
Conversely, during a short sale price test, a short sale order not
marked ``exempt'' would be subject to special handling and would be
excluded from the definition of covered order and thus from Rule 605
reporting.
---------------------------------------------------------------------------

    \254\ If an order is otherwise subject to special handling it
would not be a covered order. See proposed Rule 600(b)(30).
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment generally on the proposed expansion of
Rule 605 reporting requirements to include certain orders received
outside of regular trading hours and orders submitted with stop prices,
as well as the proposal to incorporate non-exempt short sale orders
into Rule 605 unless a price test restriction is in effect for the
security. In particular, the Commission solicits comment on the
following:
    15. Should the security's opening or re-opening price be required
to be used as a benchmark to determine whether a limit order submitted
outside of regular trading hours is marketable or non-marketable? If
not, what would be an alternative benchmark? Please explain.
    16. Should the definition of ``covered order'' include NMLOs
submitted outside of regular trading hours or when the NBBO is not
being disseminated (i.e., limit orders that are not marketable based on
the security's opening or re-opening price)? Should market orders and
marketable limit orders submitted outside of regular trading hours or
when the NBBO is not being disseminated be included within the
definition of ``covered order''? Why or why not? Should these orders be
grouped with other market or marketable limit orders or as new order
type categories?
    17. Do commenters agree that requiring orders submitted with stop
prices to be included in Rule 605 reports, and segregating them into
their own order type category, would avoid distorting execution quality
statistics? If not, why not?
    18. Do commenters agree that periods when a short sale price test
is in effect are relatively infrequent and clustered around a small
number of isolated events? Why or why not?
    19. Should other types of orders be included within the scope of
covered orders? For example, currently intermarket sweep orders
(``ISOs'') with a limit price inferior to the NBBO may

be viewed to be subject to special handling and are excluded from Rule
605 reports. Should these or other orders types be included within the
scope of covered orders? If so, please explain any additional
requirements or conditions that would help ensure comparability of
order execution quality statistics across reporting entities. For
example, if a new order type should be within the scope of covered
orders, should it be a new order type category or be added to an
existing or proposed order type category (as described in part IV.B.2
below)?

B. Required Information

    The categories in Rule 605 reports are intended to strike a balance
between sufficient aggregation of orders to produce statistics that are
meaningful on the one hand, and sufficient differentiation of orders to
facilitate fair comparisons of execution quality across market centers
on the other hand.\255\ When adopting the Rule, the Commission stated
that its experience with the categories prescribed by the Rule may
indicate ways in which they could be improved in the future.\256\
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    \255\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75423.
    \256\ See id.
---------------------------------------------------------------------------

1. Categorization by Order Size
    Rule 600(b)(13) defines ``categorized by order size'' as dividing
orders into separate categories based on the number of shares composing
an order.\257\ For the purposes of Rule 605 reports, the largest size
category has been limited to include only orders greater than 5,000
shares and less than 10,000 shares.\258\ The Commission proposes to
amend the definition of ``categorized by order size'' to provide the
following categories for order sizes: (i) less than 1 share; (ii) odd-
lot; (iii) 1 round lot to less than 5 round lots; (iv) 5 round lots to
less than 20 round lots; (v) 20 round lots to less than 50 round lots;
(vi) 50 round lots to less than 100 round lots; and (vii) 100 round
lots or greater.\259\
---------------------------------------------------------------------------

    \257\ 17 CFR 242.600(b)(13). See supra note 40.
    \258\ See infra note 281 and accompanying text.
    \259\ See proposed Rule 600(b)(19).
---------------------------------------------------------------------------

    The reasons for these changes are discussed below.
(a) Round Lot Multiple Characterization
    Currently, Rule 605 reports utilize order size categories based on
the numbers of shares in the order (e.g., 100-499 shares and 500-1,999
shares). Historically, round lots generally have been viewed as groups
of 100 shares, and current Rule 605 reflects this.
    In recent years, the prices of some of the most widely held stocks
have increased significantly,\260\ and differences in price affect how
stocks trade. For example, a 100-share order of a $1,200 stock would
likely have very different execution quality statistics than a 100-
share order of a $10 stock because more capital is at risk in the
former. But under current Rule 605, these orders are reported in the
same order size category.
---------------------------------------------------------------------------

    \260\ See supra note 16.
---------------------------------------------------------------------------

    Further, many of Rule 605's execution quality measures rely on the
NBBO as a benchmark.\261\ In adopting the Market Data Infrastructure
rules (the ``MDI Rules''), the Commission stated that the new
definition of round lot will improve certain Rule 605 statistics. The
Commission stated that the definition of round lot would allow
additional orders of meaningful size to determine the NBBO, and,
therefore, the execution quality and price improvement statistics
required under Rule 605 would be based upon an NBBO that the Commission
believes is a more meaningful benchmark for these statistics.\262\ As a
result of the new round lot definition,\263\ the NBBO in higher-priced
NMS stocks is based on smaller, potentially better-priced orders.\264\
The newly adopted definition of round lot is tiered based on the NMS
stock's prior month closing price.\265\ Upon implementation, the NBBO
will be calculated based on the new definition of round lot.\266\
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    \261\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75421
(stating that nearly all of the statistical measures included in the
Rule depend on the availability of a consolidated BBO at the time of
order receipt).
    \262\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at
18621.
    \263\ Specifically, the Commission re-defined ``round lot'' as:
100 shares for stocks priced at $250 or less, 40 shares for stocks
priced at $250.01 to $1,000, ten shares for stocks priced at
$1,000.01 to $10,000, and one share for stocks priced at $10,000.01
or more. See 17 CFR 242.600(b)(82).
    \264\ As described in the MDI Adopting Release, orders currently
defined as odd-lots often reflect superior pricing. See MDI Adopting
Release, 86 FR 18596 (Apr. 9, 2021) at 18616 (describing analysis
that made similar findings using data from May of 2020). A recent
working paper analyzed the effect of the new round lot definition
and found that for sample stocks in the 40-share round lot category
the incidence of better-priced odd-lot quotes fell by approximately
4.8% and for sample stocks in the 10-share round lot category the
incidence fell by approximately 22%. See Bartlett, et al. at 5.
    \265\ The round lot definition, together with the increased
availability of better priced odd-lot information, was designed to
provide investors with valuable information about the best prices
available and help to facilitate more informed order routing
decisions and the best execution of investor orders. See MDI
Adopting Release, 86 FR 18596 (Apr. 9, 2021) at 18602.
    \266\ See id. The Commission is separately proposing to
accelerate the implementation of the round lot definition. See
Securities Exchange Act Release No. 96494 (Dec. 14, 2022) (File No.
S7-30-22) (Regulation NMS: Minimum Pricing Increments, Access Fees,
and Transparency of Better Priced Orders) (``Minimum Pricing
Increments Proposal''). The Commission established a phased
transition plan for the implementation of the MDI Rules, which
provided for the implementation of the round lot definition as part
of the final phase of implementation. See MDI Adopting Release, 86
FR 18596 (Apr. 9, 2021) at 18698-18701. At a minimum, round lot
implementation will be two years after the Commission's approval of
the plan amendment(s) required by Rule 614(e). Until the round lot
definition adopted pursuant to the MDI Rules is implemented, round
lots continue to be defined in exchange rules. See id. at 16738. For
most NMS stocks, a round lot is defined as 100 shares. According to
TAQ Data, as of April 2022, eleven stocks had a round lot size other
than 100. Nine stocks had a round lot of ten and two stocks had a
round lot of one.
---------------------------------------------------------------------------

    The Commission proposes to modify the order size categories to
utilize the new definition of round lot and include odd-lots,
fractional shares, and larger order sizes. Because the new definition
of round lot incorporates the current market price of the security, the
Commission believes that notional buckets and caps suggested by
commenters are not necessary.\267\ The proposed order size categories
would correspond to the existing share-based order size categories to
reflect that round lots historically had been viewed as groups of 100
shares. For example, the category for 100 to 499 shares would instead
be 1 round lot to less than 5 round lots. Because the current exemptive
relief \268\ effectively caps the existing order size category of 5,000
or more shares to 9,999 shares, the second largest order size category
would be 50 round lots to less than 100 round lots. The Commission is
also proposing to add new order size categories for odd-lots,
fractional shares, and larger-sized orders as discussed below.\269\
---------------------------------------------------------------------------

    \267\ See supra notes 128-132 and accompanying text.
    \268\ See Large Order Exemptive Letter.
    \269\ See infra section IV.B.1.(b)(1) and (2). The largest order
size category would be 100 round lots or more. See proposed Rule
600(b)(19)(vii).
---------------------------------------------------------------------------

    Additionally, modifying the order size categories to reflect the
number of round lots would better allow Rule 605 reports to group
orders with similar characteristics and notional values, and thereby
provide more useful execution quality information. In particular, with
the NBBO to be calculated based on the new definition of round lot,
updating the order size categories to be based on round lots should
allow for better comparisons of statistics that rely on the NBBO as a
benchmark, including price improvement statistics. The NBBO is used as
a benchmark throughout Rule 605 to determine marketability of orders,
effective and realized spread, and price improvement/dis-improvement
statistics. If the order size category were not based on the round lot
size for that stock, Rule 605 statistics

would show, for example, larger amounts of price improvement for high-
priced stocks based on the presumably wider NBBO. However, the
statistics would still be comparable across market centers and broker-
dealers since they would all be utilizing the same benchmark.
(b) New Sizes Within Scope
(1) Odd-Lots and Orders Less Than a Share
    Currently, Rule 605 does not require reporting for orders smaller
than 100 shares, including odd-lot orders or fractional share orders
(i.e., orders for less than one share).\270\ Commenters suggested
amending the scope of the Rule to include odd-lot orders.\271\ One
commenter offering suggestions regarding enhancements to Rule 605 and
Rule 606 from a retail perspective stated that, while ``odd lots may
not represent a high percentage of executed share volume, they do
represent a high percentage of incoming executed order volume.'' \272\
Market participants stated that odd-lots make up a majority of all
trades.\273\ Particularly as stock prices have risen,\274\ odd-lots
have come to represent an increased percentage of orders.\275\ Analysis
using TAQ data found that odd-lots increased from around 15% of trades
in January 2014 to more than 55% of trades in March 2022.\276\ An
analysis of data from the SEC's MIDAS analytics tool shows that, in Q1
2022, odd-lots made up 81.2% of on-exchange trades (40% of volume) for
stocks in the highest price decile and 25% of on-exchange trades (2.72%
of volume) for stocks in the lowest price decile.\277\ Based on changes
the Commission has observed in the market, the observations of
commenters and other market participants, as well as its analysis, the
Commission preliminarily believes the exclusion of order sizes smaller
than 100 shares excludes an important segment of order flow. Therefore,
the Commission is proposing a new order size category for odd-lots.
---------------------------------------------------------------------------

    \270\ There are a variety of circumstances in which an order for
an NMS stock submitted to a broker-dealer results in a fractional
share. Examples include customer orders to buy: (1) a fraction of a
share (e.g., order to buy 0.5 shares); (2) shares with a fractional
component (e.g., order to buy 10.5 shares); and (3) a dollar amount
that leads to the purchase of a fractional share (e.g., order to buy
$1,223 worth of XYZ stock at $50 per share or 24.46 shares).
    \271\ See Healthy Markets IV (discussing recommended reforms to
Rule 605 and Rule 606) at 3; IHS Markit Letter (responding to the
2018 Rule 606 Amendments) at 5, text accompanying n.15; EMSAC III
(recommendations regarding modifications to Rule 605 and Rule 606)
at 2.
    \272\ FIF I at 1. The commenter also stated that retail
investors account for a notable portion of odd-lot trades. See FIF I
at 1. Later, the commenter stated that odd-lots represent close to
50% of self-directed orders. See FIF III at 4.
    \273\ See ``Effective Spreads, Payment for Order Flow, and Price
Improvement'', RBC Capital Markets (Mar. 2022) at 5. Cf., Virtu
Petition at 4, n.13 and accompanying text (odd-lots make up 70% of
all trades in high priced stocks).
    \274\ See supra note 16.
    \275\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at
18616 (describing analyses confirming observations made in the MDI
Proposing Release that a significant proportion of quotation and
trading activity occurs in odd-lots, particularly for frequently
traded, high-priced stocks).
    \276\ See supra note 91.
    \277\ See dataset ``Summary Metrics by Decile and Quartile''
available at https://www.sec.gov/marketstructure/downloads.html.
---------------------------------------------------------------------------

    Similarly, fractional share orders have become increasingly popular
with individual investors as certain stock prices have risen and
certain broker-dealers have made fractional shares available to their
customers.\278\ Analysis of CAT data from March 2022 found that
executed orders with a fractional share component originated from over
5 million unique accounts. Orders for less than a single share
represent a significant portion of fractional orders executions.\279\
In order to capture execution quality information for these orders, the
Commission is proposing a new size category for orders less than a
share. To the extent an order with a fractional share component is for
more than a single share, it would not be included in this size
category to help ensure comparability of order execution quality
statistics.\280\
---------------------------------------------------------------------------

    \278\ See infra note 642. Orders with a fractional share
component may be executed in a number of ways: a broker-dealer may
(i) internalize the entire order as principal using its own
inventory; (ii) create a representative order that rounds up the
order to the nearest whole number using its own inventory and route
it for execution, then fill the original customer's fractional order
after the representative order is executed; (iii) internalize the
fractional component of the order (e.g., 0.5 shares) and send the
whole share component (e.g., 2 shares) away for execution; or (iv)
aggregate different fractional orders to make one large
representative order and then route it for execution, and fill the
original fractional orders post-execution.
    \279\ Analysis of CAT data from March 2022 found that almost 68%
percent (31.67 million) of the 46.63 million executed orders with a
fractional component were for less than a single share. See infra
note 644 and accompanying text.
    \280\ For example, a covered order for 10.5 shares in a security
with a 100-share round lot would be categorized as an odd-lot. See
proposed Rule 600(b)(19).
---------------------------------------------------------------------------

(2) Larger-Sized Orders
    Currently, Rule 605 does not require reports that include orders
with a size of 10,000 shares or greater pursuant to exemptive relief
provided by the Commission in 2001.\281\ In granting the exemption, the
Commission stated that a primary objective of the Rule is to ``generate
statistical measures of execution quality that provide a fair and
useful basis for comparisons among different market centers,'' and
reasoned that the exclusion of such orders would help assure greater
comparability of statistics in the largest size category of 5,000 or
more shares.\282\
---------------------------------------------------------------------------

    \281\ See Large Order Exemptive Letter.
    \282\ Id. at 2.
---------------------------------------------------------------------------

    Commenters have advocated for the Commission to include larger-
sized orders in Rule 605 reports. One commenter responding to the 2018
Rule 606 Amendments stated that the exclusion of certain types of
marketable limit orders, including those of 10,000 shares or more,
undermines the utility of Rule 605 reports.\283\ The entity that
petitioned for rulemaking in this area stated that because of the
variation in stock prices (e.g., a 5,000 share order with a notional
value of $17.3 million and a 5,000 share order with a notional value of
$76,000), categorizing orders by share size is no longer
effective.\284\ The petitioner recommended the Commission include both
odd-lots and orders of 10,000 or more shares, and add notional size
categories to the metrics, with a notional cap.\285\
---------------------------------------------------------------------------

    \283\ See IHS Markit Letter at 34. See also KOR Group I at 4
(responding to the Commission's Concept Release on Equity Market
Structure, suggesting elimination of a share size cap on Rule 605
reporting).
    \284\ See Virtu Petition at 4-5.
    \285\ See id. at 5.
---------------------------------------------------------------------------

    The Commission proposes to rescind the exemptive relief for orders
of 10,000 or more shares and include these orders within the scope of
Rule 605 reports. The Commission believes that including such larger-
sized orders would improve execution quality statistics in Rule 605
reports by including information about an important segment of order
flow. Analysis of TAQ data shows that the number of shares associated
with trades that were for 10,000 or more shares as a percent of total
executed shares was 11.3% in March 2022.\286\ In addition, analysis of
the distribution of NMLO sizes in order submission data from MIDAS for
the month of March 2022, shows that, while NMLOs of 10,000 or more
shares made up only 0.09% of order flow in terms of number of orders,
they made up nearly 7.8% of order flow in terms of share volume.\287\
Although

the Commission had concerns about the comparability of execution
quality statistics for larger-sized orders when adopting the Rule, the
Commission expects that the proposed inclusion of two additional
categories for larger order sizes \288\ (i.e., corresponding to 5,000-
9,999 shares and 10,000 or more shares in the case of a 100 share round
lot) would allow for better comparability of statistics. The proposed
amended definition of ``categorized by order size'' that aligns with
the new definition of round lot would enhance such comparability.
---------------------------------------------------------------------------

    \286\ See infra note 649 and accompanying text. The percentage
of larger-sized trades has fluctuated over time, in part due to
broker-dealers' use of Smart Order Routers (``SORs'') to break up
their institutional investor customers' large parent orders into
smaller-sized child orders along with other market changes, such as
the overall increase in stock prices. The rate of larger-sized
trades has declined from a rate of more than 25% in late 2003, but
has increased from 6.7% in August 2011. See id.
    \287\ See infra Figure 4. While larger-sized orders comprise a
non-negligible percent of order flow, some or possibly most of these
large orders may be not held to the market, in which case they would
not be included in Rule 605 reports even without the exemptive
relief.
    \288\ See supra text following note 267, notes 268-269 and
accompanying text. The two largest buckets in proposed Rule
600(b)(19)(vi) and (vii) group together orders of between 50 round
lots to less than 100 round lots and orders of 100 round lots or
greater, respectively.
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment on the proposed changes to the
definition of ``categorized by order size.'' In particular, the
Commission solicits comment on the following:
    20. Should fractional share orders be required to be included in
Rule 605 reports? Why or why not?
    21. Should odd-lot orders be required to be included in Rule 605
reports? Why or why not?
    22. Should orders of 10,000 or more shares be required to be
included in Rule 605 reports? Why or why not? Do commenters believe
that including such orders would skew the statistics for the largest
order size category? Would commenters support one or more notional caps
for share size buckets (such as 10,000 shares or greater), and if so,
why? Please explain and provide data.
    23. Do commenters agree with the proposed modification of order
size categories? If not, why not? Would categories based on number of
shares--or the following categories based exclusively on notional
value: $1 to less than $10,000.00, $10,000.01 to less than $25,000.00,
$25,000 to less than $100,000, and over $100,000--be more useful, less
burdensome, or more cost-effective as either a permanent or an
alternative measure until such time as the new definition of round lot
has been implemented? Do commenters recommend different size or
notional value categories? If so, please describe such categories.
2. Categorization by Order Type
    Under Rule 605(a)(1), monthly reports are categorized by order
type. Currently, ``categorized by order type'' means dividing orders
into separate categories for market orders, marketable limit orders,
inside-the-quote limit orders, at-the-quote limit orders, and near-the-
quote limit orders.\289\ As discussed below, the Commission proposes to
modify this definition to mean dividing orders into separate categories
for market orders, marketable limit orders (excluding immediate-or-
cancel orders), marketable immediate-or-cancel orders, beyond-the-
midpoint limit orders, executable non-marketable limit orders
(excluding beyond-the midpoint limit orders and orders submitted with
stop prices), and executable orders submitted with stop prices.\290\
The following compares the order type categories under the current Rule
to the proposed new order type categories:
---------------------------------------------------------------------------

    \289\ See 17 CFR 242.600(b)(14). The Commission is proposing to
renumber the definition of ``categorized by order type'' as proposed
Rule 600(b)(20).
    \290\ See proposed Rule 600(b)(20). Market orders and marketable
limit orders are existing categories under the current definition of
``categorized by order type.'' See 17 CFR 242.600(b)(14).

------------------------------------------------------------------------
      Existing order type category       Order type category as proposed
------------------------------------------------------------------------
Market.................................  Market, Marketable IOC.
Marketable Limit.......................  Marketable Limit, Marketable
                                          IOC.
Inside-the-Quote Limit.................  Beyond-the-Midpoint Limit,
                                          Executable NMLO.
At-the-Quote Limit.....................  Executable NMLO.
Near-the-Quote Limit...................  Executable NMLO.\291\
[Not Included] \292\...................  Executable NMLO, Executable
                                          Stop.
------------------------------------------------------------------------

    The Commission believes that the proposed categories will improve
execution quality information within Rule 605 reports and better group
comparable orders.
---------------------------------------------------------------------------

    \291\ Under the proposal, near-the-quote limit orders would fall
outside the scope of the order type categories if they do not become
executable. See infra section IV.B.2.(a) for discussion of the
definition of executable.
    \292\ The following orders fall outside the scope of the current
order type categories: (1) non-marketable buy orders and non-
marketable sell orders with limit prices that are more than $0.10
lower than the national best bid or higher than the national best
offer, respectively, at the time of order receipt; and (2) stop
orders. Under the proposal, such orders, if they become executable,
would fall within the order types for executable NMLOs or executable
stop orders. However, these orders would fall outside the scope of
the order type categories as proposed if they do not become
executable.
---------------------------------------------------------------------------

(a) NMLOs and Orders Submitted With Stop Prices
    The Commission proposes to eliminate the three separate categories
for types of NMLOs (i.e., inside-the-quote limit orders, at-the-quote
limit orders, and near-the-quote limit orders) and to replace them with
new categories: non-marketable limit orders that become executable
(excluding orders submitted with stop prices and beyond-the-midpoint
limit orders) and beyond-the-midpoint limit orders.\293\ Current Rule
605 reports group NMLOs as inside-the-quote, at-the-quote, and near-
the-quote, and exclude NMLOs that are more than ten cents away from the
quote at the time of order receipt.\294\ When proposing to exclude
NMLOs with a limit price more than ten cents away from the NBBO, the
Commission reasoned that the execution quality statistics for these
types of orders may be less meaningful because executions of these
types of orders depend more on the order's limit price and price
movement in the market than on handling by the market center.\295\
---------------------------------------------------------------------------

    \293\ See supra text accompanying note 290. Beyond-the-midpoint
limit orders, discussed in more detail in section IV.B.2.(b) infra,
are a type of NMLO that is priced more aggressively than the
midpoint.
    \294\ See 17 CFR 242.600(b)(14). Inside-the-quote limit order,
at-the-quote limit order, and near-the-quote limit order mean non-
marketable buy orders with limit prices that are, respectively,
higher than, equal to, and lower by $0.10 or less than the national
best bid at the time of order receipt, and non-marketable sell
orders with limit prices that are, respectively, lower than, equal
to, and higher by $0.10 or less than the national best offer at the
time of order receipt. See 17 CFR 242.600(b)(37). The Commission is
proposing to eliminate this definition of inside-the-quote limit
order, at-the-quote limit order, and near-the-quote limit order.
These defined terms would no longer be used with the changes to
order type categories proposed herein. The proposed new order type
categories for NMLOs would focus on whether a NMLO becomes
executable rather than on how a NMLO's limit price compares to the
quote, as discussed further below.
    \295\ See Proposing Release, 65 FR 48406 (Aug. 8, 2000) at
48414.
---------------------------------------------------------------------------

    Commenters supported including NMLOs further away from the quote in

Rule 605 reports but noted the difficulty of providing meaningful
execution quality statistics for such orders. One commenter to the 2018
Rule 606 Amendments observed: ``With non-marketable limit orders, what
matters is the skill of the broker in choosing the venue with the
highest probability of filling the order. Measuring execution quality
is difficult in that some limit orders are placed far away from the
NBBO and are unlikely to be filled. Others are cancelled after varying
lengths of time for any number of reasons. It may be difficult to tell
whether a cancelled order would have been filled later had it not been
cancelled.'' \296\ In offering suggestions to modernize Rule 605,
another commenter recommended including an additional ``away-from-the-
quote'' bucket for NMLOs, which the commenter stated would capture a
significantly greater number of self-directed orders from individual
investors.\297\
---------------------------------------------------------------------------

    \296\ Angel Letter at 7. See also Blackrock Letter at 3 (stating
in response to the Commission's Concept Release on Equity Market
Structure that revised Rule 605 disclosures should provide greater
transparency on NMLOs).
    \297\ See FIF III at 4.
---------------------------------------------------------------------------

    The Commission recognizes that more meaningful measures of
execution quality for NMLOs, as well as orders submitted with stop
prices,\298\ would assist investors in measuring execution quality. A
large number of NMLOs are not captured because they are more than ten
cents away from the NBBO or submitted outside of regular market
hours.\299\ The Commission believes that it would be informative to
calculate execution quality statistics for those NMLOs and orders
submitted with a stop price that become ``executable.'' \300\ Because
execution quality for orders placed further away from the quote depends
heavily on prevailing market conditions,\301\ adding the concept of
``executable'' allows execution quality statistics to be measured from
a point where an order could be executed.\302\
---------------------------------------------------------------------------

    \298\ See supra section IV.A.2.
    \299\ An analysis of 80 stocks in March 2022 finds that away-
from-the-quote orders (i.e., NMLOs that are more than $0.10 away
from the NBBO) represent 23.8% of non-marketable share volume). See
infra section VII.C.2.(c)(1).
    \300\ As discussed above, the Commission is proposing to modify
the definition of ``covered order'' to include NMLOs submitted
outside of regular trading hours or when an NBBO is not being
disseminated and orders submitted with a stop price. See supra
sections IV.A.1 and IV.A.2.
    \301\ For example, even if a limit order is placed $0.05 away
from the quote, if the market moves away and only 25 minutes later
returns to a price level where the limit order executes, the time to
execution for that order is less reflective of execution quality
than of prevailing market conditions.
    \302\ As discussed above (see supra section IV.A.2.), the
Commission also believes it would be helpful to investors to measure
the execution quality of orders submitted with stop prices.
Therefore, it is proposing to add a separate order type category of
``executable orders submitted with stop prices'' to the definition
of ``categorized by order type.'' See proposed Rule 600(b)(20).
---------------------------------------------------------------------------

    As proposed, Rule 605 statistics would be collected for
``executable'' NMLOs. The Commission proposes the following definition
of ``executable'' for NMLOs (other than orders submitted with stop
prices): for any non-marketable buy order (excluding orders submitted
with stop prices), executable means that the limit price is equal to or
greater than the national best bid during regular trading hours, and,
for any non-marketable sell order (excluding orders submitted with stop
prices), that the limit price is equal to or less than the national
best offer during regular trading hours.\303\ This definition is
designed to capture NMLOs (including beyond-the-midpoint limit orders)
that, during their time in force, ``touched'' a price where they could
have been executed. For example, if the market is $10.05 x $10.10, a
limit order to buy at $10.02 would not be an executable NMLO unless the
market moved to a price at which that limit order could be executed--
for example, $10.02 x $10.06. As is the case for orders submitted with
stop prices, incorporation of the ``executable'' concept would have two
effects. First, NMLOs would only be reported as part of a Rule 605
report if they become executable during regular trading hours.\304\
Because there are substantial differences in the nature of the market
between regular trading hours and after-hours, this would provide a
basis for more comparable execution quality measures. Second, the point
that a NMLO first becomes executable would be used as an input for
several execution quality metrics: average time to execution
statistics,\305\ average effective spread,\306\ average percentage
effective and realized spread,\307\ and average effective over quoted
spread.\308\ The Commission is proposing to use the time an order first
becomes executable rather than the time of order receipt in order to
measure execution quality from a point in time when a liquidity-
providing order is priced at or better than the quote. Including
executable NMLOs within the scope of the Rule would help investors
compare the performance of market centers and broker-dealers from a
point in time when such orders could reasonably be expected to execute
and provides a more informative measure of execution quality by
controlling for market conditions.
---------------------------------------------------------------------------

    \303\ See proposed Rule 600(b)(42). See also supra note 240 and
accompanying text (discussing the definition of ``executable'' as it
relates to orders submitted with stop prices).
    \304\ See proposed Rule 600(b)(20) (defining ``categorized by
order type'' to include a category for ``executable non-marketable
limit orders'') (emphasis added).
    \305\ See infra section IV.B.3.
    \306\ See infra section IV.B.4.(b).
    \307\ See infra section IV.B.4.(c).
    \308\ See infra section IV.B.4.(d).
---------------------------------------------------------------------------

(b) Beyond-the-Midpoint Limit Orders
    Under current Rule 605, inside-the-quote limit orders are a
separate order type category.\309\ Because they are not a marketable
order type (i.e., they do not fully cross the spread),\310\ current
Rule 605 does not require price improvement statistics to be calculated
for inside-the-quote limit orders.\311\
---------------------------------------------------------------------------

    \309\ See 17 CFR 242.600(b)(14).
    \310\ Cf. id. (marketable limit orders separated from inside-
the-quote limit orders).
    \311\ Rule 605(a)(1)(i) specifies execution quality statistics
to be provided for all order types, and Rule 605(a)(1)(ii) specifies
execution quality statistics to be provided for marketable order
types. See 17 CFR 242.605(a)(1)(i) and (ii). For a discussion of the
changes that the Commission is proposing to make to the execution
quality statistics to be provided for all order types and for
marketable order types, see infra sections IV.B.4 and IV.B.5,
respectively. The Commission is also proposing to require additional
execution quality statistics to be provided for non-marketable order
types. See infra section IV.B.6.
---------------------------------------------------------------------------

    Limit orders priced more aggressively than the midpoint may have
different execution quality statistics than other types of NMLOs
because market centers and broker-dealers may treat beyond-the-midpoint
limit orders as marketable limit orders in certain circumstances and as
NMLOs in others. An analysis of a sample of orders executed by the six
most active wholesalers for the period of Q1 2022 \312\ shows that
beyond-the-midpoint NMLOs executed by wholesalers tend to have much
faster time-to-executions and higher fill rates than other types of
inside-the-quote NMLOs, and are also somewhat more likely to be given
price improvement, indicating wholesalers often treat limit orders
priced more aggressively than the midpoint more like marketable limit
orders and may offer price improvement to these orders.\313\
---------------------------------------------------------------------------

    \312\ See infra note 689 and accompanying text; Table 5.
    \313\ See infra section VII.C.2.(c)(3).
---------------------------------------------------------------------------

    The Commission is proposing to label those limit orders priced more
aggressively than the midpoint as ``beyond-the-midpoint limit orders.''
Because beyond-the-midpoint limit orders are a type of NMLO and could
therefore be covered orders even if received outside of regular trading
hours

or during a time when the NBBO is not being disseminated, the
Commission is proposing to define a beyond-the-midpoint limit order
with respect to orders received both when an NBBO is being disseminated
and when it is not. If the NBBO is being disseminated, ``beyond-the-
midpoint limit order'' would mean: (i) any non-marketable buy order
with a limit price that is higher than the midpoint of the national
best bid and national best offer at the time of order receipt, or (ii)
any non-marketable sell order with a limit price that is lower than the
midpoint of the national best bid and national best offer at the time
of order receipt.\314\ If the NBBO is not being disseminated, it would
mean: (i) any non-marketable buy order with a limit price that is
higher than the midpoint of the national best bid and national best
offer at the time that the national best bid and national best offer is
first disseminated after the time of order receipt, or (ii) any non-
marketable sell order with a limit price that is lower than the
midpoint of the national best bid and national best offer at the time
that the national best bid and national best offer is first
disseminated after the time of order receipt.\315\
---------------------------------------------------------------------------

    \314\ See proposed Rule 600(b)(16). See also proposed Rule
600(b)(20) (modifying the definition of ``categorization by order
type'' to add beyond-the-midpoint limit orders to the list of order
types).
    \315\ See proposed Rule 600(b)(16).
---------------------------------------------------------------------------

    In addition, the Commission proposes to require that the execution
quality statistics for beyond-the-midpoint limit orders include the
additional information required of both marketable \316\ and non-
marketable \317\ order types. If beyond-the-midpoint orders instead
were treated solely as a non-marketable order type, similar to inside-
the-quote limit orders, then market centers and broker-dealers would
not be required to provide the types of execution quality statistics
specific to marketable orders for these orders. Because beyond-the-
midpoint limit orders may participate in the proposed qualified
auctions \318\ or be treated as marketable orders in certain
circumstances, it would be informative if reporting entities provided
these types of statistics for these orders, especially given the
increased likelihood that these types of orders may receive price
improvement in certain circumstances.\319\ However, because beyond-the-
midpoint limit orders may execute more like inside-the-quote limit
orders in other circumstances, the additional statistics required for
the non-marketable order types would also be required to be reported
for beyond-the-midpoint limit orders. This would facilitate comparisons
of beyond-the-midpoint limit orders with other types of NMLOs.
Therefore, the Commission proposes to add beyond-the-midpoint limit
orders to both the list of marketable order categories and the list of
non-marketable order categories for which those execution quality
statistics are required, as provided in proposed Rules 605(a)(1)(ii)
and 605(a)(1)(iii), respectively.
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    \316\ See proposed Rule 605(a)(1)(ii) (specifying additional
required information for market orders, marketable limit orders,
marketable immediate-or-cancel orders, and beyond-the-midpoint limit
orders).
    \317\ See proposed Rule 605(a)(1)(iii) (specifying additional
required information for beyond-the-midpoint limit orders,
executable non-marketable limit orders, and executable orders with
stop prices).
    \318\ See supra section III.B.
    \319\ See infra note 689 and accompanying text; Table 5.
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    Unlike market, marketable limit, and marketable IOC orders, beyond-
the-midpoint limit orders may be covered orders even if received
outside of regular trading hours or when an NBBO is not being
disseminated.\320\ However, because beyond-the-midpoint limit orders
are priced more aggressively than the midpoint of the NBBO when
received, they are by definition executable from the time of order
receipt unless submitted prior to market open or during a trading halt.
In that case, they would be executable at the time the NBBO is first
disseminated after the time of order receipt during regular trading
hours. Therefore, the Commission proposes to modify the time to order
execution statistics to state, with respect to beyond-the-midpoint
limit orders, these time-based statistics should be measured from the
time such orders become executable to the time of order execution.\321\
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    \320\ The time-based execution quality statistics that would be
required for marketable order types other than beyond-the-midpoint
limit orders would be measured from the time of order receipt to the
time of order execution. See proposed Rule 605(a)(1)(ii)(C), (D),
(E), (G), (H), (I), (L), (M), and (N).
    \321\ See proposed Rule 605(a)(1)(ii)(C), (D), (E), (G), (H),
(I), (L), (M), and (N).
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(c) Marketable IOCs
    Rule 605 reports group marketable IOCs together with other
marketable orders.\322\ The Commission included IOC orders in the scope
of the Rule, reasoning that IOC orders are functionally the same as
orders that are submitted and cancelled almost immediately
thereafter.\323\
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    \322\ Rule 600(b)(14) defines ``categorized by order type'' and
includes ``marketable limit orders'' within the listed categories of
order types. See 17 CFR 242.600(b)(14).
    \323\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75421.
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    The EMSAC, as well as commenters on the 2010 Equity Market
Structure Concept Release and the 2018 Rule 606 Amendments, suggested
separating IOCs within the categorization by order type.\324\ While the
Commission continues to believe that information regarding IOCs is
useful to measure execution quality, marketable IOCs may have a
different submitter profile (typically, institutional investors) \325\
and different execution quality characteristics.\326\ Analysis of Tick
Size Pilot data indicates that IOCs typically have much lower fill
rates than other market and marketable limit orders (on average 3.22%
as compared to 15.94%), particularly with respect to larger-sized
orders and orders received by wholesalers.\327\ This data also shows
that IOCs make up more than 90% of executed market and marketable share
volume.\328\ As a result, including them with other market and
marketable limit orders may be skewing fill rates downwards, especially
for larger-sized orders and orders handled by wholesalers.
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    \324\ See IHS Markit Letter at 11; EMSAC III at 2; FIF I at 2.
    \325\ Analysis of CAT data of retail orders received at broker-
dealers with 10,000 or more individual accounts during June 2021
indicates that approximately only 0.02% of retail orders are
submitted with an IOC instruction. See infra note 722 and
accompanying text.
    \326\ In offering recommendations to modernize Rule 605, a
commenter who supported separating IOC orders within Rule 605
statistics stated that such orders have a different profile and can
skew statistics. See FIF III at 5.
    \327\ See infra note 723 and accompanying text; Table 6. This
analysis shows that wholesaler fill rates range between 60% to 90%
for non-IOC orders, but are mostly below 30% for IOC orders, and
even smaller with respect to larger order sizes. See id.
    \328\ See infra note 723 and accompanying text; Table 6.
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    To address this issue, the Commission proposes to assign marketable
IOCs to a separate order type category so that they no longer would be
commingled with other order types. Specifically, the Commission
proposes to add a category for ``marketable immediate-or-cancel
orders'' and indicate that the category for ``marketable limit orders''
excludes IOC orders.\329\ Rule 605(a)(1)(i) and (ii) specify execution
quality statistics required for enumerated categories of orders,
including marketable limit orders. The Commission proposes to add
marketable immediate-or-cancel orders to the enumerated order
categories for those sets of execution quality statistics so that the
Rule would continue to require the same information for marketable IOCs
that is

required for other marketable order types.\330\
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    \329\ See proposed Rule 600(b)(20).
    \330\ See proposed Rule 605(a)(i) and (ii). Additional
information that is currently calculated for market and marketable
limit orders (e.g., price improvement statistics) would continue to
be calculated for marketable IOCs.
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Request for Comments
    The Commission seeks comment on the proposed changes to the
definition of ``categorized by order type.'' In particular, the
Commission solicits comment on the following:
    24. Should the proposed concept of executability be required to be
used as a benchmark for NMLO and stop order statistics? Why or why not?
Is another benchmark more appropriate, and if so why? Please explain
and provide data, if available.
    25. Should beyond-the-midpoint limit orders have different
execution quality statistics than other types of NMLOs or marketable
limit orders? Why or why not?
    26. Should marketable IOCs be required to be broken out into a
separate order type category? Why or why not? Do commenters agree that
marketable IOCs may have a different submitter profile and different
execution quality characteristics than market orders and marketable
limit orders? Please explain.
3. Timestamp Conventions
    Rule 605 reports are required to include information on the number
of shares of covered orders executed within certain timeframes,
measured by seconds after the time of order receipt.\331\ Rule 600
definitions for ``time of order execution'' and ``time of order
receipt'' require that time be measured ``to the second.'' \332\
Further, the smallest time-to-execution category in current Rule 605
includes those covered orders executed from 0 to 9 seconds after the
time of order receipt. The Commission proposes to update the timestamp
conventions used for the time of order receipt \333\ and time of order
execution \334\ definitions to require that such times be measured ``in
increments of a millisecond or finer.'' The Commission also is
proposing to specify that the average time-to-execution statistics
currently required for marketable order types should be expressed in
increments of a millisecond or finer.\335\ Similarly, the proposed
definition of ``executable'' provides that the time an order becomes
executable ``shall be measured in increments of a millisecond or
finer.'' \336\ The equities markets now operate at much greater speeds
than they did in 2000 when timestamps were adopted with second
granularity. For example, an analysis of data from the SEC's MIDAS
analytics tool shows that in Q1 2022 more than half (51.6%) of on-
exchange NMLOs executed in less than one second in large market cap
stocks.\337\ Changes in technology have made more granular timestamp
information more cost effective and practicable and timestamp
information ``in increments of a millisecond or finer'' would result in
more informative reports.
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    \331\ See 17 CFR 242.605(a)(1)(i)(F)-(J).
    \332\ See 17 CFR 242.600(b)(91) and (92). The Commission is
proposing to renumber the definitions of ``time of order execution''
and ``time of order receipt'' as proposed Rule 600(b)(108) and
(109), respectively.
    \333\ See proposed Rule 600(b)(109).
    \334\ See proposed Rule 600(b)(108).
    \335\ For shares executed with price improvement, executed at
the quote, or executed outside the quote, respectively, see proposed
Rules 605(a)(1)(ii)(C), 605(a)(1)(ii)(G), and 605(a)(1)(ii)(L).
Current Rule 605 does not specify a level of granularity for the
existing time-to-execution statistics. However, the Plan requires
these fields to be expressed in number of seconds and carried out to
one decimal place. See Rule 605 NMS Plan section VI.a(21), (23), and
(26).
    \336\ Proposed Rule 600(b)(42). As discussed above, the
Commission is also proposing to expand the scope of Rule 605
reporting to include certain NMLOs submitted outside of regular
trading hours, specifically NMLOs that become executable during
regular trading hours. See supra section IV.A.1.
    \337\ See dataset ``Conditional Cancel and Trade Distribution''
available at https://www.sec.gov/marketstructure/downloads.html. See
also infra note 692 and accompanying text.
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    Numerous commenters have raised concerns about the Rule's timestamp
conventions, especially given the increases in the speed of the
market.\338\ One commenter stated that current time bucketing is
outdated and the Rule should provide average execution time for
marketable orders, measured in milliseconds (or microseconds).\339\
Another commenter suggested that Rule 605 should be re-written to
include statistics at a granular number of milliseconds from order
receipt time to either fill or cancel time.\340\
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    \338\ See, e.g., KOR Group I at 2, FIF I at 2.
    \339\ See FIF III, Appendix 1 at 4.
    \340\ See IHS Markit Letter at 26-27.
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    The proposed amendments would not require the use of reporting
increments finer than milliseconds for reports generated under Rule
605. The CAT NMS Plan requires CAT reporters to report CAT data to the
CAT in milliseconds and, to the extent a CAT reporter's order handling
or execution systems utilize timestamps in increments finer than
milliseconds, such CAT reporter is required to utilize such finer
increments up to nanoseconds when reporting CAT data to the CAT.\341\
CAT requires the use of such finer increments, when available, to
assist in the accurate sequencing of reportable events on an order-by-
order basis.\342\ In contrast, the order and execution quality
statistics under Rule 605 utilizing timestamp information are reported
in the aggregate. Timestamp information in millisecond increments would
allow for meaningful points of comparison between market centers or
broker-dealers for both aggregate data that utilizes timestamp
information and time-to-execution statistics such as average time to
execution. There would be limited additional utility in requiring Rule
605 reporting using increments finer than a millisecond.
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    \341\ See Securities and Exchange Commission File No. 4-698
(National Market System Plan Governing the Consolidated Audit
Trail), section 6.8(b). See also Securities Exchange Act Release No.
79318 (Nov. 15, 2016), 81 FR 84696 (Nov. 23, 2016).
    \342\ See 17 CFR 242.613(d)(3) (requiring the use of timestamp
increments finer than the minimum so that all reportable events
``can be accurately sequenced'').
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    In conjunction with the proposed requirement to use the more
granular timestamps, the Commission is proposing to eliminate the
current time-to-execution buckets.\343\ Average time to execution is
already required to be reported for market orders and marketable limit
orders,\344\ and generally provides a more informative metric for those
order types than the existing time-to-execution buckets given the speed
with which those order types typically execute. The vast majority of
market orders and marketable limit orders that execute are executed in
less than a second,\345\ an increment that results in almost all market
and marketable limit orders being contained in the smallest of the
existing time-to-execution buckets.\346\ As a result, the existing
time-to-execution buckets do not generally provide meaningful time-to-
execution differentiation for market orders and marketable limit
orders. The existing time-to-execution buckets only generally provide
meaningful information for non-marketable order

types. The Commission believes that requiring average time to execution
for all order types, in addition to statistics that would provide
information about the distribution of execution times within each order
type, would provide more meaningful information because these
statistics could be used to compare the average time to execution for a
particular order type, while still providing information about the
extent to which outlier values do or do not skew the average.
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    \343\ See 17 CFR 242.605(a)(1)(i)(F) through (J) (detailing
time-to-execution buckets of 0 to 9 seconds, 10 to 29 seconds, 30 to
59 seconds, 60 to 299 seconds and 5 to 30 minutes after the time of
order receipt).
    \344\ See 17 CFR 242.605(a)(1)(ii)(D), (F), and (I), requiring
share-weighted average period from the time of order receipt to the
time of order execution for shares executed with price improvement,
at the quote, and outside the quote, respectively.
    \345\ Analysis of Tick Size Pilot data shows more than 95% of
market and marketable limit orders that executed did so within 1
second. See analysis in infra Figure 12. See also infra section
VII.E.3.(b)(1) (analyzing execution speeds of market and marketable
limit orders, along with the three categories of NMLOs currently
required in Rule 605 (inside-the-quote, at-the-quote, and near-the-
quote)).
    \346\ See 17 CFR 242.605(a)(1)(i)(F) (requiring the reporting of
the cumulative number of shares of covered orders executed from 0 to
9 seconds after the time of order receipt).
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    Although average time to execution is currently required for
marketable order types,\347\ the Commission believes it would be both
feasible and useful to measure average time to execution for non-
marketable order types from the point in time they become executable.
As stated above, this would provide a control for prevailing market
conditions and benchmark orders from a point when such orders could
reasonably be expected to execute. Therefore, the proposal would
require the share-weighted average time to execution for non-marketable
order types, calculated from the time such orders become
executable.\348\
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    \347\ See 17 CFR 242.605(a)(1)(ii)(D), (G), and (H) for shares
executed with price improvement, executed at the quote, or executed
outside the quote, respectively.
    \348\ See proposed Rule 605(a)(1)(iii)(C), (D), and (E).
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    Because orders may execute near-instantaneously or over a number of
minutes, average time to execution within a category could be skewed by
outlier values. Given this, information about the distribution of
execution speeds in addition to the average would still be useful.
However, the existing time-to-execution buckets are of limited utility,
especially for the fastest executions, given that the smallest time-to-
execution bucket encompasses all orders executed between zero and nine
seconds. Although finer increments could be added below one second, it
would still be important to retain information for those orders that
take longer to execute. Rather than adding additional buckets to
provide this distribution information, the Commission proposes
requiring both share-weighted median and 99th percentile time-to-
execution statistics in order to provide additional descriptive
statistical information for executions of all covered order types.\349\
These two measurements would provide additional information to allow
users of the data to assess how quickly a market center or broker-
dealer is able to execute incoming orders and better understand whether
and to what extent the time to execution within a particular category
is affected by outlier values.
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    \349\ See proposed Rule 605(a)(1)(ii)(D), (E), (H), (I), (M),
and (N), and proposed Rule 605(a)(1)(iii)(D) and (E), requiring
share-weighted median and share-weighted 99th percentile time to
execution information. These measures would represent the time at or
below which 50 percent of executions occur, weighted by number of
shares (in the case of the share-weighted median) and the time at or
below which 99 percent of executions occur, weighted by number of
shares (in the case of the share-weighted 99th percentile).
---------------------------------------------------------------------------

    For these reasons, the Commission proposes to require share-
weighted median and 99th percentile time to execution for all order
types. Average time to execution statistics for marketable order types
(market orders, marketable limit orders, marketable IOCs, and beyond-
the-midpoint limit orders) would be required for each of: shares
executed with price improvement,\350\ at the quote,\351\ and outside
the quote.\352\ For the marketable order types, the Commission is
similarly proposing to require: (i) the share-weighted median period
from the time or order receipt to the time of order execution; \353\
and (ii) the share-weighted 99th percentile period from the time of
order receipt to order execution.\354\ For non-marketable order types
(beyond-the-midpoint limit orders, executable NMLOs, and executable
orders with stop prices NMLOs), the Commission proposes to require, for
executed orders: (i) the share-weighted average period from the time
the order becomes executable to the time of order execution; \355\ (ii)
the share-weighted median period from the time the order becomes
executable to the time of order execution; \356\ and (iii) the share-
weighted 99th percentile period from the time the order becomes
executable to the time of order execution.\357\
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    \350\ See 17 CFR 242.605(a)(1)(ii)(C).
    \351\ See 17 CFR 242.605(a)(1)(ii)(G).
    \352\ See 17 CFR 242.605(a)(1)(ii)(L).