The Commission believes that, in most cases, a customer that trades
in NMS stock order dollar values of $200,000 or more and is
sufficiently sophisticated to utilize not held orders, will also be
sufficiently sophisticated to submit such orders to broker-dealers that
are not excepted from Rule 606(b)(3) by the firm-level de minimis
exception, should the customer desire the Rule 606(b)(3) information
(and meet or surpass the customer-level de minimis threshold). In
addition, as discussed above, the customer-level de minimis exception
targets customers whose trading activity is not substantial enough to
provide a sample of data that would accurately and reliably reflect a
broker-dealer's order handling behavior and make the Rule 606(b)(3)
disclosures meaningful. Thus, should a customer that submits a not held
NMS stock order for $200,000 or more not meet the customer-level de
minimis threshold (a scenario that the Commission believes is unlikely
to occur in most cases), the Commission believes that Rule 606(b)(1) is
the appropriate recourse for the customer regardless of the dollar
value of any of the customer's individual orders. If requested, the
Rule 606(b)(1) disclosures provide the customer with information as to
the venues to which its orders were routed, whether the orders were
directed or non-directed, and the time of any transactions that
resulted from the orders. The Commission believes that these
disclosures provide information that is more meaningful in light of the
overall extent to which the customer trades, and are sufficient to
provide a basis for the customer to engage in further discussions with
its broker-dealer regarding the broker-dealer's order handling
practices.
vii. Definitions of ``Directed Order'' and ``Non-Directed Order''
    The Commission is adopting revised definitions of the terms
``directed order'' \142\ and ``non-directed order'' \143\ under Rule
600(b). These terms are used throughout Rule 606. They are referenced
in Rule 606(a) and Rule 606(b)(1) and, as discussed infra,\144\ are
referenced in new Rule 606(b)(3). Therefore, these terms are being
defined compatibly with Rule 606 as amended, which as adopted does not
distinguish between NMS stock orders based on order dollar value.
---------------------------------------------------------------------------

    \142\ A directed order is a customer order that the customer
specifically instructed the broker-dealer to route to a particular
venue for execution. See 17 CFR 242.600(b)(19).
    \143\ A non-directed order is any customer order other than a
directed order. See 17 CFR 242.600(b)(48).
    \144\ See Section III.A.5.b.
---------------------------------------------------------------------------

    Specifically, Rule 600(b) prior to these amendments defines the
terms directed order and non-directed order in reference to a
``customer order,'' and the term ``customer order'' includes a $200,000
dollar value threshold for NMS stock orders that the Commission is not
incorporating into Rule 606 as amended. Thus, the Commission is
removing the reference to ``customer order'' from the definitions of
``directed order'' and ``non-directed order'' to eliminate the $200,000
dollar-value threshold for NMS stock orders incorporated into those
terms. Accordingly, as amended, the term ``directed order'' means an
order from a customer that the customer specifically instructed the
broker-dealer to route to a particular venue for execution, and the
term ``non-directed order'' means any order from a customer other than
a directed order.\145\ By eliminating the term ``customer order'' and
instead referring to ``an order from a customer,'' these amended
definitions do not incorporate the dollar value limitations in the
definition of the term ``customer order.''
---------------------------------------------------------------------------

    \145\ See Rules 600(b)(20) and 600(b)(49).
---------------------------------------------------------------------------

    Otherwise, however, the amended definitions of ``directed order''
and

``non-directed order'' are consistent with the pre-existing
definitions. While the amended definitions eliminate the previously
existing order dollar value limitation in the cross-referenced term
``customer order,'' they maintain the pre-existing definitions'
exclusion of orders from a broker-dealer. In this regard, the
Commission notes that the amended definitions of ``directed order'' and
``non-directed order'' continue to incorporate the term ``customer,''
which is defined in Rule 600(b) as any person that is not a broker-
dealer.\146\ Thus, the defined terms ``directed order'' and ``non-
directed order,'' as amended, apply only to orders that are from a
person that is not a broker-dealer.
---------------------------------------------------------------------------

    \146\ See 17 CFR 242.600(b)(16).
---------------------------------------------------------------------------

2. Definition of Actionable Indication of Interest
a. Proposal
    To further facilitate the updated order handling disclosure regime,
the Commission proposed to amend Rule 600 to include a definition of
``actionable indication of interest.'' \147\ Specifically, the
Commission proposed that, under proposed Rule 600(b)(1) of Regulation
NMS, an actionable IOI be defined as ``any indication of interest that
explicitly or implicitly conveys all of the following information with
respect to any order available at the venue sending the indication of
interest: (1) Symbol; (2) side (buy or sell); (3) a price that is equal
to or better than the national best bid for buy orders and the national
best offer for sell orders; and (4) a size that is at least equal to
one round lot.'' \148\
---------------------------------------------------------------------------

    \147\ See proposed Rule 600(b)(1). As the Commission indicated
in 2009, an actionable IOI is a privately transmitted message by
certain trading centers, such as an ATS or an internalizing broker-
dealer, to selected market participants to attract immediately
executable order flow to such trading centers, and functions in some
respects similarly to a displayed order or a quotation. See
Securities Exchange Act Release No. 60997 (November 13, 2009), 74 FR
61208, 61210 (November 23, 2009) (``Regulation of Non-Public Trading
Interest Proposing Release'').
    \148\ See proposed Rule 600(b)(1). See also Proposing Release,
supra note 1, at 49445-49447 for additional detail on the
Commission's proposal. As noted in the Proposing Release, this
definition is based on and substantively similar to the Commission's
description of actionable IOIs in the Regulation of Non-Public
Trading Proposing Release in 2009. See Regulation of Non-Public
Trading Interest Proposing Release, supra note 147.
---------------------------------------------------------------------------

b. Final Rule and Response to Comments
    The Commission is adopting as proposed the definition of actionable
indication of interest under Rule 600(b)(1) of Regulation NMS.\149\
Accordingly, under final Rule 600(b)(1), actionable IOI means any
indication of interest that explicitly or implicitly conveys all of the
following information with respect to any order available at the venue
sending the indication of interest: (1) Symbol; (2) side (buy or sell);
(3) a price that is equal to or better than the national best bid for
buy orders and the national best offer for sell orders; and (4) a size
that is at least equal to one round lot.
---------------------------------------------------------------------------

    \149\ See Rule 600(b)(1).
---------------------------------------------------------------------------

    By defining actionable IOIs in this manner, the Rule 606(b)(3)
order handling reporting requirements mandate that a broker-dealer
disclose its activity communicating to external liquidity providers for
them to send an order to the broker-dealer in response to a not held
NMS stock order of a customer of the broker-dealer. The Commission
continues to believe that including these disclosures relating to
actionable IOI activity in the Rule 606(b)(3) order handling reports
would better enable customers to understand and evaluate how broker-
dealers handle their orders, in particular with respect to the
potential for information leakage stemming from broker-dealers' use of
actionable IOIs. The Commission also continues to believe that the
definition of actionable IOI is appropriately designed to capture
trading interest that is the functional equivalent to an order or
quotation.
    Commenters generally supported the creation of a definition of
actionable IOI in Rule 600(b), but some commenters expressed concerns
about and suggested revisions to the Commission's proposed
definition.\150\ One of the main concerns was that it was not
sufficiently clear from the Proposal what it means for an IOI to be
``actionable.'' \151\ In this regard, some commenters suggested that
the proposed definition could be read to capture conditional orders or
IOIs that require additional negotiation or ``firming up'' to be
executable by the broker-dealer,\152\ and several commenters asserted
that such conditional trading interest is distinguishable from an
actionable IOI and therefore should be excluded from the definition of
actionable IOI and the disclosures required by Rule 606.\153\
---------------------------------------------------------------------------

    \150\ See, e.g., Fidelity Letter at 3-4; FIF Letter at 7;
Bloomberg Letter at 13-15; SIFMA Letter at 6.
    \151\ See, e.g., FSR Letter at 2, 6-7; Bloomberg Letter at 13-
14; FIF Letter at 7; HMA Letter at 10. One of these commenters
stated that broker-dealer order routers respond to IOIs but do not
send them, and that the inclusion of IOIs in the Proposal appeared
out of context with order routing transparency. See Bloomberg Letter
at 13. This is not consistent with the Commission's understanding,
which, as noted in the Proposing Release, is that broker-dealers may
send an actionable IOI to select external liquidity providers to
communicate to send orders to the broker-dealer to trade with the
order that is represented by the actionable IOI at the broker-
dealer. See Proposing Release, supra note 1, at 49453; see also
Section III.A.6.a, infra.
    \152\ See FSR Letter at 2, 6-7; Fidelity Letter at 4; Letter
from Timothy J. Mahoney, Chief Executive Officer, BIDS Trading L.P.,
dated October 7, 2016 (``BIDS Letter'').
    \153\ See Markit Letter at 4, 12-13; Bloomberg Letter at 14;
BIDS Letter; SIFMA Letter at 6; EMSAC Rule 606 Recommendations,
supra note 16, at 3. One commenter stated that, absent
clarification, the Proposing Release's definition of actionable IOIs
would be inconsistent with the Commission's published understanding
of conditional orders in the ATS-N Proposing Release. See BIDS
Letter at 4. The clarification, set forth below, of the difference
between actionable IOIs versus IOIs or conditional orders that
require additional agreement of the broker-dealer responsible for
the IOI or conditional order before an execution can take place is
consistent with what is stated in the ATS-N Adopting Release. See
ATS-N Adopting Release, supra note 2, at 38847-38848.
---------------------------------------------------------------------------

    As stated above and in the Proposing Release, for an IOI to be
actionable it must convey (explicitly or implicitly) information
sufficient to attract immediately executable orders to the venue
sending the indication of interest.\154\ In addition, Rule 3b-16
defines an order as any firm indication of a willingness to buy or sell
a security, as either principal or agent, including any bid or offer
quotation, market order, limit order, or other priced order.\155\ When
the Commission adopted Rule 3b-16 in connection with the adoption of
Regulation ATS, the Commission stated:
---------------------------------------------------------------------------

    \154\ See Proposing Release, supra note 1, at 49446.
    \155\ See 17 CFR 240.3b-16.

    Whether or not an indication of interest is `firm' will depend
on what actually takes place between the buyer and seller. . . . At
a minimum, an indication of interest will be considered firm if it
can be executed without further agreement of the person entering the
indication. Even if the person must give its subsequent assent to an
execution, however, the indication will still be considered firm if
this subsequent agreement is always, or almost always, granted so
that the agreement is largely a formality. For instance, indications
of interest where there is a clear prevailing presumption that a
trade will take place at the indicated price, based on
understandings or past dealings, will be viewed as orders.\156\
---------------------------------------------------------------------------

    \156\ See Securities Exchange Act Release No. 40760 (December 8,
1998), 63 FR 70844, 70850 (December 22, 1998).

    The Commission believes that this language is instructive here in
light of the Commission's intention for the definition of actionable
IOIs to apply to IOIs that are the functional equivalent of orders or
quotations, i.e., firm representations of trading interest.
Specifically, the Commission intends that the actionable IOI definition
would include, at a minimum, an IOI that represents an order that can
be executed against by the IOI recipient without

further agreement of the broker-dealer that communicated the IOI.
Moreover, indications of interest where the agreement of the parties to
the terms of a trade is presumed from the facts or circumstances, such
as past dealings or a course of conduct between the parties, may also
be considered actionable IOIs. Indeed, in the context of dark pools,
the Commission has previously noted that IOIs may communicate
information explicitly or implicitly, such as through a course of
conduct, based on which the recipient of the IOI can reasonably
conclude that sending a contra-side marketable order responding to the
IOI will result in an execution if the trading interest has not already
been executed against or cancelled.\157\ The Commission believes that,
generally, it would consider an IOI from a broker-dealer to be
actionable if it fits this description, i.e., if the IOI recipient can
reasonably conclude that sending a contra-side marketable order to the
broker-dealer will result in an execution against trading interest
represented by the IOI that has not already been executed against or
cancelled.
---------------------------------------------------------------------------

    \157\ See Regulation of Non-Public Trading Interest Proposing
Release, supra note 147, at 61211.
---------------------------------------------------------------------------

    So-called ``conditional'' orders referenced by several commenters
would not, therefore, constitute actionable IOIs if they require
additional agreement by the broker-dealer responsible for the
conditional order before an execution can occur, unless facts or
circumstances suggest that the broker-dealer's agreement can be
presumed. The Commission believes that IOIs that do not enable the IOI
recipient to send a marketable order to the IOI sender that is
executable against the interest represented by the IOI without further
agreement by the IOI sender may not function equivalently to orders or
quotations and therefore do not represent the sort of order handling
activity that the Rule 606(b)(3) order handling reports are meant to
capture.
    Moreover, as noted in the Proposal, actionable IOIs have the
capacity to communicate information about the existence of a large
parent order, and as such their usage, like other components of broker-
dealers' order handling and routing practices, creates the potential
for information leakage.\158\ The Commission believes that disclosing
in the Rule 606(b)(3) order handling reports information regarding a
broker-dealer's use of actionable IOIs could help enable its customers
to assess the degree to which the trading interest they route to the
broker-dealer is subject to potential information leakage. By contrast,
the Commission does not believe that this same utility would exist if
non-actionable IOIs (those that are not executable without further
agreement) were to be included in the customer-specific order handling
reports, as the Commission does not understand such non-actionable IOIs
to present the same risk of information leakage as actionable IOIs.
---------------------------------------------------------------------------

    \158\ See Proposing Release, supra note 1, at 49446.
---------------------------------------------------------------------------

    In addition, the Commission continues to believe that the four
elements contained in the definition of actionable IOI (symbol, side,
price, and size) are all necessary pieces of information for an
external liquidity provider to respond with an order that is
immediately executable against trading interest of a customer of the
broker-dealer responsible for the IOI. The Commission emphasizes that
these pieces of information may be implicitly conveyed, such as via a
course of dealing between the IOI sender and the recipient. For
example, given that Rule 611 of Regulation NMS generally prevents
trading centers from executing orders at prices inferior to the NBBO,
if a broker-dealer sends an IOI communicating an interest to buy a
specific NMS stock, the IOI recipient reasonably can assume that the
associated price is the NBBO or better.\159\ Moreover, the IOI
recipient may have responded previously with orders to the IOI sender
and repeatedly received executions at the NBBO or better with a size of
at least one round lot.\160\ In this example, the IOI communicated by
the broker-dealer would be actionable, with explicit conveyance of the
symbol and side elements and implicit conveyance of the price and size
elements. Indeed, the Commission understands that IOIs are frequently
conveyed with explicit side and symbol terms and implicit price and
size terms, and can be executed against by the IOI recipient without
further agreement of the IOI sender.
---------------------------------------------------------------------------

    \159\ See Regulation of Non-Public Trading Interest Proposing
Release, supra note 147, at 61211.
    \160\ See id.
---------------------------------------------------------------------------

    One commenter stated that, for the purpose of routing brokers
determining whether to send an order to a non-displayed venue, an IOI
should have, at a minimum, a symbol.\161\ Another commenter stated
that, at a minimum, symbol and side (buy or sell) must be included with
an IOI in order for it to be an actionable IOI, and that size or price
do not need to be explicitly included.\162\ While these comments may
suggest that an IOI could still be actionable with less than the four
noted elements in the definition, the Commission believes that, without
the inclusion of all four elements (symbol, side, price, and size)
explicitly or implicitly with the IOI, the IOI recipient could require
additional information before executing against the IOI and the IOI
therefore may not be actionable. To the extent these comments suggest
that one or more of the four noted elements of an actionable IOI may be
implicitly conveyed, as noted above, the Commission agrees. One
commenter stated that the Commission has captured all the necessary
elements for the actionable IOI definition, but that the definitions of
two of the elements--quantity and price--should be expanded to include
relative measures in addition to absolute measures.\163\ The Commission
notes in response that if each of the four elements is communicated--
explicitly or implicitly--such that the IOI recipient can respond to
the IOI with an order that is executable against trading interest
represented by the IOI without further agreement by the IOI sender
(taking into account the relevant facts and circumstances, including
any course of dealing between the parties), that communication would
constitute an actionable IOI under the definition in Rule 600(b)(1).
---------------------------------------------------------------------------

    \161\ See Markit Letter at 15.
    \162\ See Letter from Elizabeth K. King, General Counsel and
Corporate Secretary, NYSE Group, dated October 31, 2016 (``NYSE
Letter'') at 2.
    \163\ See Capital Group Letter at 3-4.
---------------------------------------------------------------------------

    The Commission does not believe that it is necessary for purposes
of the definition of actionable IOI to draw a distinction between IOIs
that are communicated manually (such as via the telephone, for example)
versus IOIs that are communicated electronically. Some commenters drew
such a distinction, and suggested that only IOIs that are communicated
and accessible electronically should constitute actionable IOIs under
Rule 600(b)(1).\164\ The Commission believes that whether an IOI is
actionable should not turn on the level of automation involved in the
communication of the IOI. Once an IOI is communicated by a broker-
dealer to the IOI recipient, regardless of whether the communication is
manual (such as via telephone) or electronic, if that IOI recipient can
respond to the IOI with an order that is executable against the trading
interest represented by the IOI without further agreement by the
broker-dealer responsible for the IOI, then the IOI should be
considered an actionable IOI under Rule 600(b)(1). An actionable IOI
has the potential to leak information as to the existence of an

order regardless of whether the actionable IOI is transmitted
electronically or manually. Thus, order handling statistics regarding
both electronic and manual actionable IOIs could be valuable to
customers in evaluating the order routing practices of their broker-
dealers and the degree to which those practices may leak information
regarding their not held NMS stock orders.
---------------------------------------------------------------------------

    \164\ See Bloomberg Letter at 13-15; FIF Letter at 7; FIF
Addendum at 4 n.7; Fidelity Letter at 4; SIFMA Letter at 6.
---------------------------------------------------------------------------

    One commenter urged the Commission to follow the commenter's
characterization of how IOIs were described in the Regulation of Non-
Public Trading Interest Proposing Release by targeting IOIs sent by
venues such as ATSs, and to consider whether other market participants
that send IOIs, such as exchanges, should be included within the scope
of the rule.\165\ The purpose of the Regulation of Non-Public Trading
Interest Proposing Release, however, was different from the
Commission's purposes here in adopting the definition of actionable IOI
for the new customer-specific order handling reports. There, due to the
Commission's concern about potentially deleterious effects of dark
pools' transmission to selected market participants, and not the public
broadly via the consolidated quotation data, of valuable pricing
information in the form of actionable IOIs that function similarly to
quotations, the Commission proposed to amend the Exchange Act quoting
requirements in Rule 602 of Regulation NMS and Rule 301(b)(3) of
Regulation ATS to apply expressly to actionable IOIs.\166\ Here, by
contrast, the Commission's purpose is to require broker-dealers to
provide order handling and routing information that is sufficient for
their customers to understand the methods their broker-dealers use to
carry out their best execution obligations and assess the potential
impact of information leakage and conflicts of interest, not to provide
public access to comprehensive pricing information or encourage the
public display of quotations. The Commission believes that the
definition of actionable IOI being adopted today is appropriately
tailored to serve the purpose of this rulemaking, and that the concerns
it expressed in the Regulation of Non-Public Trading Proposing Release
are outside the scope of this rulemaking.
---------------------------------------------------------------------------

    \165\ See Bloomberg Letter at 13-15; see also Regulation of Non-
Public Trading Interest Proposing Release, supra note 147.
    \166\ See Regulation of Non-Public Trading Proposing Release,
supra note 147, at 61211-12.
---------------------------------------------------------------------------

    For similar reasons, the Commission is not excluding from the
definition of actionable IOI in Rule 600(b)(1) an IOI for a quantity of
NMS stock having a market value of at least $200,000 that is
communicated only to those who are reasonably believed to represent
current contra-side trading interest of at least $200,000, as suggested
by one commenter.\167\ The Commission likewise is not requiring broker-
dealers to disclose in the publicly available reports the percentage of
orders that were exposed through so-called ``size-discovery IOIs,'' as
suggested by another commenter.\168\ These commenters noted that the
Regulation of Non-Public Trading Proposing Release proposed to exclude
such ``size-discovery IOIs'' from the rule amendments proposed
therein,\169\ but the Commission again notes that the purpose of the
Commission's actions here is different from what it was in the
Regulation of Non-Public Trading Proposing Release. There, the
Commission recognized that the benefits of certain size-discovery
mechanisms could be undermined if their narrowly tailored IOIs for
large size were required to be included in the public quotation
data.\170\ Here, by contrast, the Commission is not requiring that
actionable IOIs be included in public quotation data, and thus the
Commission does not believe that the same concern is implicated.
---------------------------------------------------------------------------

    \167\ See Bloomberg Letter at 14-15.
    \168\ See NYSE Letter at 1-2.
    \169\ See Bloomberg Letter at 14; NYSE Letter at 2.
    \170\ See id. at 61213.
---------------------------------------------------------------------------

    Finally, in response to commenters who requested clarification as
to whether rules, regulations, and guidance applicable to quotes or
orders would be applicable to actionable IOIs under the final
rule,\171\ the Commission is defining actionable IOIs at this time for
purposes of the Rule 606 amendments also being adopted today. The
Commission is not expanding the scope of existing rules, regulations,
or guidance related to orders or quotations, other than Rule 606 and
guidance related thereto, with regard to actionable IOIs.
---------------------------------------------------------------------------

    \171\ See Fidelity Letter at 4; SIFMA Letter at 6.
---------------------------------------------------------------------------

3. Scope of Broker-Dealer's Obligation Under Rule 606(b)(3)
a. Broker-Dealer Required To Provide Report on Its Order Handling To
Customer Placing Order With the Broker-Dealer
i. Proposal
    The Commission proposed in Rule 606(b)(3) that every broker-dealer
shall, on request of a customer that places, directly or indirectly, an
institutional order with the broker-dealer, disclose to such customer a
report on its handling of institutional orders for that customer.\172\
The Commission noted in the Proposal that, pursuant to this rule
language, a broker-dealer would be required to provide the order
handling report to the customer placing the institutional order with
the broker-dealer, even if the customer is acting on behalf of others
and is not the ultimate beneficiary of any resulting transactions.\173\
Thus, the broker-dealer would not be required to provide the order
handling report to the underlying clients of that customer.
---------------------------------------------------------------------------

    \172\ See proposed Rule 606(b)(3).
    \173\ See Proposing Release, supra note 1, at 49448.
---------------------------------------------------------------------------

    The Commission also noted that the proposed report would cover
instances where an institutional order is handled either directly by
the broker-dealer or indirectly through systems provided by the broker-
dealer.\174\ By way of example, the Commission stated that an
institutional order would have been placed with a broker-dealer if a
broker-dealer receives an institutional order directly from a customer
and works to execute the order itself, as well as if a broker-dealer
receives an institutional order indirectly from a customer, where the
customer self-directs its institutional order by entering it into a
routing system or execution algorithm provided by the broker-
dealer.\175\
---------------------------------------------------------------------------

    \174\ See id. at 49447.
    \175\ See id.
---------------------------------------------------------------------------

    Further, the Commission did not propose to change the existing
definition of customer in Rule 600(b), which states that ``customer''
means any person that is not a broker-dealer.\176\ In utilizing this
defined term, proposed Rule 606(b)(3) therefore required a broker-
dealer to provide the customer-specific institutional order handling
report only to a non-broker-dealer.\177\
---------------------------------------------------------------------------

    \176\ See 17 CFR 242.600(b)(16).
    \177\ See Proposing Release, supra note 1, at 49447-48 for
additional detail on the Commission's proposal.
---------------------------------------------------------------------------

ii. Final Rule and Response to Comments
    Notwithstanding that Rule 606(b)(3) is modified from what was
proposed such that the adopted rule covers not held NMS stock orders of
any dollar value (subject to the two de minimis exceptions), the person
or entity to which the broker-dealer must provide the Rule 606(b)(3)
report is the same as under the Proposal. Specifically, under Rule
606(b)(3), every broker-dealer must, on request of a customer that
places, directly or indirectly, one or more orders in NMS stock that
are submitted on a not held basis with the broker-dealer, disclose to
such customer a report on its handling of such orders

for that customer. In other words, the broker-dealer must provide the
Rule 606(b)(3) report to the customer that places with the broker-
dealer the orders covered by Rule 606(b)(3), even if the customer is
acting on behalf of others and is not the ultimate beneficiary of any
resulting transactions. In addition, broker-dealers remain excluded
from the definition of ``customer'' in Rule 600(b), and that exclusion
is maintained for purposes of Rule 606(b)(3), which cross-references
the defined term ``customer.'' As a result, under Rule 606(b)(3) as
adopted, a broker-dealer is required to provide the report only to non-
broker-dealers.
    For the same reasons as stated in the Proposal, the Commission
continues to believe that a broker-dealer should be required to provide
the customer-specific order handling report to the customer that places
the order with the broker-dealer, even if that customer may be acting
on behalf of others and is not the ultimate beneficiary of any
resulting transactions, such as when an investment adviser, as the
customer of a broker-dealer, places an order with the broker-dealer
that represents the trading interest of clients of the investment
adviser.\178\ Multiple commenters supported this delineation of Rule
606(b)(3)'s scope.\179\ In addition, the Rule 606(b)(3) report
requirement covers instances where an order is handled either directly
by the broker-dealer or indirectly through systems provided by the
broker-dealer. The Commission continues to believe that requiring the
reports to be provided to the customer that places the order with the
broker-dealer--whether the customer is the account holder or an
investment adviser or other fiduciary--is appropriate because it would
require the broker-dealer to provide detailed information to the person
that is responsible for making the routing and execution decisions for
such order and for assuring the effectiveness of those functions.
Despite one commenter's assertion that an investment adviser's
underlying client also should be entitled to receive the Rule 606(b)(3)
report from the adviser's broker-dealer,\180\ the Commission does not
believe it is appropriate to require a broker-dealer to create
individualized order handling reports for and make its execution data
available to an end user with whom the broker-dealer may have no direct
relationship.
---------------------------------------------------------------------------

    \178\ As discussed infra in this section, a broker-dealer is
required to report to the customer that places the order with the
broker-dealer so long as the customer is not itself a broker-dealer.
    \179\ See Markit Letter at 16, 18; Bloomberg Letter at 16;
Capital Group Letter at 4; FIF Letter at 7-8, 16; EMSAC Rule 606
Recommendations, supra note 16, at 3.
    \180\ See Better Markets Letter at 7-8.
---------------------------------------------------------------------------

    One commenter stated that an account-level report should not be
required because accounts often are assigned after the order is entered
via an allocation process that is different from the system that
handles routing, and thus it would be costly.\181\ This commenter also
stated it would require brokers, when using a third party to generate
the reports, to transmit client account numbers, which are more
sensitive and confidential than the name of the institutional
manager.\182\ This commenter also stated, however, that reporting
information in the aggregate should prevent any secret routing
strategies from being divulged.\183\ In addition, another commenter
stated it did not believe that customers will able to reverse engineer
the way a smart order router works or discern any other proprietary
information about the broker's technology or order handling techniques
from the proposed disclosure information.\184\
---------------------------------------------------------------------------

    \181\ See Markit Letter at 16, 19-20.
    \182\ See id.
    \183\ See id. at 19.
    \184\ See Capital Group Letter at 5.
---------------------------------------------------------------------------

    Consistent with these comments, the Commission continues to believe
that, because the Rule 606(b)(3) customer-specific order handling
disclosures will aggregate information to be disclosed to a specific
customer across all of the customer's not held NMS stock orders, the
risk that such disclosures would reveal sensitive, proprietary
information about broker-dealers' order handling techniques should be
minimal. The customer-level de minimis exception from Rule 606(b)(3)
also is relevant in this regard, as it should help ensure that there is
a significant level of trading activity reflected in the aggregated
information provided to the customer under Rule 606(b)(3), and not
information regarding just one or a few orders from which the customer
may be able to discern aspects of the broker-dealer's sensitive or
proprietary order handling techniques. A broker-dealer's sensitivity
lies with its methods for determining how, where, and when to route a
specific, individual order. By providing information for all of the
customer's orders in the aggregate, the report conceals a broker-
dealer's proprietary determinations with respect to any specific,
individual order. Even if the report reflected that the broker-dealer
sent a small number of orders to a particular venue, the report would
not reveal why the broker-dealer chose that particular venue, when the
broker-dealer routed the orders to that venue, what market signals
informed the broker-dealer's choices as to venue and timing, or what
type of routing strategy the broker-dealer utilized. As to one
commenter's assertion that account-level disclosure would require
broker-dealers that use third-parties to generate the Rule 606(b)(3)
report to disclose sensitive client account numbers to such third-
parties, the Commission is not adopting any requirement that the Rule
606(b)(3) disclosures be provided at the client account level, and thus
nothing in Rule 606(b)(3) compels a broker-dealer to disclose client
account numbers to third-parties.
    The Commission further notes that, because it is not altering the
broker-dealer exclusion from the definition of customer, and because
Rule 606(b)(3) utilizes this defined term, the rule does not require a
broker-dealer to report to another broker-dealer. This is consistent
with what was proposed and with the order routing disclosure regime
that has existed under Rules 606(a) and 606(b)(1).\185\
---------------------------------------------------------------------------

    \185\ The Commission did not propose to modify the definition of
``customer'' in Rule 600(b)(16), which defines ``customer to mean
any person that is not a broker or dealer.'' See Rule 600(b)(16).
---------------------------------------------------------------------------

    Some commenters argued that the broker-dealer exclusion should be
eliminated because a broker-dealer should be required, under Rule
606(b)(3), to report to the customer that places the order with the
broker-dealer even if that customer is itself a broker-dealer.\186\ Two
commenters stated that, absent a modification to the Proposal, the Rule
606 report received by the end-customer of a broker-dealer that
utilizes another broker-dealer's technology for execution would reflect
only that the customer's orders were sent by its broker-dealer to the
other executing broker-dealer, and lack the level of detail that is
necessary for the customer to assess execution quality.\187\ Another
commenter suggested that the Rule 606 reports exclude only those orders
received from other broker-dealers and foreign banks acting as broker-
dealers and routing to U.S. execution venues that were directed by such
broker-dealers and foreign banks acting as broker-dealers to a
particular execution venue.\188\
---------------------------------------------------------------------------

    \186\ See Markit Letter at 3 n.6, 18; Dash Letter at 1, 4-5; FIF
Letter at 2, 8, 16-17; SIFMA Letter at 1, 3.
    \187\ See Dash Letter at 5; FIF Letter at 8 n. 9, 16-17.
    \188\ See Markit Letter at 3 n.6.
---------------------------------------------------------------------------

    On the other hand, one commenter asserted that, in a ``white-
labeling'' or leveraged outsourced technology

arrangement, where a broker that receives an order from an
institutional customer outsources another broker's smart order routing
or algorithmic trading technology, the broker that received the order
should be evaluating the effectiveness of the outsourced technology and
should fulfill the obligation of being able to provide clients' reports
on request.\189\ Another commenter asserted that the Proposal is
unclear as to whether a broker-dealer that provides algorithmic trading
services would be required to provide an order handling report to a
broker-dealer that utilizes those algorithmic trading services in the
course of executing orders on behalf of institutional customers.\190\
---------------------------------------------------------------------------

    \189\ See Bloomberg Letter at 16.
    \190\ See STA Letter at 4-5; STA Letter II at 1.
---------------------------------------------------------------------------

    In response to these comments, as an initial matter, it is worth
highlighting that Rule 606(b)(3) requires a broker-dealer, upon request
of a customer that places not held NMS stocks order with the broker-
dealer, to disclose to such customer a report with respect to its--
i.e., the broker-dealer's--handling of such orders for that customer.
As such, Rule 606(b)(3) is designed to require a broker-dealer to
disclose the information required by Rule 606(b)(3) to the extent of
its involvement in routing and executing its customers' orders. If the
broker-dealer exercises discretion with regard to how an order is
routed and ultimately executed, such as (but not limited to) by
determining particular venue destinations for an order, choosing among
different trading algorithms, adjusting or customizing algorithm
parameters, or performing other similar tasks involving its own
judgment as to how and where to route and execute orders, the broker-
dealer is required to provide the information required by Rule
606(b)(3) with regard to the customer's order flow with the broker-
dealer as well as the order routing and execution information set forth
in subparagraphs (b)(3)(i) through (iv) of the rule. If, by contrast,
the broker-dealer simply forwards its customers' orders on to another
broker-dealer and that second broker-dealer exercises all discretion in
determining where and how to route and execute the orders, then the
first broker-dealer is not required to provide disclosures under Rule
606(b)(3) beyond those relevant to its activity in forwarding orders to
the executing broker. In either case, the broker-dealer reports the
required information under Rule 606(b)(3) with respect to its order
handling for a customer.
    This language from the rule informs the scope of a broker-dealer's
obligation in the types of scenarios that commenters raised. As noted
by some commenters, broker-dealers sometimes license or outsource
technology offerings, such as trading algorithms, from third-parties,
including other broker-dealers, to use for routing and executing
orders. In these so-called ``white-labeling'' scenarios, the broker-
dealer typically exercises discretion in determining what trading
algorithm or other technology offering to utilize on behalf of its
customer, as well as how to handle the customer's orders using that
technology. For example, the broker-dealer may be able to adjust
discretionary parameters that determine the aggressiveness of a
particular algorithm,\191\ otherwise determine where or how an order is
routed and executed using the algorithm or other technology, or
determine when the algorithm is turned ``on'' or ``off.'' In this type
of scenario, it is the broker-dealer utilizing the trading algorithm or
other technology offering--and not the third-party provider of such
algorithm or other technology--that handles the customer's order and
that is obligated to provide the information required by Rule
606(b)(3). The broker-dealer's obligation in this scenario extends to
the routing and execution of child orders that, for example, the
trading algorithm may have placed after being ``turned on'' by the
broker-dealer.\192\
---------------------------------------------------------------------------

    \191\ See, e.g., Markit Letter at 20; FIF Letter at 6.
    \192\ See infra Section III.A.3.b.
---------------------------------------------------------------------------

    The Commission understands that broker-dealers typically have
access or rights to the execution data for trades made using algorithms
or other technology that they license or outsource. As such, the
Commission believes that most broker-dealers should be well-positioned
to provide the Rule 606(b)(3) information to their customers for orders
(or child orders thereof) that they routed or executed using a trading
algorithm or other type of technology offering. Ultimately, however,
when relying on third-party technology in this manner, broker-dealers
will need to ensure that they can provide the information required by
Rule 606(b)(3), should it be requested by a customer. Further,
consistent with the exclusion of broker-dealers from the definition of
customer, broker-dealers are required to report the Rule 606(b)(3)
information only to non-broker-dealers.
    In another type of arrangement raised by commenters, one broker-
dealer, sometimes referred to as an introducing broker-dealer, will
route an order on behalf of its customer to another broker-dealer,
sometimes referred to as an executing broker-dealer, and the executing
broker-dealer will carry out the further routing and ultimate execution
of the order, perhaps utilizing trading algorithms or other technology.
In this type of scenario, the executing broker-dealer's customer is the
introducing broker-dealer because it is the introducing broker-dealer
that places the order with the executing broker-dealer. Since, as
discussed above, a broker-dealer is required to report only to the
customer that places the order with the broker-dealer, in the
introducing-broker-dealer/executing-broker-dealer arrangement, the
executing broker-dealer is not required to report the Rule 606(b)(3)
information to the introducing broker-dealer's customer. Moreover, Rule
606(b)(3) does not require the executing broker-dealer to report to the
introducing broker-dealer in light of the broker-dealer exclusion from
the definition of customer.
    As noted above, some commenters argued that a different result
would be appropriate under the rule; specifically, they argued that
broker-dealers should be required to provide the Rule 606(b)(3) reports
for broker-dealer orders.\193\ The Commission intends, however, for
Rule 606(b)(3) to be focused on the relationship between a customer
(that is not a broker-dealer) and its broker-dealer, and the
information that the customer receives from its broker-dealer with
respect to how the broker-dealer handles the customer's not held NMS
stock orders. Rule 606(b)(3) is designed to provide a customer with
access to baseline information that would enable the customer to assess
the nature and quality of services provided by its broker-dealer with
respect to such orders, as many customers may not have the
sophistication or leverage necessary to receive adequate information in
the absence of a rule. The Commission does not believe that broker-
dealer to broker-dealer relationships carry the same level of risk of
an imbalance of information or sophistication on one side of the
relationship as compared to customer to broker-dealer relationships.
Therefore, the Commission has determined not to depart from the current
practice under Rule 606 by including broker-dealer orders in Rule
606(b)(3).
---------------------------------------------------------------------------

    \193\ See supra note 186.
---------------------------------------------------------------------------

    For similar reasons, the Commission believes it is appropriate for
the Rule 606(b)(3) requirements not to extend to orders handled by
exchange-affiliated routing brokers, which are also excluded from Rule
606(b)(3)'s coverage

by virtue of the broker-dealer exclusion from the definition of
customer. Three commenters suggested that requiring the Rule 606(b)(3)
disclosures for orders handled by exchange-affiliated routing brokers
would provide market participants with a more complete picture as to
how their orders are handled.\194\ But since only broker-dealers can be
members of an exchange, by the time an order reaches an exchange-
affiliated routing broker, it first has traveled from the end customer
to a broker-dealer, from a broker-dealer to the exchange (or perhaps
from an end customer through a broker-dealer's systems via a market
access arrangement and onto an exchange), and then from the exchange to
the exchange's affiliated routing broker. Like an executing broker-
dealer, an exchange-affiliated routing broker has no direct
relationship with the customer that sent the order in the first place.
Thus, the Commission does not believe that it would be appropriate to
require an exchange-affiliated routing broker to provide the Rule
606(b)(3) information to the customer from whom the order originated.
As noted above, the Commission's goal is for Rule 606(b)(3) to provide
non-broker-dealer customers with access to baseline information that
would enable them to assess the discretion exercised by their broker-
dealers and the nature and quality of services provided by their
broker-dealers with respect to their not held NMS stock orders. The
Commission believes that this goal will still be achieved without
including orders routed by exchange-affiliated routing brokers.
---------------------------------------------------------------------------

    \194\ See SIFMA Letter at 4; Markit Letter at 24; FIF Letter at
2, 8; EMSAC Rule 606 Recommendations, supra note 16.
---------------------------------------------------------------------------

    A broker-dealer is still required to provide the Rule 606(b)(3)
report to its customer, upon request, with respect to its handling of
orders for that customer (assuming the customer is not a broker-dealer)
even if the broker-dealer's handling of the customer's orders amounts
mainly to routing them to another broker-dealer (including perhaps one
affiliated with an exchange) for further routing. In such a situation,
the report is required to include the information regarding the
customer's order flow with the introducing broker-dealer required by
Rule 606(b)(3), as well as the information on order routing required by
subparagraph (b)(3)(i) of the rule, as this information pertains to the
introducing broker-dealer's order handling even if that order handling
amounts mainly to routing to an executing broker-dealer. But, in this
scenario, Rule 606(b)(3) would not require the broker-dealer to provide
the information on order executions required by subparagraphs
(b)(3)(ii) through (iv) in its report to its customer. Because Rule
606(b)(3) requires a broker-dealer to provide the required information
only with respect to ``its'' order handling, an introducing broker-
dealer's obligation under Rule 606(b)(3) does not extend to the order
handling activities of another broker-dealer.
    Nevertheless, the Commission believes that competitive forces in
the market may enable a customer whose orders are routed by its broker-
dealer to another broker-dealer to receive detailed order execution
information, such as that required by Rule 606(b)(3)(ii) through (iv),
for such orders. Customers could choose not to send not held NMS stock
orders to broker-dealers that are unable to provide detailed order
execution information, the prospect of which could cause such broker-
dealers to request the information from their executing broker-dealers
that, in turn, may risk losing broker-dealers as customers unless they
provide the information. Even if this type of information sharing does
not occur, a customer will still be entitled to receive information
from its broker-dealer under Rule 606(b)(3) that illustrates how the
broker-dealer is handling the customer's orders. With that information,
the customer should be in a better position to determine whether its
broker-dealer is adequately serving its investing and trading needs, as
well as whether it would be better served by utilizing the services of
a broker-dealer that is able to provide the full suite of detailed
order handling information set forth in Rule 606(b)(3).
b. Smaller Orders Derived From the Order Submitted to the Broker-Dealer
(i.e., Child Orders)
i. Proposal
    The Commission proposed that, for purposes of the customer-specific
order handling report required under proposed Rule 606(b)(3), the
handling of an institutional order would include the handling of all
smaller orders derived from the institutional order.\195\
---------------------------------------------------------------------------

    \195\ See proposed Rule 606(b)(3). See Proposing Release, supra
note 1, at 49448 for additional detail on the Commission's proposal.
---------------------------------------------------------------------------

ii. Final Rule and Response to Comments
    The Commission is adopting this requirement as proposed. Any child
orders derived from an order that is covered by Rule 606(b)(3) are also
covered by the rule. Accordingly, Rule 606(b)(3) states that, for
purposes of the customer-specific order handling report required under
the rule, the handling of an NMS stock order submitted by a customer to
a broker-dealer on a not held basis includes the handling of all child
orders derived from that order.\196\
---------------------------------------------------------------------------

    \196\ See Rule 606(b)(3).
---------------------------------------------------------------------------

    Thus, the broker-dealer is required to include any such child
orders in the Rule 606(b)(3) customer-specific order handling report.
For example, if a broker-dealer splits a customer's not held NMS stock
parent order into several child orders to be executed across different
venues, the rule adopted today would require that the broker-dealer
provide the required information regarding the execution of those child
orders in the customer's Rule 606(b)(3) order handling report.
    The Commission believes that such a result is consistent with the
views of commenters. No commenter suggested that the Rule 606(b)(3)
order handling report should not include child orders that were derived
from a customer's parent order. To the contrary, several commenters
suggested that it is essential that the broker-dealer order handling
disclosures include the handling of all smaller (child) orders derived
from the parent order.\197\ In addition, several commenters noted that
institutional investors often break up orders in a security across
several broker-dealers, so that the aggregate may exceed $200,000 where
the individual child orders do not.\198\ The Commission believes that
the rule adopted today addresses commenters' concerns regarding child
orders by requiring the routing of any customer's not held NMS stock
order and any child order derived therefrom, regardless of size or
monetary value, to be included in the Rule 606(b)(3) order handling
report (subject to the two de minimis exceptions) while at the same
time achieving the Commission's stated goals.
---------------------------------------------------------------------------

    \197\ See, e.g., Capital Group Letter at 4; FSR Letter at 4;
SSGA Letter at 1; Citadel Letter at 2; Bloomberg Letter at 11; Dash
Letter at 3; HMA Letter at 5-6; FIF Letter at 3-4, 17; FIF Addendum
at 2.
    \198\ See, e.g., Citadel Letter at 2; Bloomberg Letter at 11;
Dash Letter at 3.
---------------------------------------------------------------------------

4. Timing and Frequency Requirements for Customer-Specific Order
Handling Report
a. Proposal
    Proposed Rule 606(b)(3) required a broker-dealer to provide the
customer-specific order handling report to the customer within seven
business days of receiving the customer's request, and required that
the report contain information on the broker-dealer's

handling of orders for that customer for the prior six months, broken
down by calendar month.\199\ To allow time for broker-dealers to
develop the ability to produce such reports, the Commission stated that
it would not require broker-dealers to produce Rule 606(b)(3) order
handling reports containing information to cover months before broker-
dealers are required to comply with Rule 606(b)(3), if adopted.\200\
---------------------------------------------------------------------------

    \199\ See proposed Rule 606(b)(3). See Proposing Release, supra
note 1, at 49447-50 for additional detail on the Commission's
proposal.
    \200\ See Proposing Release, supra note 1, at 49448.
---------------------------------------------------------------------------

b. Final Rule and Response to Comments
    The Commission is adopting as proposed Rule 606(b)(3)'s requirement
that a broker-dealer provide the customer-specific order handling
report to the customer within seven business days of receiving the
customer's request, and that the report contain information on the
broker-dealer's handling of orders for that customer for the prior six
months, broken down by calendar month.\201\ The Commission received
varied comments supporting certain aspects of the rule as proposed and
other commenters suggesting different approaches. These comments and
the Commission's responses on various aspects of the rule are discussed
below.
---------------------------------------------------------------------------

    \201\ See Rule 606(b)(3).
---------------------------------------------------------------------------

    Seven Business Days for Broker-Dealer to Respond to Customer
Request. Two commenters believed that seven business days is a
reasonable amount of time for a broker-dealer to respond to a
customer's request to produce a monthly report.\202\ One of those
commenters also posited that, if the reports prove important to
clients, they will likely be produced in shorter time-frames due to
competitive forces.\203\ Another commenter stated that 20 days to
respond to a customer data request would be appropriate until
generating portions of the Rule 606(b)(3) reports and responding to
customer requests is automated, and that upon automation and
implementation of the program, the proposed seven days may be a
reasonable period of time to respond.\204\ Another commenter stated
that seven business days may not be enough time to respond to a
customer request, particularly since broker-dealers do not know how
many customers will request the reports, and suggested that the seven-
business day limit be removed.\205\ Another commenter stated that seven
days is not achievable if the customer request is made within the first
half of the month because broker-dealers typically do not receive the
rebate/fee information from an execution venue until the end of the
first or second week of the month, and suggested that customer-level
reports should not be required to be ready until the month following
receipt of the fee/rebate information.\206\ One commenter stated that,
given that some broker-dealers offer fee pass-through arrangements
(known as Cost-Plus), the commenter believed that the capabilities are
in the industry to track net execution fee or rebate information.\207\
---------------------------------------------------------------------------

    \202\ See Capital Group Letter at 4; Markit Letter at 17.
    \203\ See Markit Letter at 17.
    \204\ See Bloomberg Letter at 15.
    \205\ See Fidelity Letter at 4-5.
    \206\ See FIF Letter at 17-18.
    \207\ See HMA Letter at 11.
---------------------------------------------------------------------------

    The Commission continues to believe, at this juncture, that it is
appropriate to require a broker-dealer to provide the Rule 606(b)(3)
report to a customer within seven business days of the customer's
request. While Rule 606(b)(1) does not set forth a time limit for
broker-dealers to respond to a customer's request for a report, the
Rule 606(b)(1) disclosures are not as detailed as the disclosures set
forth in Rule 606(b)(3). Furthermore, customers that submit not held
NMS stock orders face a greater risk of information leakage than
customers that submit held NMS stock orders. As a result, the
Commission believes that requiring broker-dealers to respond within
seven business days is designed to ensure that customers receive the
Rule 606(b)(3) disclosures in a manner that is timely enough to enable
them to assess the risk of information leakage from how their orders
are routed while still providing the broker-dealer with adequate time
to prepare the report.
    The Commission acknowledges, as noted in the Proposal, that broker-
dealers will need to configure their systems to capture the information
necessary to produce the Rule 606(b)(3) reports and, therefore, may not
have the ability to produce historical reports about the routing of
orders and executions that occurred before such systems are
updated.\208\ The Commission also notes that many broker-dealers'
systems may already compile some of the order routing statistics
required to be included in the Rule 606(b)(3) reports, thus mitigating
to a degree the burden incurred by many broker-dealers in updating
their systems and processes to be able to provide Rule 606(b)(3)
reports to customers within seven business days. Further, the
Commission has provided time between the effected date and the
compliance date during which broker-dealers will be able to update
their systems as necessary. Once such system updates are completed, the
Commission expects broker-dealers to be able to generate the Rule
606(b)(3) reports in a largely automated fashion. As such, the
Commission believes that the seven business day turnaround time will
not be difficult for most broker-dealers to meet, and a longer time
period for broker-dealers to respond is not necessary especially in
light of the expected high level of automation for generating these
reports.
---------------------------------------------------------------------------

    \208\ See Proposing Release, supra note 1, at 49448. Broker-
dealers are required to provide the Rule 606(b)(3) reports for dates
going forward from the compliance date of this rulemaking and are
not required to provide the reports for dates prior to the
compliance date.
---------------------------------------------------------------------------

    Even though one commenter expressed concern that a seven business
day response window would not be achievable because broker-dealers
typically do not receive rebate/fee information from execution venues
until the end of the first or second week of the following month, the
Commission continues to believe that the seven business day timeframe
is important in requiring that all customers receive their order
handling information in a timeframe that will allow them to act in a
timely fashion in response to the information contained in the report.
Relatedly, the Commission notes that the six-month period covered by
Rule 606(b)(3) is a six calendar month period.\209\ Because there is no
limit on the number of times that a customer may make a request for
information under Rule 606(b)(3), the customer could subsequently make
another request for information under Rule 606(b)(3) once the broker-
dealer has obtained the fee/rebate information for the immediately
preceding month.\210\ Therefore, the Commission is not altering the
seven business day time period for broker-dealers to respond to a
customer request for the Rule 606(b)(3) disclosures.
---------------------------------------------------------------------------

    \209\ Thus, for example, if a customer requests a Rule 606(b)(3)
report during the month of July, the customer would be entitled
(subject to the de minimis exceptions) to a report that covers the
not held NMS stock orders it submitted to the broker-dealer during
January through June, unless the broker-dealer does not yet have fee
and rebate information for the month of June at the time of the
customer's request, in which case the report would be required to
cover the not held NMS stock orders that the customer submitted to
the broker-dealer during December of the prior calendar year through
May of the current calendar year.
    \210\ In this scenario, the broker-dealer would be required to
provide a Rule 606(b)(3) report covering the immediately preceding
month if the customer's trading activity for the six month period
including the immediately preceding month meets the customer-level
de minimis threshold.

---------------------------------------------------------------------------

    Frequency of Responses to Requests for Rule 606(b)(3) Report. Two
commenters believed that Rule 606(b)(3) does not need to specify the
number of times that a broker-dealer is required to respond to a
customer request for a report on order handling.\211\ One of these
commenters stated that the competitive dynamics of customer service in
the free market should control and that, if the frequency of requests
becomes a problem, the Commission can address this at a later
date.\212\ One commenter stated that broker-dealers should be required
to provide the proposed data on a weekly basis if requested by the
customer, and that the timeframe for providing aggregated data should
be no longer than monthly.\213\
---------------------------------------------------------------------------

    \211\ See Bloomberg Letter at 16; Markit Letter at 18.
    \212\ See Bloomberg Letter at 16.
    \213\ See Capital Group Letter at 5.
---------------------------------------------------------------------------

    Proposed Rule 606(b)(3) did not specify the number of times a
broker-dealer is required to respond to a customer request for a report
on order handling, and the Commission is not adopting any such
specification in final Rule 606(b)(3). Consistent with the Commission's
guidance in the Proposing Release, Rule 606(b)(3) does not limit the
number of times that a customer may place a request for an order
handling report and does not preclude a customer from making a standing
request to its broker-dealer, whereby the customer would automatically
receive a recurring report on a periodic basis without the need to make
repeated requests.\214\ Rule 606(b)(3) also does not require the
broker-dealer to provide order handling information that is duplicative
of information that the broker-dealer previously provided the customer
pursuant to a prior request under the rule.\215\ For example, if a
broker-dealer provides a report to a customer for the prior six months,
and that customer requests an additional report the following month,
the broker-dealer would only need to provide a report for the latest
month, subject to the customer-level de minimis threshold being met for
the six month period that includes the latest month.
---------------------------------------------------------------------------

    \214\ See id. at 49448.
    \215\ See id.
---------------------------------------------------------------------------

    Six-Month Period Covered by the Report. One commenter stated that
six months is a reasonable timeframe for broker-dealers to make
historical data available for the Rule 606(b)(3) report, and suggested
that historical data be retained at the broker-dealer for two years to
fill any gaps in data collection from counterparties.\216\ Another
commenter suggested that the report cover the previous quarter, not six
months.\217\ The Commission continues to believe that it is appropriate
to require the Rule 606(b)(3) report to provide order handling data for
a six-month period because it would provide customers with historical
data to evaluate their broker-dealers' order routing practices to gauge
the risk of information leakage and the potential for conflicts of
interest. The Commission believes that a six-month period is reasonable
to judge the performance of an execution venue, and the time period is
long enough to offset any potential market moving event that may
distort the data.\218\ In addition, while one commenter requested a
record retention period of two years for the Rule 606(b)(3) data, the
Commission believes that such a retention period is unwarranted because
the purpose of the Rule 606(b)(3) report is to provide customers with
baseline information on a current or near-current basis that better
enables them to understand how a broker-dealer is exercising discretion
when routing their NMS stock orders. The purpose of the Rule 606(b)(3)
report is not to enable a historical perspective on how broker-dealers
routed orders. Moreover, broker-dealer order routing practices may be
altered frequently, in connection with, among other things, an ever-
evolving equity market structure, and so how a broker-dealer routed NMS
stock orders more than six months prior to a request for a Rule
606(b)(3) report may not be consistent with the broker-dealer's more
current routing practices. At the same time, if a Rule 606(b)(3) report
is requested by a broker-dealer's customer, the broker-dealer is
required to provide all of the information set forth in the rule, as
applicable. As noted above, a broker-dealer is required to fulfill the
customer's request with the most recent six months-worth of complete
order handling information that the broker-dealer has already obtained
at the time of the customer's request, subject to the de minimis
exception.
---------------------------------------------------------------------------

    \216\ See Capital Group Letter at 4-5.
    \217\ See Markit Letter at 16.
    \218\ See Rule 606 Predecessor Adopting Release, supra note 7,
at 75430 n.81.
---------------------------------------------------------------------------

    Report Data Broken Down by Calendar Month. One commenter stated
that broker-dealers should be required to provide the proposed data on
a weekly basis if requested by the customer, and that this frequency of
data would be most useful to firms, particularly if data is provided in
eXtensible Markup Language (``XML'') format.\219\ This commenter also
stated that the time frame for providing the data should be no longer
than monthly. This commenter asserted that the Commission correctly
noted in the Proposal that changes in fee structures at trading centers
may affect a broker-dealer's routing decisions and that these fee
changes mostly take place at the beginning of the month. According to
this commenter, broker-dealers typically adjust mid-month to fee
structure changes in order to meet targeted volume tiers that may have
changed and having monthly data will enable a customer to monitor for
such changes in order routing behavior.\220\
---------------------------------------------------------------------------

    \219\ See Capital Group Letter at 5.
    \220\ See id.
---------------------------------------------------------------------------

    The Commission continues to believe that it is appropriate for the
data in the Rule 606(b)(3) report to be broken down by calendar month.
Consistent with this calendar month breakdown, as noted above, the six
month period covered by the Rule 606(b)(3) report is a six calendar
month period. Grouping the report data by calendar month should enable
customers to assess how changes in fee structures at trading centers,
which typically occur on a monthly basis, may affect a broker-dealer's
routing decisions. Further, the Commission continues to believe that
requiring the report data to be grouped by calendar month will help
enable customers to assess how a broker-dealer's order handling
practices may change in response to other internal or external factors.
Grouping the data by calendar month allows a small aggregation of data,
since it is possible that certain trading days may not yield any data
points. Therefore, allowing grouping by calendar month may enable
customers to evaluate the performance of their broker-dealers based on
more meaningful data, and enable customers and broker-dealers to
further discuss in a more meaningful manner how orders are routed and
executed. The Commission does not believe that the rule should require
a finer time period, such as weekly, as suggested by one commenter. The
adopted rule does not limit what a customer may request from its
broker-dealer, and in certain situations, a customer may request and
receive weekly reports from its broker-dealer. The Commission believes
that to require by rule a weekly report could increase compliance costs
that may not be commensurate with the expected benefits. As such, the
Commission does not believe that it is necessary to change the calendar
month time period.
    Annual Notice of Availability of Rule 606(b)(3) Report. Rule
606(b)(2) requires

broker-dealers to notify customers in writing at least annually of the
availability on request of the information specified in Rule 606(b)(1),
and the Commission solicited comment as to whether the Commission
should include a similar requirement for the new Rule 606(b)(3)
disclosures. Four commenters stated that broker-dealers should not be
required to provide an annual notice of the availability of the Rule
606(b)(3) report to institutional customers,\221\ as institutional
customers that do not request the report are unlikely to need it.\222\
One commenter stated that institutional customers are sophisticated
market participants who can best judge the type of information they
need.\223\ Accordingly, the Commission is not adopting an annual
notification requirement with respect to the Rule 606(b)(3) reports.
---------------------------------------------------------------------------

    \221\ See FIF Letter at 17; Fidelity Letter at 5; Bloomberg
Letter at 15; Markit Letter at 17.
    \222\ See Bloomberg Letter at 15; Fidelity Letter at 4.
    \223\ See Fidelity Letter at 4.
---------------------------------------------------------------------------

    Automatic Report to Customers. In the Proposing Release, the
Commission noted that it considered an alternative to proposed Rule
606(b)(3) that would not require that customers request customer-
specific standardized reports on order handling, but would instead
require broker-dealers to provide them to customers automatically even
in the absence of a customer request. The Commission also raised the
notion of whether broker-dealers should be required to provide an
internet portal where customers can view or download the reports.\224\
---------------------------------------------------------------------------

    \224\ See Proposing Release, at 49501-02.
---------------------------------------------------------------------------

    One commenter supported the Commission's proposed approach and
stated that some institutional customers may request firm-specific
customized reports and may not need the additional information in the
order handling report.\225\ Another commenter did not believe that the
Commission should mandate delivery of the Rule 606(b)(3) order handling
reports via internet portal.\226\ Another commenter suggested that the
process of sending reports to the customer should be automated such
that it is emailed to the customer, either with a trade confirmation or
on a periodic basis.\227\ Two commenters stated that broker-dealers
could make customer's data available via the internet for broker-
dealers with customer-specific portals.\228\ Another commenter stated
that customer specific information should be sent periodically to
investors, rather than on an ad hoc user-requested basis.\229\
---------------------------------------------------------------------------

    \225\ See Fidelity Letter at 4.
    \226\ See Markit Letter at 18.
    \227\ See Kohen Letter.
    \228\ See Capital Group Letter at 4; FIF Letter at 18.
    \229\ See HMA Letter at 8-10.
---------------------------------------------------------------------------

    The Commission is adopting as proposed the aspect of Rule 606(b)(3)
that requires a broker-dealer to provide the order handling report upon
customer request, and is not adopting any requirement regarding
automatic provision of the report in the absence of a customer request
or via an internet portal. Commenters that did support such automated
delivery mechanisms did not provide a persuasive rationale for the
Commission at this time to impose the likely cost to broker-dealers of
developing such mechanisms. Not all customers may feel the need to
request Rule 606(b)(3) reports from their broker-dealer, and as such it
would not be a productive use of resources for broker-dealers
automatically to provide reports to such customers. Moreover, under the
adopted rule, a customer that wishes to receive the report can request
it from the customer's broker-dealer. Mandating an automatic push to
all customers would not be efficient, and could provide additional
costs to broker-dealers. The Commission believes that the adopted rule
strikes an appropriate balance between broker-dealers and customers,
and does not believe that the rule should require the disclosure of
order information when it is not requested by the customer. Likewise,
customers that do request Rule 606(b)(3) reports may not desire to
receive them via an internet portal, rendering the provision of
internet portal access to such customers unnecessary.
5. Format of Customer-Specific Order Handling Reports
a. Breakdown by Order Routing Strategy Category at Each Venue
i. Proposal
    The Commission proposed to require that the Rule 606(b)(3) order
handling report be categorized by order routing strategy category for
institutional orders for each venue.\230\ The Commission proposed that
order routing strategies be categorized into three general strategy
categories for purposes of the Rule 606(b)(3) report: (1) A ``passive
order routing strategy,'' which emphasizes the minimization of price
impact over the speed of execution of the entire institutional order;
(2) a ``neutral order routing strategy,'' which is relatively neutral
between the minimization of price impact and speed of execution of the
entire order; and (3) an ``aggressive order routing strategy,'' which
emphasizes speed of execution of the entire order over the minimization
of price impact.\231\
---------------------------------------------------------------------------

    \230\ See proposed Rule 606(b)(3).
    \231\ See proposed Rule 606(b)(3)(v). See Proposing Release,
supra note 1, at 49450-52 for additional detail on the Commission's
proposal.
---------------------------------------------------------------------------

ii. Final Rule and Response to Comments
    The Commission is not adopting the proposed requirement that the
Rule 606(b)(3) disclosures be categorized by order routing strategy for
each venue to which the broker-dealer routed the customer's orders. The
Commission received a significant amount of comment on this proposed
requirement, nearly all of which expressed concern about, and none of
which supported, the requirement as proposed. Commenters generally
believed that the proposed categorization of the Rule 606(b)(3) order
handling information for each venue by passive, neutral, or aggressive
routing strategies category would be unnecessarily subjective and
complex.\232\ Several commenters stated that broker-dealers may
categorize similar routing strategies differently, which could limit
the utility and comparability of the reports.\233\ Multiple commenters
stated that the proposed strategies could be impacted by investor-
specific customization.\234\ In addition, several commenters stated
that the proposed routing strategy categorization would be unworkable
in light of the fact that trading algorithms may use multi-layered
methodologies that would fit into more than one of the proposed
categories,\235\ and can be dynamic and adjust to market conditions in
real-time.\236\ Commenters also asserted, broadly, that the proposed
order routing strategy breakdown would be of little to no value to
institutional investors.\237\
---------------------------------------------------------------------------

    \232\ See, e.g., SIFMA Letter at 4; FIF Letter at 4, 15-16; FIF
Addendum at 3; ICI Letter at 8; MFA Letter at 5; STA Letter at 5, 7-
8; STA Letter II at 1; EMSAC Rule 606 Recommendations, supra note
16, at 3, 5.
    \233\ See, e.g., SIFMA Letter at 4; FIF Letter at 4, 15-16; FIF
Addendum at 3; MFA Letter at 5; Dash Letter at 6. One of these
commenters agreed with the Commission's proposal to require broker-
dealers to document their assignment of institutional orders to a
particular routing strategy category, and suggested that the
documentation be publicly available. See Dash Letter at 6-7.
    \234\ See SIFMA Letter at 4; FIF Letter at 4; KCG Letter at 5-6;
Markit Letter at 20.
    \235\ See FIF Letter at 4, 15.
    \236\ See ICI Letter at 8; Capital Group Letter at 6; FIF Letter
at 4, 15; MFA Letter at 5.
    \237\ See Markit Letter at 20-22; STA Letter at 5; Fidelity
Letter at 5, KCG Letter at 6. The Commission also received comment
that suggested alternative methods to characterize order routing
strategies or proposed breaking down the venue data by categories
other than routing strategy, which the Commission is not adopting.
See, e.g., MFA Letter at 5; Dash Letter at 6; HMA Letter at 10; HMA
Letter II at 4; Better Markets Letter at 5; SIFMA Letter at 4-5; FIF
Letter at 4; FIF Addendum at 3; ICI Letter at 8.

---------------------------------------------------------------------------

    The Commission acknowledged in the Proposing Release that the
proposed order routing strategy categorization had limitations similar
to many of those raised by commenters, including the potential for
inconsistency in how broker-dealers categorize an order routing
strategy and reduced comparability of order handling reports across
broker-dealers, mixed routing strategies that could reasonably fit into
more than one category, and customers that provide specific or market
condition-dependent order handling instructions to their broker-dealers
that affect how a broker-dealer handles an institutional order.\238\
The Commission preliminarily believed that such limitations would occur
mainly at the margins, and that grouping order routing strategies into
the three proposed categories would still allow for meaningful
comparison of order handling practices across broker-dealers, and would
allow customers to better evaluate a broker-dealer's order handling
practices for orders that are handled using similar strategies.\239\ In
addition, a breakdown by routing strategy within each venue category
was suggested by a group of commenters who submitted to the Commission,
in advance of the Proposal, a proposed template for the customer-
specific institutional order handling report.\240\
---------------------------------------------------------------------------

    \238\ See Proposing Release, supra note 1, at 49451.
    \239\ See id.
    \240\ See Letter to Mary Jo White, Chair, Commission, from
Dorothy M. Donohue, Deputy General Counsel, Investment Company
Institute, Stuart J. Kaswell, Executive Vice President & Managing
Director, General Counsel, Managed Funds Association, and Randy
Snook, Executive Vice President, Securities Industry and Financial
Markets Association, dated October 23, 2014 (``Associations
Letter''), available at http://www.sec.gov/comments/s7-02-10/s70210-428.pdf.
---------------------------------------------------------------------------

    The comments received on this topic indicate, however, that
interested market participants widely believe that the proposed order
routing strategy categorization would not provide a sufficient benefit
that justifies adopting the categorization notwithstanding its
limitations. Commenters appear to believe that these limitations are
more pervasive and potentially more deleterious to the quality and
usefulness of the Rule 606(b)(3) order handling reports than the
Commission preliminarily believed. Indeed, the Commission acknowledges
that several commenters believed that the proposed order routing
strategy categorization would not provide information to customers that
is useful for assessing their broker-dealers' order handling
performance and, in fact, could impair the utility and comparability of
the Rule 606(b)(3) order handling reports. Accordingly, the Commission
is persuaded not to include in final Rule 606(b)(3) the proposed order
routing strategy categorization and therefore has not included proposed
subparagraph (b)(3)(v) in the adopted rule.\241\ Final Rule 606(b)(3)
requires that the customer-specific order handling report categorize
the data specified in subparagraphs (b)(3)(i) through (iv) for each
venue to which the broker-dealer routed orders covered by the rule for
the customer, without further categorization within each venue
category.
---------------------------------------------------------------------------

    \241\ The Commission has not identified an appropriate
alternative. The Commission believes that the commenters'
suggestions such as categorizations based on ``scheduled'' versus
``non-scheduled'' distinctions, broker-dealers' intent, order types,
or the state of the market, would all face similar issues as the
originally proposed categorization because, as expressed in the
comment letters, order routing strategies are difficult to place
into well-defined categories due to the complex nature of today's
order execution algorithms and smart order routing systems. The
Commission believes that requiring categorization of order routing
strategies could lead to inaccurate and potentially misleading
disclosures.
---------------------------------------------------------------------------

    As discussed infra,\242\ the Commission believes that the order
handling data points specified in subparagraphs (b)(3)(i) through (iv)
of the rule, separated according to each venue to which the broker-
dealer routed orders for the customer, will provide the customer with
sufficient information to evaluate its broker-dealer's routing
performance and compare it to that of other broker-dealers. This data
would also allow a customer to ascertain at a high level what type of
routing strategies a broker-dealer may have utilized for the customer's
not held NMS stock order flow. For example, as discussed infra,\243\
subparagraphs (b)(3)(iii) and (iv) of Rule 606(b) require broker-
dealers to disclose specific information regarding orders that provided
liquidity and orders that removed liquidity, respectively. Orders that
provided liquidity may reasonably be associated with routing strategies
that operate more passively, while orders that remove liquidity may be
associated with routing strategies that operate more aggressively. Even
if such associations cannot be made reliably, however, the Commission
believes that Rule 606(b)(3) is more likely to provide appropriate and
useful order handling information, and information that is more uniform
across broker-dealers and therefore more likely to facilitate
comparisons across broker-dealers, by requiring that the information
specified in subparagraphs (b)(3)(i) through (iv) be separated for each
venue to which the broker-dealer routed orders for the customer without
further categorization within each venue category. The requirements of
Rule 606(b)(3) provide a standardized baseline of customer-specific
order handling disclosures, and customers remain free to negotiate for
additional disclosures or categorizations, such as categorizations by
routing strategy, with their broker-dealers if they so desire.
---------------------------------------------------------------------------

    \242\ See infra Section III.A.6.
    \243\ See id.
---------------------------------------------------------------------------

b. Segregation of Directed Orders and Non-Directed Orders
i. Proposal
    The Commission did not propose to require that the Rule 606(b)(3)
customer-specific order handling report differentiate between orders
that the customer directed the broker-dealer to route to a particular
venue versus orders that the customer did not so direct.
ii. Final Rule and Response to Comments
    Several commenters suggested that directed orders and non-directed
orders be segregated in the Rule 606(b)(3) order handling reports. As
noted above, several commenters asserted that the disclosures in the
Rule 606(b)(3) reports would be most useful to customers if they are
focused on orders for which the broker-dealer exercised discretion in
handling.\244\ In addition, commenters suggested that directed orders
be clearly segregated in the reports from orders that were routed
according to the broker-dealer's default routing behavior, otherwise
the broker-dealer's normal routing behavior could be
misrepresented.\245\ One commenter requested that directed orders be
included, but as a separate category, in Rule 606 reports in order to
expand the universe of covered orders.\246\
---------------------------------------------------------------------------

    \244\ See supra Section III.A.1.b.ii. See also Bloomberg Letter
at; Markit Letter at 8; STA Letter at 6.
    \245\ See FIF Letter at 5; Better Markets Letter at 5-6.
    \246\ See HMA Letter at 3.
---------------------------------------------------------------------------

    The Commission is modifying Rule 606(b)(3) to require that the
customer-specific order handling report for not held NMS stock orders
be divided into separate sections for the customer's directed orders
and non-directed orders, with each section containing the disclosures
regarding the customer's order flow with the broker-dealer specified in
Rule 606(b)(3), as well as the disclosures for each venue to which the
broker-dealer routed orders specified in Rules 606(b)(3)(i)-(iv). The
two types of orders are fundamentally different in that, with directed
orders,

the customer directs the broker-dealer to route its orders to a
particular venue, whereas the broker-dealer exercises discretion in
determining where to route and execute the customer's non-directed
orders. Segregating directed not held orders from non-directed not held
orders in the customer-specific report would provide a customer with
one report that reflects all of its not held NMS stock orders handled
by the broker-dealer while separately providing disclosures for orders
for which the broker-dealer exercises venue routing discretion.
    By providing the order handling information separately for non-
directed not held orders, the Rule 606(b)(3) report will provide a
customer with a more precise reflection of how and where its broker-
dealer is routing the customer's not held NMS stock orders pursuant to
the discretion afforded to the broker-dealer. A primary utility of the
Rule 606(b)(3) reports is to enable customers to better understand how
their broker-dealers exercise discretion in handling their not held
orders, and this will be more easily achieved if the reported
disclosures for directed and non-directed orders are separate.
Otherwise, with directed not held orders and non-directed not held
orders commingled in the report, a customer may not be able to
accurately differentiate routing behavior for which its broker-dealer
exercised discretion in determining where to route an order from
routing behavior where the customer itself directed the routing
destination. Separating the Rule 606(b)(3) order handling disclosures
for non-directed not held orders from those for directed not held
orders should help customers evaluate their broker-dealers order
handling performance and how their broker-dealers are achieving best
execution for their non-directed not held orders while managing the
potential impact of information leakage and conflicts of interest.
    In addition, the Commission believes that customers will benefit
from being able to analyze Rule 606(b)(3) routing disclosures that are
specific to their directed not held orders for NMS stock. As discussed
below, the Rule 606(b)(3) reports require the broker-dealer to
disclose, among other things, information on order execution.\247\ This
information would be relevant to a customer assessing its broker-
dealer's execution of its directed not held orders, including a
customer interested in validating that its broker-dealer is routing its
directed not held orders consistent with the customer's instructions.
---------------------------------------------------------------------------

    \247\ See infra Section III.A.6.
---------------------------------------------------------------------------

c. XML Format and Standardization
i. Proposal
    The Commission proposed to require that the customer-specific order
handling report required under proposed Rule 606(b)(3) be made
available using an XML schema and associated PDF renderer published on
the Commission's website.\248\ To provide a standardized presentation
for the report, the Commission also proposed a chart form for the
report's required disclosures of information regarding orders that a
broker-dealer executes internally or routes to other venues.\249\
Specifically, the Commission proposed to require that each report
contain rows that would be categorized by venue and by order routing
strategy category for each venue,\250\ with certain columns of
information for each of the required rows.\251\ Thus, as proposed, each
report would have been formatted so that a customer would be readily
able to observe its order activity at a particular venue, as further
subdivided by order routing strategy category for that venue.\252\
---------------------------------------------------------------------------

    \248\ See proposed Rule 606(b)(3). The Commission's schema is a
set of custom XML tags and XML restrictions designed by the
Commission to reflect the proposed disclosures in Rule 606. XML
enables data to be defined, or ``tagged,'' using standard
definitions. The tags establish a consistent structure of identity
and context. This consistent structure can be automatically
recognized and processed by a variety of software applications such
as databases, financial reporting systems, and spreadsheets, and
then made immediately available to the end-user to search,
aggregate, compare, and analyze. In addition, the XML schema could
be easily updated to reflect any changes to the open standard. XML
and PDF are ``open standards,'' which is a term that is generally
applied to technological specifications that are widely available to
the public, royalty-free, at no cost.
    \249\ See Proposing Release, supra note 1, at 49450. The
Commission also noted that, for purposes of the Rule 606(b)(3) order
handling report, a venue would be any trading center to which an
order is routed or where an order is executed. See Rule 600(b)(78);
Proposing Release, supra note 1, at 49450.
    \250\ See proposed Rule 606(b)(3); see also Proposing Release,
supra note 1, at 49450.
    \251\ See proposed Rule 606(b)(3)(i) through (iv); see also
Proposing Release, supra note 1, at 49450.
    \252\ See Proposing Release, supra note 1, at 49450.
---------------------------------------------------------------------------

    The Commission also proposed new format requirements for the
existing customer-specific order handling disclosures in Rule
606(b)(1). Specifically, the Commission proposed to require that the
customer-specific order routing report required by Rule 606(b)(1) be
made available using an XML schema and associated PDF renderer
published on the Commission's website.\253\
---------------------------------------------------------------------------

    \253\ See proposed Rule 606(b)(1). See Proposing Release, supra
note 1, at 49448-51 for additional detail on the Commission's
proposal.
---------------------------------------------------------------------------

ii. Final Rule and Response to Comments
    The Commission is adopting as proposed the requirement that the
customer-specific order handling report required under Rule 606(b)(3)
be made available using an XML schema and associated PDF renderer
published on the Commission's website.\254\
---------------------------------------------------------------------------

    \254\ See Rule 606(b)(3).
---------------------------------------------------------------------------

    The Commission received several comments on the proposed reporting
format,\255\ with a number of commenters supporting a machine-readable
or standardized format \256\ or XML in particular,\257\ and other
commenters criticizing the proposed use of XML and a PDF renderer and
suggesting different formats such as JavaScript Object Notation
(``JSON''), comma-separated values (``CSV''), spreadsheet, or flat
text.\258\
---------------------------------------------------------------------------

    \255\ See Capital Group Letter at 4; Kohen Letter; HMA Letter at
12; Better Markets Letter at 2; FIF Letter at 17; Markit Letter at
17; CFA Letter at 11; FIA Letter at 2; Thomson Reuters Letter at 2.
    \256\ See, e.g., HMA Letter at 12; Markit Letter at 17.
    \257\ See, e.g., Capital Group Letter at 4; Better Markets
Letter at 2; FIF Letter at 17; FIA Letter at 2.
    \258\ See HMA Letter at 12; Markit Letter at 17; Kohen Letter.
---------------------------------------------------------------------------

    The Commission believes that while XML predates JSON as a standard,
XML has proven to be a flexible standard that continues to be
incorporated into common desktop applications and is the basis for a
variety of financial reporting languages in a way that JSON is not.
Moreover, if the Commission did not specify a particular format and
instead left it to the discretion of the filer, users of the data would
lose their ability to compare the data easily and easily ensure their
consistency between filers. XML's Schema is a widely used, stable
metadata standard which is better suited for validation than JSON.
Validations help ensure data consistency and comparability, which
enhances overall data quality for both broker-dealers and customers.
Market participants have the necessary tools and experience with
analyzing a variety of financial data in the XML format. The use of XML
has been adopted in a number of recent Commission rulemakings \259\ and
the

Proposal to use an XML format here was supported by a number of
commenters.\260\
---------------------------------------------------------------------------

    \259\ See, e.g., Securities Exchange Act Release Nos. 79095, 81
FR 81870 (November 18, 2016) (adopting Investment Company Reporting
Modernization); 74246, 80 FR 14437 (March 19, 2015) (adopting
Security-Based Swap Data Repository Registration, Duties, and Core
Principles); 72982 (September 4, 2014), 79 FR 57183 (September 24,
2014) (adopting Asset-Backed Securities Disclosure and
Registration).
    \260\ See, e.g., Capital Group Letter at 4; Better Markets
Letter at 2; FIF Letter at 17; CFA Letter at 11.
---------------------------------------------------------------------------

    As for the suggestions to adopt a CSV, spreadsheet file, or flat-
text file format, the Commission does not believe that these formats
would be as suitable as XML, since the hierarchical nature of the
disclosures required by the amendments being adopted today would
require more than a single set of uniformly structured rows, and these
formats would not support representing such disclosures easily.
Moreover, neither of those formats can incorporate robust validations
to address issues such as completeness, required relationships, and
correct formatting. If used, a CSV, spreadsheet, or flat text file
format would likely have data quality issues of consistency and
comparability that would make the data less usable and require repeated
corrections by the broker-dealers. Accordingly, the Commission is
adopting as proposed the requirement that the customer-specific order
handling report be made available using an XML schema to be published
on the Commission's website.
    While one commenter criticized the use of the PDF renderer, that
commenter criticized its use because PDF files cannot be processed and
analyzed.\261\ The Commission notes, however, that the rule, as
amended, requires that the data be provided ``using the most recent
versions of the XML schema and the associated PDF renderer'' (emphasis
added). The PDF file and underlying data in an XML format both will be
required. The requirement to use the Commission's XML schema is
designed to ensure that the data is provided in an XML format that is
structured and machine-readable, so that the data can be more easily
processed and analyzed. As a result, all data that would appear in a
PDF file would be required to have a corresponding file provided in XML
that has been used to generate the PDF file using the renderer. The
Commission received no other comments opposing the Proposal to require
that the reports be provided in a human-readable format through the use
of a PDF renderer, and one commenter supported requiring a human-
readable format.\262\ The Commission continues to believe that the
reports should be provided in a human-readable format for those
customers that prefer only to review individual reports and not
necessarily aggregate or conduct large-scale data analysis on the data.
The Commission believes that by requiring use of the associated PDF
renderer published on the Commission's website, the XML data would be
instantly presentable in a human-readable PDF format and consistently
presented across reports. Accordingly, the Commission is adopting as
proposed the requirements that the customer-specific order handling
report be made available using an XML schema and associated PDF
renderer published on the Commission's website.
---------------------------------------------------------------------------

    \261\ See Kohen Letter.
    \262\ See Markit Letter at 28.
---------------------------------------------------------------------------

    One commenter suggested that the Commission should add headers to
rows and columns in the customer-specific report that explains what
each category of information means,\263\ and another commenter stated
that the fields in the report should be explicitly defined.\264\ For
purposes here, the Commission assumes that the latter comment pertains
to defining the terms used in Rule 606(b)(3)(i) through (iv). No
commenters stated that any of the undefined terms in proposed Rule
606(b)(3)(i) through (iv) were unclear or inconsistent or would
otherwise impede comparability, and the Commission believes that adding
headers and definitions may result in unnecessary confusion and
complexity. Accordingly, the Commission is not adopting definitional
headers for the customer-specific reports and is not adopting
definitions for the terms used in proposed Rule 606(b)(3)(i) through
(iv). The Commission is adopting as proposed the chart form for the
required disclosures set forth in Rule 606(b)(3)(i) through (iv).\265\
---------------------------------------------------------------------------

    \263\ See CFA Letter at 10-11.
    \264\ See FIF Letter at 17.
    \265\ See Rule 606(b)(3).
---------------------------------------------------------------------------

    The Commission also is adopting as proposed the requirement that
the customer-specific order handling report required under Rule
606(b)(1) be made available using an XML schema and associated PDF
renderer published on the Commission's website.\266\ The Commission
believes that providing the customer-specific Rule 606(b)(1) reports in
the proposed XML/PDF format will promote the consistency and
comparability of the reports. The Commission received two comments
specifically questioning the need for providing such reports in the
proposed XML/PDF format, stating that customers rarely request these
reports, and stating their view that the cost of implementing the
proposed format would outweigh the benefits.\267\ As discussed above,
the Commission is amending the categories of orders to which the
existing disclosure requirements of Rule 606(b)(1) apply to include
orders in NMS stock that are submitted on a not held basis and for
which the broker-dealer is not required to provide the customer a
report under Rule 606(b)(3).\268\ The Commission believes that
customers that submit orders on a not held basis that are not entitled
to receive the disclosures required by Rule 606(b)(3) may still analyze
and compare the data they receive under Rule 606(b)(1) and engage in
informed discussions with their broker-dealers about the broker-
dealer's order handling practices. The use of the XML/PDF format will
enable those customers to more easily analyze and compare the
individualized data provided.
---------------------------------------------------------------------------

    \266\ See Rule 606(b)(1).
    \267\ See Thomson Reuters Letter at 2; FIF Letter at 9, 12.
    \268\ See supra Section III.A.1.b.vi.
---------------------------------------------------------------------------

6. Rule 606(b)(3) Report Content
a. Information on the Customer's Order Flow With the Reporting Broker-
Dealer
i. Proposal
    The Commission proposed that the Rule 606(b)(3) order handling
report include information on the order flow sent by the customer to
the broker-dealer. Specifically, the Commission proposed to require
disclosure of: (1) Total number of shares of orders sent to the broker-
dealer by the customer during the reporting period; (2) total number of
shares executed by the broker-dealer as principal for its own account;
(3) total number of orders exposed by the broker-dealer through an
actionable IOI; and (4) venue or venues to which orders were exposed by
the broker-dealer through an actionable IOI.\269\
---------------------------------------------------------------------------

    \269\ See proposed Rule 606(b)(3). See Proposing Release, supra
note 1, at 49452-54 for additional detail on the Commission's
proposal.
---------------------------------------------------------------------------

ii. Final Rule and Response to Comments
    The Commission is adopting, with certain modifications, the
requirement that the Rule 606(b)(3) order handling report include
information on the customer's not held NMS stock order flow with the
broker-dealer. The Commission believes that this information would be
useful for customers to evaluate their not held order flow with a
particular broker-dealer during the reporting period, the broker-
dealer's methods for achieving best execution for such order flow, and
the potential for conflicts of interests and information leakage
associated with

such methods. Specifically, the Commission is adopting as proposed the
requirement that the Rule 606(b)(3) report disclose the total number of
shares of not held NMS stock orders sent to the broker-dealer by the
customer during the reporting period, as well as the requirement that
the Rule 606(b)(3) report disclose the total number of shares executed
by the broker-dealer as principal for its own account.\270\ One
commenter expressed support for these requirements.\271\ The Commission
continues to believe that the information would be useful to customers
in understanding how much of their not held order flow was handled by a
particular broker-dealer during the reporting period, which should help
customers make comparisons across broker-dealers, as well as how often
a particular broker-dealer trades against the customers' not held
orders, which is relevant information to customers assessing their
broker-dealers' compliance with best execution obligations and
potential conflicts of interest that their broker-dealers face when
trading as principal.
---------------------------------------------------------------------------

    \270\ See Rule 606(b)(3).
    \271\ See Markit Letter at 22.
---------------------------------------------------------------------------

    The Commission also is adopting the requirement that the Rule
606(b)(3) report disclose the total number of not held NMS stock orders
exposed by the broker-dealer through actionable IOIs. One commenter
expressed support for this requirement.\272\ The Commission continues
to believe that that identifying the total number of not held NMS stock
orders exposed by a broker-dealer though actionable IOIs should give
customers a more complete view of how their broker-dealers handle their
not held orders and allow them to better evaluate how their broker-
dealer manages information leakage.
---------------------------------------------------------------------------

    \272\ See id. at 23.
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    The Commission is adopting, with modifications discussed below, the
requirement that broker-dealers disclose the venue(s) to which not held
NMS stock orders were exposed by the broker-dealer through an
actionable IOI. The Commission continues to believe that disclosure of
the specific venue(s) to which a broker-dealer exposed such an order by
an actionable IOI would be useful for the customer to further assess
the extent, if any, of information leakage of their not held orders and
potential conflicts of interest facing their broker-dealers.
Specifically, the Commission believes that such information will enable
customers to assess whether their broker-dealers are exposing their not
held orders to select market participants with which the broker-dealer
has affiliations or business relationships, or from which the broker-
dealer receives other incentives. In addition, the Commission believes
that disclosure of this information will provide the customer with a
more complete understanding of the broker-dealer's order handling
activities for purposes of assessing the broker-dealer's execution
quality generally.
    Commenters generally supported requiring a broker-dealer to
identify the venue(s) that were sent actionable IOIs.\273\ One
commenter expressed broad support for requiring a broker-dealer to
identify for customers the total number of orders exposed, and the
venue(s) to which orders were exposed, through actionable IOIs.\274\
This commenter also stated that the venue information is necessary for
an institution to evaluate the exposure of its orders through
actionable IOIs for information leakage and conflicts of interest.\275\
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    \273\ See HMA Letter at 10; NYSE Letter at 1-2; Markit Letter at
4, 11-12; FIF Letter at 7; Fidelity Letter at 4; STA Letter II at 3.
    \274\ See NYSE Letter at 1.
    \275\ See id. at 2.
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    Some commenters suggested that the Commission should clarify that
the reference in proposed Rule 606(b)(3) to the venue(s) to which not
held NMS stock orders were exposed by the broker-dealer through an
actionable IOI does not include IOIs that a broker-dealer may send to
its institutional customers.\276\ They stated that including broker-
dealers' institutional customers as ``venues'' under the rule would be
problematic from a competitive perspective, as broker-dealers would be
required to disclose their customer lists, and many customers likely
would not want their identities to be disclosed.\277\ Some of these
commenters suggested that, to effectuate the suggested clarification,
the Commission should require disclosure of actionable IOI information
only with respect to actionable IOIs sent to ``market centers'' as
defined in Rule 600(b)(38), which would not include broker-dealers'
customers.\278\
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    \276\ See Markit Letter at 4, 11-12; FIF Letter at 7; Fidelity
Letter at 4; STA Letter II at 3.
    \277\ See Market Letter at 12; FIF Letter at 7; Fidelity Letter
at 4; STA Letter II at 3.
    \278\ 17 CFR 242.600(b)(38). See FIF Letter at 7; FIF Addendum
at 4 n.7; Fidelity Letter at 4; STA Letter II at 3.
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    The Commission's reference to ``venues'' for purposes of Rule
606(b)(3) is meant to refer to external liquidity providers to which
the broker-dealer may send actionable IOIs. To provide the clarity
requested by commenters, the Commission intends in this context for
these external liquidity providers generally to include market
participants that operate a business of providing liquidity by buying
and selling securities for their own account and seek to profit from
the spread between such trades, and that may reasonably be assumed by a
broker-dealer to be willing to take the opposite side of a trade in
connection with that business. The Commission believes that this
category of market participants likely would include market centers as
defined in Rule 600(b)(38), but may not be limited to such market
centers. For example, as noted above, for purposes of Rule 606(b)(3),
the Commission believes that the venues referenced by Rule 606(b)(3)
generally would include an external liquidity provider that trades
proprietarily. Rule 600(b)(38) defines market centers to include OTC
market makers, among other things. In this context, an external
liquidity provider that trades proprietarily, and to which a broker-
dealer sends an actionable IOI, may be an OTC market maker and thus a
market center under Rule 600(b)(38). But even if such an external
liquidity provider is not an OTC market maker and does not qualify as a
market center under Rule 600(b)(38), the Commission generally would
consider a venue to be covered by Rule 606(b)(3) if it operates a
business of providing liquidity by buying and selling securities for
its own account and seeks to profit from the spread from such trades,
and may reasonably be assumed by a broker-dealer to be willing to take
the opposite side of a trade in connection with that business.
    The Commission has considered commenters' concerns regarding the
potential disclosure of customer identities if customers to which
broker-dealers send actionable IOIs are ``venues'' under the rule. The
Commission believes that it is appropriate to protect the
confidentiality of broker-dealer customer information, which can be
proprietary. At the same time, the Commission believes that it is
important for a customer to receive detailed, standardized disclosures
from its broker-dealer that enable the customer to better evaluate the
broker-dealer's handling of its not held NMS stock orders. If a broker-
dealer exposes a customer's not held NMS stock order to one or more of
its other customers via an actionable IOI, the customer should be
entitled to that information as it may inform its assessment of its
broker-dealer's performance in handling its orders. Accordingly, the
Commission is adopting a modification to Rule

606(b)(3) that requires broker-dealers to disclose the fact that
actionable IOIs were sent to other customers, but not the identity of
such customers. The Commission believes that this approach strikes an
appropriate balance between protecting the identities of broker-
dealers' customers and sufficient and meaningful disclosure to
customers of the venues to which broker-dealers expose their not held
NMS stock orders through actionable IOIs. Thus, in pertinent part,
final Rule 606(b)(3) requires that the broker-dealer's customer-
specific order handling report include the venue(s) to which not held
NMS stock orders were exposed by the broker-dealer through an
actionable IOI provided that, where applicable, a broker-dealer must
disclose that it exposed a customer's order through an actionable IOI
to other customers but need not disclose the identity of such
customers.\279\ In other words, where a broker-dealer exposes a
customer's not held NMS stock order through an actionable IOI to a
venue that is a person or entity that may place an order, such as
another of the broker-dealer's customers, the broker-dealer's
disclosure in the Rule 606(b)(3) report with respect to this exposure
may be aggregated and anonymized, and simply state that the customer's
order was exposed to other customers of the broker-dealer via an
actionable IOI.
---------------------------------------------------------------------------

    \279\ See Rule 606(b)(3).
---------------------------------------------------------------------------

    One commenter suggested that IOIs should be reported separately
from orders.\280\ This commenter stated that the execution quality and
routing characteristics of IOIs are fundamentally different from normal
parent and child orders, and must be reported separately for investors
to properly analyze how orders are being handled; otherwise, according
to this commenter, the IOIs could generate potentially misleading
information.\281\ Consistent with this comment and what was proposed,
actionable IOIs are required to be reported separately under Rule
606(b)(3). Specifically, with respect to the order flow sent by the
customer to the broker-dealer, Rule 606(b)(3) requires disclosure of,
among other things: The total number of not held NMS stock orders
exposed by the broker-dealer through an actionable IOI and the venue or
venues to which such orders were exposed by the broker-dealer through
an actionable IOI. These are the only disclosures for actionable IOIs
under Rule 606(b)(3), and each such disclosure must be set forth
separately in the Rule 606(b)(3) report. The other Rule 606(b)(3)
disclosures pertain to customers' not held NMS stock orders (and any
child orders derived therefrom). They are distinct from the actionable
IOI disclosures, and they generally should not include actionable IOIs
in the reported information.
---------------------------------------------------------------------------

    \280\ See HMA Letter at 10.
    \281\ See id.
---------------------------------------------------------------------------

    Finally, one commenter stated that Rule 606 should require
disclosure of routing statistics in response to IOIs received by smart
order routers.\282\ According to this commenter, many smart order
routers accept IOIs and use them to make routing decisions, while few
smart order routers send IOIs. This commenter suggested that the
amendments to Rule 606 should require disclosure of routing statistics
in response to IOIs received by SORs including the fill rates on orders
sent to external liquidity providers or other venues, categorized by
the receipt of a contra-side IOI or not.\283\
---------------------------------------------------------------------------

    \282\ See Markit Letter at 4, 11-12, 23, 34.
    \283\ See id. at 23.
---------------------------------------------------------------------------

    As the commenter acknowledged, Rule 606(b)(3) focuses on requiring
the disclosure of IOIs sent by routing broker-dealers on behalf of
orders received from their customers, not of IOIs received by broker-
dealers.\284\ The Commission, at this time, intends to maintain the
focus of the rule's disclosure requirement for actionable IOIs on IOIs
sent by the broker-dealer. The required disclosures are intended to be
a baseline from which customers can, if they so choose, negotiate with
their broker-dealers for further data. The Commission believes that
such a baseline is provided, with respect to actionable IOIs, through
requiring disclosure of the actionable IOIs sent by a broker-dealer on
behalf of an order received from its customer. The Commission also
believes that this information would provide an adequate basis for
customers to assess the extent, if any, of information leakage of their
orders and potential conflicts of interest facing their broker-dealers,
as well as enable such customers to assess whether their broker-dealers
are exposing their orders to select market participants with which the
broker-dealer has affiliations or business relationships, or from which
the broker-dealer receives other incentives. The Commission does not
believe, at this juncture, that also including disclosures related to
IOIs received by broker-dealers would provide significantly more useful
information to customers in making those assessments with respect to
their broker-dealers.
---------------------------------------------------------------------------

    \284\ See id. at 12.
---------------------------------------------------------------------------

    Accordingly, Rule 606(b)(3) requires, with respect to the not held
NMS stock order flow sent by the customer to the broker-dealer, the
total number of shares of orders sent to the broker-dealer by the
customer during the relevant period; the total number of shares
executed by the broker-dealer as principal for its own account; the
total number of orders exposed by the broker-dealer through an
actionable indication of interest; and the venue or venues to which
orders were exposed by the broker-dealer through an actionable
indication of interest, provided that the identity of such venue or
venues may be anonymized if the venue is a person or entity that may
place an order with the broker-dealer.\285\
---------------------------------------------------------------------------

    \285\ See Rule 606(b)(3).
---------------------------------------------------------------------------

b. Information For Each Venue to Which the Broker-Dealer Routed Orders
For the Customer
i. Proposal
    The Commission proposed that the customer-specific order handling
report required under proposed Rule 606(b)(3) include specific columns
of information for each venue to which the broker-dealer routed orders
for the customer, in the aggregate and broken down by passive, medium,
and aggressive order routing strategies.\286\ The proposed rule
identified four categories of such information: Information on order
routing, information on order execution, information on orders that
provided liquidity, and information on orders that removed
liquidity.\287\
---------------------------------------------------------------------------

    \286\ See proposed Rule 606(b)(3). As discussed above, the
Commission is not adopting the proposed order routing strategy
categorization. See supra Section III.A.5.a.
    \287\ See proposed Rule 606(b)(3)(i) through (iv). See also
Proposing Release, supra note 1, at 49453-58 for additional detail
on the Commission's proposal.
---------------------------------------------------------------------------

    Information on Order Routing. With respect to information on order
routing, the Commission proposed to require, within each venue and
order routing strategy category, disclosure of: (1) Total shares
routed; (2) total shares routed marked immediate or cancel; \288\ (3)
total shares routed that were further routable; and (4) average order
size routed.\289\
---------------------------------------------------------------------------

    \288\ See Proposing Release, supra note 1, at 49453.
    \289\ See proposed Rule 606(b)(3)(i). See also Proposing
Release, supra note 1, at 49453-54.
---------------------------------------------------------------------------

    Information on Order Execution. With respect to information on
order execution, the Commission proposed to require disclosure of: (1)
Total shares executed; (2) fill rate; \290\ (3) average fill size;
\291\ (4) average net execution fee or

rebate; \292\ (5) total number of shares executed at the midpoint;
\293\ (6) percentage of shares executed at the midpoint; (7) total
number of shares executed that were priced on the side of the spread
more favorable to the order; (8) percentage of total shares executed
that were priced on the side of the spread more favorable to the order;
(9) total number of shares executed that were priced on the side of the
spread less favorable to the order; and (10) percentage of total shares
executed that were priced on the side of the spread less favorable to
the order.\294\
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    \290\ Fill rate would be calculated by the shares executed
divided by the shares routed.
    \291\ Average fill size would be the average size, by number of
shares, of each order executed on the venue.
    \292\ The fee and rebate would be measured in cents per 100
shares, specified to four decimal places.
    \293\ The midpoint would be the price halfway between the
national best bid and national best offer.
    \294\ See proposed Rule 606(b)(3)(ii). See also Proposing
Release, supra note 1, at 49454-55.
---------------------------------------------------------------------------

    Information on Orders that Provided Liquidity. In addition to the
order routing and execution data described above, the Commission
proposed to require disclosure of information on orders that provided
liquidity.\295\ Specifically, the Commission proposed to require
disclosure of: (1) Total number of shares executed of orders providing
liquidity; (2) percentage of shares executed of orders providing
liquidity; (3) average time between order entry and execution or
cancellation for orders providing liquidity (in milliseconds); and (4)
the average net execution rebate or fee for shares of orders providing
liquidity (cents per 100 shares, specified to four decimal
places).\296\ In connection with this new proposed requirement, the
Commission proposed to define the term ``orders providing liquidity''
to mean ``orders that were executed against after resting at a trading
center.'' \297\
---------------------------------------------------------------------------

    \295\ See proposed Rule 606(b)(3)(iii).
    \296\ See id. See also Proposing Release, supra note 1, at
49456.
    \297\ See proposed Rule 600(b)(58).
---------------------------------------------------------------------------

    Information on Orders that Removed Liquidity. Similar to orders
that provided liquidity, the Commission proposed to require the
disclosure of information on orders that removed liquidity.\298\
Specifically, the Commission proposed to require disclosure of: (1)
Total number of shares executed of orders removing liquidity; (2)
percentage of shares executed of orders removing liquidity; and (3)
average net execution fee or rebate for shares of orders removing
liquidity (cents per 100 shares, specified to four decimal
places).\299\ Relatedly, the Commission also proposed to define the
term ``orders removing liquidity'' as ``orders that executed against
resting trading interest at a trading center.'' \300\
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    \298\ See proposed Rule 606(b)(3)(iv).
    \299\ See proposed Rule 606(b)(3)(iv)(A) through (C). See also
Proposing Release, supra note 1, at 49458.
    \300\ See proposed Rule 600(b)(56).
---------------------------------------------------------------------------

ii. Final Rule and Response to Comments
    The Commission is adopting as proposed the requirement that the
Rule 606(b)(3) customer-specific order handling report include specific
columns of information for each venue to which the broker-dealer routed
orders for the customer,\301\ and is adopting as proposed the specific
pieces of information set forth in Rules 606(b)(3)(i) through (iv) that