[Federal Register Volume 81, Number 144 (Wednesday, July 27, 2016)]
[Proposed Rules]
[Pages 49431-49511]
[FR Doc No: 2016-16967]

Vol. 81

Wednesday,

No. 144

July 27, 2016

Part III

Securities and Exchange Commission

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17 CFR Parts 240 and 242

 Disclosure of Order Handling Information; Proposed Rule

Federal Register / Vol. 81 , No. 144 / Wednesday, July 27, 2016 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 242

[Release No. 34-78309; File No. S7-14-16]
RIN 3235-AL67

Disclosure of Order Handling Information

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is proposing to amend Rules 600 and 606 of Regulation National
Market System (``Regulation NMS'') under the Securities Exchange Act of
1934 (``Exchange Act'') to require additional disclosures by broker-
dealers to customers about the routing of their orders. Specifically,
with respect to institutional orders, the Commission is proposing to
amend Rule 606 of Regulation NMS to require a broker-dealer, upon
request of its customer, to provide specific disclosures related to the
routing and execution of the customer's institutional orders for the
prior six months. The Commission also is proposing to amend Rule 606 of
Regulation NMS to require a broker-dealer to make publicly available
aggregated information with respect to its handling of customers'
institutional orders for each calendar quarter. With respect to retail
orders, the Commission is proposing to make targeted enhancements to
current order routing disclosures under Rule 606 by requiring limit
order information to be broken down into marketable and non-marketable
categories, requiring the disclosure of the net aggregate amount of any
payment for order flow received, payment from any profit-sharing
relationship received, transaction fees paid, and transaction rebates
received by a broker-dealer from certain venues, requiring broker-
dealers to describe any terms of payment for order flow arrangements
and profit-sharing relationships with certain venues that may influence
their order routing decisions, and eliminating the requirement to
divide retail order routing information by listing market. In
connection with these new requirements, the Commission is proposing to
amend Rule 600 of Regulation NMS to include a number of newly defined
terms which are used in the proposed amendments to Rule 606. The
Commission is also proposing to amend Rules 605 and 606 of Regulation
NMS to require that the public order execution and order routing
reports be kept publicly available for a period of three years and to
make conforming changes to Rule 607. Finally, the Commission is
proposing to amend Rule 3a51-1(a) under the Exchange Act; Rule 13h-
1(a)(5) of Regulation 13D-G; Rule 105(b)(1) of Regulation M; Rules
201(a) and 204(g) of Regulation SHO; Rules 600(b), 602(a)(5),
607(a)(1), and 611(c) of Regulation NMS; and Rule 1000 of Regulation
SCI, to update cross-references as a result of this proposed rule.

DATES: Comments should be received on or before September 26, 2016.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-14-16 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Brent J. Fields, Secretary,
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-1090.

All submissions should refer to File Number S7-14-16. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street NE., Washington, DC
20549-1090 on official business days between the hours of 10:00 a.m.
and 3:00 p.m. All comments received will be posted without change; we
do not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly.
    Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any materials will
be made available on the Commission's Web site. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Theodore S. Venuti, Assistant
Director, at<PHONE_NUMBER>, Arisa Tinaves Kettig, Senior Special
Counsel, at<PHONE_NUMBER>, Steve Kuan, Special Counsel, at (202) 551-
5624, Amir Katz, Special Counsel, at<PHONE_NUMBER>, Chris Grobbel,
Special Counsel, at<PHONE_NUMBER>, or Andrew Sioson, Attorney-Advisor,
at<PHONE_NUMBER> Division of Trading and Markets, Securities and
Exchange Commission, 100 F Street, NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is proposing: (1) Amendments
to Rules 600 and 606 under the Exchange Act [17 CFR 242.600 and
202.606] to require additional disclosures by broker-dealers to
customers about the routing of their orders; (2) amendments to Rule 605
[17 CFR 242.605] to require that the public order execution and order
routing reports be kept publicly available for a period of three years;
and (3) conforming changes and updating cross-references in Rule 3a51-
1(a) under the Exchange Act [17 CFR 240.3a51-1(a)], Rule 13h-1(a)(5) of
Regulation 13D-G [17 CFR 240.13h-1(a)(5)], Rule 105(b)(1) of Regulation
M [17 CFR 242.105(b)(1)] Rules 201(a) and 204(g) of Regulation SHO [17
CFR 242.201(a) and 242.204(g)], Rules 600(b), 602(a)(5), 605,
607(a)(1), and 611(c) of Regulation NMS [17 CFR 242.600(b),
242.602(a)(5), 242.605, 242.607(a)(1), and 242.611(c)], and Rule 1000
of Regulation SCI [17 CFR 242.1000].

Table of Contents

I. Introduction
II. Current Practices and Regulation and the Need for Enhanced
Disclosures
    A. Background on Rule 606
    B. Changes in Order Handling Practices
    C. Need for Enhanced Disclosures for Institutional Orders
    1. Market Complexity
    2. Assessing Best Execution
    3. Conflicts of Interest
    4. Information Leakage
    D. Need for Public Reporting of Aggregated Institutional Order
Information
    E. Need for Enhanced Disclosures for Retail Orders
    F. Comments on Equity Market Structure
    1. General Need to Update Rule 606
    2. Need for Rule 606 to be Modernized to Maintain Pace with
Technological Advances
    3. Requests for Specific Information and Standardized
Disclosures
    4. Requests for Specific Disclosures for Institutional Orders
    5. Comments on Actionable Indications of Interest
III. Proposed Amendments to Rule 600, Rule 605, Rule 606, and Rule
607
    A. Disclosures for Institutional Orders
    1. Definition of Institutional Order in Proposed Rule 600(b)(31)

    2. Definition of Actionable Indication of Interest in Proposed
Rule 600(b)(1)
    3. Scope and Format of Reports
    4. Report Content
    5. Public Report for Institutional Orders
    B. Disclosures for Retail Orders
    1. Marketable Limit Orders and Non-Marketable Limit Orders
    2. Net Payment for Order Flow and Transaction Fees and Rebates
by Specified Venue
    3. Discussion of Arrangement Terms with a Specified Venue
    4. Additional Amendments to Retail Disclosures
    5. Amendment to Rule 600(b)(18) to rename ``Customer Order'' to
``Retail Order''
    C. Amendment to Disclosure of Order Execution Information
IV. Paperwork Reduction Act
    A. Summary of Collection of Information
    1. Customer Requests for Information on Institutional Orders
    2. Public Aggregated Report on Institutional Orders
    3. Requirement to Document Methodologies for Categorizing
Institutional Order Routing Strategies
    4. Amendment to Current Disclosures With Respect to Retail
Orders
    5. Amendment to Current Disclosures under Rule 605
    B. Proposed Use of Information
    1. Customer Requests for Information on Institutional Orders
    2. Public Aggregated Report on Institutional Orders
    3. Requirement to Document Methodologies for Categorizing
Institutional Order Routing Strategies
    4. Amendment to Current Disclosures With Respect to Retail
Orders
    5. Amendment to Current Disclosures under Rule 605
    C. Respondents
    D. Total Initial and Annual Reporting and Recordkeeping Burdens
    1. Customer Requests for Information on Institutional Orders
    2. Public Aggregated Report on Institutional Orders
    3. Requirement to Document Methodologies for Categorizing
Institutional Order Routing Strategies
    4. Amendment to Current Disclosures With Respect to Retail
Orders
    5. Amendment to Current Disclosures under Rule 605
    E. Collection of Information is Mandatory
    F. Confidentiality of Responses to Collection of Information
    G. Retention Period for Recordkeeping Requirements
    H. Request for Comments
V. Economic Analysis
    A. Introduction
    B. Baseline
    1. Ad Hoc Reports for Institutional Orders
    2. Publication Period for Reports on Retail Orders Required by
Current Rules 605 and 606
    3. Available Information on Conflicts of Interest
    4. Available Information on Execution Quality for Institutional
and Retail Orders
    5. Format of Current Reports for Institutional and Retail Orders
    6. Quality of Broker-Dealer Routing Practices for Institutional
Orders
    7. Use of Actionable IOIs in Institutional Orders
    8. Competition, Efficiency, and Capital Formation
    9. Request for Comment
    C. Costs and Benefits
    1. Disclosures for Institutional Orders
    2. Disclosures for Retail Orders
    3. Disclosure of Order Execution Information
    4. Structured Format of Reports
    5. Other Definitions in Proposed Amendments to Rule 600
    D. Alternatives Considered
    1. Definition of Institutional Order in Proposed Rule 606(b)(31)
    2. Limited or No Public Disclosure of Institutional Order
Routing and Execution Quality (Proposed Rule 606(c))
    3. More Frequent Public Disclosure of Institutional Order
Routing and Execution Information (Proposed Rule 606(c))
    4. Automatic Provision of Customer-Specific Institutional Order
Handling Report (Proposed Rule 606(b)(3))
    5. Submission of Institutional Order Handling Reports (Proposed
Rules 606(b)(3) and 606(c))
    6. Disaggregate Categories of NMS Stocks for Rule 606(a)
    7. Disclosure of Additional Information about Institutional
Order Routing and Execution
    8. Institutional Order Handling Reports at the Stock Level
(Proposed Rule 606(b)(3))
    9. Alternative to Three-Year Posting Period (Proposed Amendments
to Rules 605(a)(2) and 606(a)(1), and Proposed Rule 606(c))
    10. Request for Comment
    E. Economic Effects and Effects on Efficiency, Competition, and
Capital Formation
    1. Effects of Proposed Amendments on Efficiency and Competition
    2. Effects of Proposed Amendments on Capital Formation
    3. Request for Comment
VI. Consideration of Impact on the Economy
VII. Regulatory Flexibility Analysis
VIII. Statutory Authority and Text of the Proposed Rule Amendments

I. Introduction

    Institutional customers have a compelling interest in the order
handling decisions of their executing brokers as they monitor the
execution quality of their orders, both from the standpoint of the
price received and to evaluate the potential negative effects of
information leakage and conflicts of interest.\1\ This focus on order
handling has intensified in recent years as routing and execution
practices have evolved as markets have become more automated,
dispersed, and complex.\2\ Historically, there was a substantial manual
component involved in the routing and execution of institutional
customers' orders. Today, however, institutional orders tend to be
routed and executed using sophisticated order execution algorithms
developed by broker-dealers or others that break up large institutional
orders into smaller ``child'' orders, and smart order routing systems
to route those child orders to the full range of trading centers in the
national market system, including exchanges, ``dark pool'' alternative
trading systems (``ATSs''), other ATSs, and internalizing broker-
dealers.\3\ These order routing and execution algorithms use a wide
variety of methods, ranging from non-time-sensitive passive strategies
to aggressive liquidity-taking strategies, to achieve the trading goals
of the institutional customer. Although certain advantages flow from
technological advancements and the increase in number of venues, the
Commission preliminarily believes that the complexity of order
execution algorithms and smart order routing systems, and the
multiplicity of venues to which broker-dealers may route orders or send
actionable indications of interest, have made it increasingly difficult
for institutional customers to assess the impact particular order
routing strategies may have on the quality of their executions, or the
risks presented by any resulting information leakage or broker-dealer
conflicts of interest.
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    \1\ An institutional customer includes, for example, pension
funds, mutual funds, investment advisers, insurance companies,
investment banks, and hedge funds.
    \2\ See Securities Exchange Act Release No. 73639 (November 19,
2014), 79 FR 72252, 72397 (December 5, 2014) (``Regulation SCI
Adopting Release'') (stating that markets have evolved ``to become
significantly more dependent on sophisticated, complex, and
interconnected technology''); see also Securities Exchange Act
Release No. 61358 (January 14, 2010), 75 FR 3594 (January 21, 2010)
(``Concept Release on Equity Market Structure'') (stating that ``the
current market structure can be described as dispersed and complex:
(1) Trading volume is dispersed among many highly automated trading
centers that compete for order flow in the same stocks; and (2)
trading centers offer a wide range of services that are designed to
attract different types of market participants with varying trading
needs'').
    \3\ A ``trading center'' means a national securities exchange or
national securities association that operates an SRO trading
facility, an alternative trading system, an exchange market maker,
an OTC market maker, or any other broker or dealer that executes
orders internally by trading as principal or crossing orders as
agent. See 17 CFR 242.600(b)(78).
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    Changes to market structure and routing practices have led many
institutional customers to demand more specific and detailed
institutional order handling information from their broker-dealers. The
Commission notes that for

purposes of this proposing release, the use of ``institution'' or
``institutional'' shall refer to an institutional order, as proposed to
be defined in proposed Rule 600(b)(31),\4\ and the term ``institutional
customer'' shall refer to a sender of an institutional order.
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    \4\ See infra Section III.A.1.
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    The Commission understands that institutional customer requests
range from detailed information about the handling of specific
institutional orders to more generic data about the order routing
strategies pursued by the broker-dealer for institutional customers and
the venues to which their orders are routed and executed. The level of
detail of the information provided tends to vary by broker-dealer, as
well as the particular institutional customer, some of whom may have
the wherewithal and desire to digest and evaluate voluminous order
handling information and some of whom may not.
    The Commission preliminarily believes that market-based efforts to
provide institutional order handling transparency may not be sufficient
insofar as smaller institutional customers may lack the bargaining
power or the resources to demand relevant order handling information
from their broker-dealers. In addition, while many institutional
customers regularly conduct, directly or through a third-party vendor,
transaction cost analysis (``TCA'') of their orders to assess execution
quality against various benchmarks, the Commission preliminarily
believes that the comprehensiveness of such analysis could be enhanced
with more granular order handling information. The Commission also
preliminarily believes that standardizing the baseline information
provided by broker-dealers could help ensure the wide availability of
meaningful order handling information that may be produced in an
efficient and cost-effective manner.\5\
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    \5\ There have been recent efforts by representatives of broker-
dealers and institutional customers to develop a template of
baseline order routing disclosure, and these efforts are reflected
in a letter from the Investment Company Institute, the Managed Funds
Association, and the Securities Industry and Financial Markets
Association (collectively, the ``Associations''). 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.
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    In light of the foregoing, the Commission preliminarily believes
that standardized baseline institutional order handling information
should be required to be made available to the institutional customer
upon request so that the institutional customer can more effectively
assess the impact of order routing decisions on the quality of their
executions, including the risks of information leakage and potential
conflicts of interest.\6\ Further, the Commission preliminarily
believes that public disclosure of institutional order handling
information, on an aggregated basis, could assist market participants
in comparing the routing services of multiple broker-dealers, and the
relative merits of competing trading centers, and facilitate
institutional customers' ability to make informed decisions when
engaging the services of a broker-dealer. The Commission preliminarily
believes that the proposal would further encourage broker-dealers to
minimize information leakage when executing an institutional order. The
Commission preliminarily believes that the potential benefits of public
disclosure of aggregated institutional order handling information
should justify any potential negative competitive impact such
disclosure may have on broker-dealers.
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    \6\ See infra Sections II.C.3. and II.C.4.
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    The changes to market structure have impacted the market for
customer order routing and execution services. Currently, a ``customer
order'' means an order to buy or sell an NMS security that is not for
the account of a broker-dealer, but shall not include any order for a
quantity of a security having a market value of at least $50,000 for an
NMS security that is an option contract and a market value of at least
$200,000 for any other NMS security.\7\ As such, the term ``customer
order,'' when used in Regulation NMS, only refers to smaller-sized
orders. As discussed in more detail below, the Commission is proposing
to rename ``customer order'' to ``retail order'' and for purposes of
this proposing release, the term ``retail customer'' shall refer to a
sender of a retail order.
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    \7\ See 17 CFR 242.600(b)(18).
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    As discussed below, the rise in the number of trading centers and
the introduction of new fee models for execution services have
intensified competition for retail order flow and created new potential
conflicts of interest for broker-dealers. The Commission preliminarily
believes that simplified and enhanced disclosures for retail orders,
particularly with respect to financial inducements from trading
centers, should assist retail customers in evaluating better the order
routing services of their broker-dealers. Additionally, public
transparency of retail orders should drive competition as broker-
dealers seek to compete on the basis of the quality of their order
routing and execution services as well as their ability to manage
conflicts of interest.
    The Commission therefore is proposing amendments to Rules 600 \8\
and 606 \9\ of Regulation NMS to require, for the first time,
disclosures by broker-dealers about their handling of institutional
orders, and enhancements to existing disclosures with respect to retail
orders.\10\ Specifically, with respect to institutional orders, the
Commission is proposing to amend Rule 606 of Regulation NMS to require
a broker-dealer, upon request of its customer, to provide specific
disclosures, for the prior six months, broken down by calendar month,
related to: (1) The handling of the customer's institutional orders at
the broker-dealer; (2) the routing of the customer's institutional
orders to various trading centers; (3) the execution of those orders,
and the quality of execution; and (4) the extent to which such orders
provided liquidity or removed liquidity, and the average transaction
rebates received or fees paid by the broker-dealer. This information
would be provided for each venue, and would further be divided into
passive, neutral, and aggressive order routing strategies. In
connection with this new requirement, the Commission is proposing to
amend Rule 600 of Regulation NMS to include definitions of the terms
``institutional order,'' ``actionable indication of interest,''
``orders providing liquidity,'' and ``orders removing liquidity,'' and
to rename the defined term ``customer order'' to ``retail order.'' The
Commission also is proposing to amend Rule 606 of Regulation NMS to
require a broker-dealer to make publicly available the foregoing
information, on an aggregated basis, for all of its customers'
institutional orders, for each calendar quarter, broken down by
calendar month, and keep such reports posted on an Internet Web site
that is free and readily accessible to the public for a period of three
years from the initial date of posting on the Internet Web site.
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    \8\ 17 CFR 242.600.
    \9\ 17 CFR 242.606.
    \10\ The Commission notes that the proposed amendments to Rule
606, if adopted, would not limit any other obligations that the
broker-dealer may have under applicable federal securities laws,
rules, or regulations, including the anti-fraud provisions of the
federal securities laws.
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    Further, with respect to retail orders, the Commission
preliminarily believes that the existing Rule 606 disclosures should be
updated to require that more relevant routing information is provided

to retail customers. Specifically, the Commission is proposing to: (1)
Require limit order information to be split into marketable \11\ and
non-marketable \12\ categories; (2) require more detailed disclosure of
the net aggregate amount of any payments received from or paid to
certain trading centers; (3) require broker-dealers to describe any
terms of payment for order flow arrangements and profit-sharing
relationships with certain venues that may influence its order routing
decisions; (4) require that broker-dealers keep retail order routing
reports posted on an Internet Web site that is free and readily
accessible to the public for a period of three years from the initial
date of posting on the Internet Web site; and (5) eliminate the
requirement to group retail order routing information by listing
market.
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    \11\ A ``marketable limit order'' is any buy order with a limit
price equal to or greater than the national best offer at the time
of order receipt, or any sell order with a limit price equal to or
less than the national best bid at the time of order receipt. 17 CFR
242.600(b)(39). ``National best bid and national best offer'' means,
with respect to quotations for an NMS security, the best bid and
best offer for such security that are calculated and disseminated on
a current and continuing basis by a plan processor pursuant to an
effective national market system plan; provided, that in the event
two or more market centers transmit to the plan processor pursuant
to such plan identical bids or offers for an NMS security, the best
bid or best offer (as the case may be) shall be determined by
ranking all such identical bids or offers (as the case may be) first
by size (giving the highest ranking to the bid or offer associated
with the largest size), and then by time (giving the highest ranking
to the bid or offer received first in time). 17 CFR 242.600(b)(42).
    \12\ The Commission is proposing in new Rule 600(b)(51) to
define ``non-marketable limit order'' to mean ``any limit order
other than a marketable limit order'', as discussed in more detail
below. See infra Section III.B.1.
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    Finally, consistent with the proposed amendments to Rule 606, the
Commission is proposing to amend Rule 605 to require market centers
\13\ to keep execution reports required by the rule posted on an
Internet Web site that is free of charge and readily accessible to the
public for a period of three years from the initial date of posting on
the Internet Web site. With respect to Rule 607, the Commission is
proposing to amend the rule text to reflect the renaming of the defined
term ``customer order'' to ``retail order,'' but is making no
substantive changes to the defined term. As noted above, the Commission
is proposing amendments to other rules to update cross-references as a
result of this proposal.\14\
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    \13\ A ``market center'' means any exchange market maker, OTC
market maker, alternative trading system, national securities
exchange, or national securities association. See 17 CFR
242.600(b)(38).
    \14\ The Commission is proposing to amend Rule 3a51-1(a) under
the Exchange Act; Rule 13h-1(a)(5) of Regulation 13D-G; Rule
105(b)(1) of Regulation M; Rules 201(a) and 204(g) of Regulation
SHO; Rules 600(b), 602(a)(5), 607(a)(1), and 611(c) of Regulation
NMS; and Rule 1000 of Regulation SCI.
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    The release first provides relevant background on Rule 606 and then
discusses the technological advances and regulatory changes that have
prompted the proposal. The release then discusses, in detail, the
proposed amendments to Rules 600, 605, 606, and 607 including the new
institutional order handling disclosures that would be required from
broker-dealers.

II. Current Practices and Regulation and the Need for Enhanced
Disclosures

A. Background on Rule 606

    The Commission proposed and adopted Rule 11Ac1-6,\15\ now known as
Rule 606 of Regulation NMS,\16\ in 2000, to improve public disclosure
of order routing practices. Rule 606 arose out of the Commission's
extended inquiry into market fragmentation, defined at the time as the
trading of orders in multiple locations without interaction among those
orders.\17\ In adopting Rule 606, the Commission stated that ``[i]n a
fragmented market structure with many different market centers trading
the same security, the order routing decision is critically important,
both to the individual investor whose order is routed and to the
efficiency of the market structure as a whole. The decision must be
well-informed and fully subject to competitive forces.'' \18\ The
Commission further stated that public disclosure of order routing
practices ``could provoke more vigorous competition on . . . order
routing performance.'' \19\
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    \15\ See Securities Exchange Act Release Nos. 43084 (July 28,
2000), 65 FR 48406 (August 8, 2000) (``Rule 606 Predecessor
Proposing Release'') and 43590 (November 17, 2000), 65 FR 75414
(December 1, 2000) (``Rule 606 Predecessor Adopting Release'').
    \16\ The Commission re-designated Rule 11Ac1-6 as Rule 606 when
adopting Regulation NMS in 2005. See Securities Exchange Act Release
No. 51808 (June 9, 2005), 70 FR 37496, 37538 (June 29, 2005)
(``Regulation NMS Adopting Release''). For clarity, when this
release discusses the proposal of Rule 606 or the adoption of Rule
606, it is referring to the Rule 606 Predecessor Proposing Release
and Rule 606 Predecessor Adopting Release, supra note 15,
respectively.
    \17\ See Securities Exchange Act Release No. 42450 (February 23,
2000), 65 FR 10577 (February 28, 2000) (Commission request for
comment, included in a notice of a proposed self-regulatory
organization (``SRO'') rule change) (``Fragmentation Release'').
    \18\ See Rule 606 Predecessor Adopting Release, supra note 15,
at 75415.
    \19\ Id. at 75417. Industry participants commenting in response
to the Concept Release on Equity Market Structure, supra note 2,
have expressed the view that increased order routing transparency
has led to increased competition. See, e.g., Letters to Secretary,
Commission, from Joan C. Conley, Senior Vice President and Corporate
Secretary, The NASDAQ OMX Group, Inc., dated April 30, 2010
(``NASDAQ Letter''), at 21 (stating that NASDAQ shares the
Commission's belief that transparency promotes competition); from
Christopher Nagy, Managing Director Order Strategy, Co-Head of
Government Relations, TD Ameritrade and John S. Markle, Deputy
General Counsel, Co-Head of Government Relations, TD Ameritrade,
dated April 21, 2010 (``TD Ameritrade Letter''), at 3-4 (stating
that added transparency has driven brokers to continuously seek
better executions for clients).
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    In adopting Rule 606, the Commission limited its scope to smaller
orders.\20\ Larger orders were excluded in recognition of the fact
that, at the time, generalized information for order routing practices
would be more useful for smaller orders, which tended to be handled in
a more homogenous manner.\21\ Because institutional orders required
more individualized, manual handling, they were excluded from Rule 606
in recognition of the fact that, at that time, providing standardized
order handling statistics would be neither practical nor useful in this
context.\22\
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    \20\ The Commission limited the scope of Rule 606 to smaller
orders by defining a customer order as an order to buy or sell an
NMS security that is not for the account of a broker or dealer, but
shall not include any order for a quantity of a security having a
market value of at least $50,000 for an NMS security that is an
option contract and a market value of at least $200,000 for any
other NMS security. See 17 CFR 242.600(b)(18).
    \21\ See Rule 606 Predecessor Adopting Release, supra note 15,
at 75426.
    \22\ See id.
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    Thus, in its current form, Rule 606(a) applies only to retail-sized
orders, and requires every broker-dealer to publicly provide a
quarterly report on its routing of non-directed orders \23\ in NMS
securities.\24\ Currently, the report includes the following
information, separated by listing market for NMS stocks,\25\ and in the
aggregate for NMS securities that are option contracts: (1) The
percentage of total retail orders that were non-directed orders, and
the percentages of total non-directed orders that were market orders,
limit orders, and other orders; (2) the identity of the ten venues to
which the largest number of total non-directed orders were routed for
execution and of any venue to which

five percent or more of such orders were routed (collectively,
``Specified Venues'') and the percentage of total non-directed orders
routed to each Specified Venue, and the percentages of total non-
directed market orders, total non-directed limit orders, and total non-
directed other orders that were routed to each Specified Venue; and (3)
a discussion of the material aspects of the broker-dealer's
relationship with each Specified Venue, including a description of any
payment for order flow \26\ or profit-sharing relationship
arrangements.\27\
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    \23\ A ``non-directed order'' means any customer order other
than a directed order. See 17 CFR 242.600(b)(48). A ``directed
order'' means a customer order that the customer specifically
instructed the broker or dealer to route to a particular venue for
execution. See 17 CFR 242.600(b)(19). See also supra note 7 and
accompanying text. The Commission is proposing to rename ``customer
order'' as ``retail order,'' which would carry through to these two
definitions. See infra Section III.B.5.
    \24\ An ``NMS security'' is any security or class of securities
for which transaction reports are collected, processed, and made
available pursuant to an effective transaction reporting plan, or an
effective national market system plan for reporting transactions in
listed options. See 17 CFR 242.600(b)(46).
    \25\ An ``NMS stock'' is any NMS security other than an option.
See 17 CFR 242.600(b)(47).
    \26\ ``Payment for order flow'' has the meaning provided in 17
CFR 240.10b-10. See 17 CFR 242.600(b)(54). ``Payment for order
flow'' means any monetary payment, service, property, or other
benefit that results in remuneration, compensation, or consideration
to a broker or dealer from any broker or dealer, national securities
exchange, registered securities association, or exchange member in
return for the routing of customer orders by such broker or dealer
to any broker or dealer, national securities exchange, registered
securities association, or exchange member for execution, including
but not limited to: research, clearance, custody, products or
services; reciprocal agreements for the provision of order flow;
adjustment of a broker or dealer's unfavorable trading errors;
offers to participate as underwriter in public offerings; stock
loans or shared interest accrued thereon; discounts, rebates, or any
other reductions of or credits against any fee to, or expense or
other financial obligation of, the broker or dealer routing a
customer order that exceeds that fee, expense or financial
obligation. See 17 CFR 240.10b-10(d)(8).
    \27\ A ``profit-sharing relationship'' means any ownership or
other type of affiliation under which the broker or dealer, directly
or indirectly, may share in any profits that may be derived from the
execution of non-directed orders. See 17 CFR 242.600(b)(56).
---------------------------------------------------------------------------

    Rule 606(b) currently requires every broker-dealer to provide
customers, upon request, specific information about the routing of
their orders. Specifically, upon request, every broker-dealer shall:
(1) Disclose to its customer the identity of the venue to which the
customer's orders were routed for execution in the six months prior to
the request, whether the orders were directed orders or non-directed
orders, and the time of the transactions, if any, that resulted from
such orders; and (2) notify customers in writing at least annually of
the availability of this information upon request.

B. Changes in Order Handling Practices

    U.S. equity market structure has changed significantly since the
adoption of Rule 606. Today it is highly automated, dispersed among
myriad trading centers, and more complex than it was in 2000.\28\ The
primary drivers of this market transformation have been the rapid and
ongoing evolution of technologies for generating, routing, and
executing orders, and the impact of regulatory changes.\29\ In 2000, a
large proportion of order flow in listed equity securities was routed
to a few, mostly manual, trading centers, and it was rare that such
orders would be re-routed to other venues.\30\ In contrast, today,
trading in the U.S. equity markets is spread among a number of highly
automated trading centers: 12 registered exchanges, more than 40
ATSs,\31\ and over 200 over-the-counter (``OTC'') market-makers,\32\
and the routing and re-routing of orders to multiple venues is common.
These venues offer a wide range of services and pricing structures that
are designed to attract different types of market participants with
varying trading needs.\33\
---------------------------------------------------------------------------

    \28\ See Concept Release on Equity Market Structure, supra note
2, at 3594. See also Regulation SCI Adopting Release, supra note 2,
at 72397.
    \29\ See Concept Release on Equity Market Structure, supra note
2, at 3594 (``Changes in market structure also reflect the markets'
response to regulatory actions such as Regulation NMS, adopted in
2005, the Order Handling Rules, adopted in 1996, as well as
enforcement actions, such as those addressing anti-competitive
behavior by market makers in NASDAQ stocks'').
    \30\ See Fragmentation Release, supra note 17.
    \31\ Data compiled from Forms ATS-R filed with the Commission as
of the end the fourth quarter of 2014.
    \32\ More than 200 broker-dealers (excluding ATSs) have
identified themselves to the Financial Industry Regulatory Authority
(``FINRA'') as market centers that must provide monthly reports on
order execution quality under Rule 605 of Regulation NMS (list
available at http://apps.finra.org/datadirectory/1/marketmaker.aspx).
    \33\ See Concept Release on Equity Market Structure, supra note
2, at 3594.
---------------------------------------------------------------------------

    According to a staff report published in 1994, prior to the
emergence and growth of electronic markets, institutional customers
would rely primarily on exchange floor brokers or upstairs block
positioners to execute their large orders.\34\ Typically, exchange
floor brokers or upstairs block positioners would negotiate large
trades off the exchange (often referred to as ``upstairs'') and
subsequently execute or ``print'' on the exchange--subject to auction
market procedures allowing the limit order book or the trading crowd to
participate in the trade and exposing the order to the market.\35\ The
nature of floor trading activity and upstairs block positioning allowed
broker-dealers to manually exercise judgment and expertise to achieve
best execution, and typically involved strategies that were designed to
conceal information about an institutional customer's trading interest
to potential counterparties to minimize price impact.
---------------------------------------------------------------------------

    \34\ See Division of Market Regulation, SEC, Market 2000: An
Examination of Current Equity Market Developments, at II-14 (January
1994).
    \35\ Id. at II-14-15.
---------------------------------------------------------------------------

    In today's electronic markets, however, the manual handling of
institutional orders is increasingly rare, and has been replaced by
sophisticated institutional order execution algorithms and smart order
routing systems. These sophisticated algorithms and systems decide the
timing, pricing, and quantity of orders routed to the various trading
centers.\36\ Broker-dealers often use order execution algorithms to
divide a large ``parent'' order of an institutional customer into many
smaller ``child'' orders, and route the child orders over time to
different trading centers in accordance with a particular strategy.\37\
Such algorithms may be ``aggressive,'' and generally seek to take
liquidity quickly at many different trading centers, or they may be
``passive,'' and generally submit resting orders at one or more trading
centers and await executions at favorable prices, or they may be
``neutral,'' and seek to take liquidity or submit resting orders
depending on market conditions.\38\ In addition, some broker-dealers
utilize indications of interest to notify external liquidity providers
of trading interest at that broker-dealer.
---------------------------------------------------------------------------

    \36\ See, e.g., Terrence Hendershott, Charles Jones, and Albert
Menkveld, Does Algorithmic Trading Improve Liquidity, 66 Journal of
Finance 1 (February 2011).
    \37\ See Concept Release on Equity Market Structure, supra note
2, at 3602.
    \38\ See id.
---------------------------------------------------------------------------

C. Need for Enhanced Disclosures for Institutional Orders

1. Market Complexity
    Institutional customers have long focused on the execution quality
of their large orders, and the potential impacts from information
leakage and conflicts of interest faced by their broker-dealers. While
there is some indication that enhancements to electronic order routing
systems and processes generally have led to improved execution quality
in many cases,\39\ the operation of order routing systems and processes
often is opaque to customers placing institutional orders, who may not
have sufficient information to understand how, where, and why their
orders are routed to specific venues, and whether particular order
routing and execution strategies, whether or not selected by

the customer, are consistent with the customer's expectations.
---------------------------------------------------------------------------

    \39\ See, e.g., Letter to Secretary, Commission, from Greg
O'Connor, Compliance Manager, Wolverine Trading, LLC, dated April
21, 2010 (``Wolverine Trading Letter''), at 5 (stating that
technological advancements have led to improved markets and
executions as indicated by tighter spreads, lower trading costs, and
more liquidity). See also Thierry Foucault and Albert J. Menkveld,
Competition for Order Flow and Order Routing Systems, 63 Journal of
Finance 119, 121 (February 2008) (discussing that utilization of
smart order routers reduces the incidence of trade-throughs and may
encourage provision of liquidity).
---------------------------------------------------------------------------

    As noted above, at the time of adoption of Rule 606, institutional
orders generally were handled by an exchange floor broker or upstairs
block positioner. The risks of information leakage and broker-dealer
conflicts of interest existed with manual order handling, but because
the execution alternatives were fewer and simpler, less data was
necessary for institutional customers to evaluate those risks and
evaluate broker-dealer performance. Now, however, because of the
complexity of order execution algorithms and smart order routing
systems, and the wide variety of venues to which broker-dealers may
route institutional orders or send actionable indications of interest,
access to data is important for institutional customers to assess the
impact a broker-dealer's order routing strategies may have on the
quality of their executions and the risks presented by any resulting
information leakage or broker-dealer conflicts of interest.
    Institutional customers increasingly have been expressing concerns
regarding the difficulty in obtaining and comparing certain information
across broker-dealers and venues, and understanding how their
institutional orders are handled by broker-dealers, and have called for
enhanced order handling disclosures.\40\ Institutional customers have
cited concerns, among other things, about the extent to which broker-
dealer routing decisions are influenced by incentives offered by
trading centers to attract order flow, that inefficiencies in order
execution algorithms and smart order routing systems may lead to
information leakage, and that the complexity and opacity of order
routing practices frustrate the ability to monitor execution quality.
Importantly, a variety of other market participants, including broker-
dealers, also have expressed support for enhanced and consistent
disclosure of institutional order handling information.\41\
---------------------------------------------------------------------------

    \40\ See Associations Letter, supra note 5, at 2.
    \41\ The Commission received letters addressing these issues in
response to requests for comment on the Concept Release on Equity
Market Structure, supra note 2 (comment letters available at http://www.sec.gov/comments/s7-02-10/s70210.shtml). See Letters to
Secretary, Commission, from Christopher Nagy, CEO, and Dave Lauer,
President, KOR Group LLC, dated September 23, 2014 (``KOR Trading
Letter II''), at 1-2 (stating Rule 606 is severely outdated, has no
coverage of large orders, and should be updated to cover all
orders); from Richie Prager, Managing Director, Head of Trading &
Liquidity Strategies, et al., BlackRock, Inc., dated September 12,
2014 (``BlackRock Letter''), at 3 (stating broker-dealers should be
required to provide periodic standardized reports on order routing
and execution metrics to both retail and institutional investors);
from Christopher Nagy, CEO, and Dave Lauer, President, KOR Trading
LLC, dated April 4, 2014 (``KOR Trading Letter I''), at 2 (stating
Rule 606 has become increasingly outdated as a result of the
increasing complexity of order-types as well as the speed of routing
and routing practices and Rule 606 should be updated to cover 100%
of order flow received, including block transactions); from Kimberly
Unger, Esq., Executive Director, Security Traders Association of New
York, Inc., dated April 30, 2010 (``STA Letter''), at 8 (stating
that since the adoption of Rule 606 in 2000, technological
advancements have made some of the measurements in the Rule less
meaningful and suggesting that 606 metrics be reviewed, amended, and
updated, as needed); NASDAQ Letter, supra note 19, at 20 (stating
Rule 606 has lagged behind technological advances that enhance
market quality, which consequently renders the metrics utilized in
Rule 606 less useful to investors, and further suggesting new
metrics for inclusion on reports and refinements to current
metrics); from Ann Vlcek, Managing Director and Associate General
Counsel, Securities Industry and Financial Markets Association,
dated April 29, 2010 (``SIFMA Letter I''), at 13 (stating that the
Commission should direct broker-dealers to provide institutional
clients with standardized execution venue statistical analysis
reports); from O. Mason Hawkins, Richard W. Hussey, Deborah L.
Craddock, Jeffrey D. Engelberg, and W. Douglas Schrank, Southeastern
Asset Management, Inc., dated April 28, 2010 (``SAM Letter''), at 7
(stating increased complexity in the marketplace has clouded order
handling to the point where even educated customers are not
completely confident as to how or why their orders are routed to
specific venues in a specific way); from Janet M. Kissane, SVP--
Legal & Corporate Secretary, Office of the General Counsel, NYSE
Euronext, dated April 23, 2010 (``NYSE Euronext Letter''), at 12,
Appendix I at 3-4 (stating that U.S. equity market structure has
changed substantially resulting in Rule 606 becoming outdated, and
that Rule 606 reports do not capture information concerning block
transactions and that the rule should be amended to include such
information); Wolverine Trading Letter, supra note 39, at 4 (stating
that the firm believes information currently required by Rule 606
reports is not as meaningful in the context of today's markets and
that Commission staff should determine the types of statistics to
add in order to improve usefulness of the reports); from Dan
Mathisson, Managing Director, Credit Suisse Securities (USA) LLC,
dated April 21, 2010 (``Credit Suisse Letter''), at 9 (stating that
equity markets have changed unequivocally since 2000 when Rule 606
was adopted resulting in a need to update the Rule 606 reports);
from Karrie McMillan, General Counsel, Investment Company Institute,
dated April 21, 2010 (``ICI Letter''), at 8 (stating that currently
institutional investors do not have ready access to complete
information about their orders and the Commission should consider
means to require new disclosures or enhance existing disclosures);
from Michael Gitlin, Head of Global Trading, T. Rowe Price
Associates, Inc.; David Oestreicher, Chief Legal Counsel, T. Rowe
Price Associates, Inc.; and Christopher P. Hayes, Sr. Legal Counsel,
T. Rowe Price Associates, Inc., dated April 21, 2010 (``T. Rowe
Price Letter''), at 3 (supporting interest in revamping Rule 606
reports to provide additional data related to trading volumes and
venues to both large and small investors); from Jennifer S. Choi,
Assistant General Counsel, Investment Adviser Association, dated
April 20, 2010 (``IAA Letter''), at 4 (stating the exclusion of
large orders from Rule 606 reports limits the value of such reports
to institutional investors); from Seth Merrin, Chief Executive
Officer, Liquidnet; Howard Meyerson, General Counsel, Liquidnet; and
Vlad Khandros, Corporate Strategy, Liquidnet, dated March 26, 2010
(``Liquidnet Letter''), at 2 (stating that institutional and retail
investors do not have sufficient information regarding how their
orders are handled, and empowering institutional traders with
appropriate disclosures regarding the handling of large orders will
empower institutions to make the best decisions for their
customers). The Commission also received one letter relevant to this
proposal in response to requests for comment on Securities Exchange
Act Release No. 76474 (November 18, 2015), 80 FR 80997 (December 28,
2015) (File No. S7-23-15) (``NMS Stock ATS Proposing Release'')
(comment letter available at http://www.sec.gov/comments/s7-23-15/s72315.shtml). See Letter to Secretary, Commission, from David M.
Weisberger, Managing Director, Markit, dated April 15, 2016
(``Markit Letter''), at 6-7 (stating order routing statistics
required under Rule 606 should be enhanced to include basic metrics
of execution quality for all categories of executed orders,
separately report on routed and executed orders broken down by
marketability, report on unexecuted routed orders, quantify net fees
paid and rebates received by marketability category, and standardize
the interpretation of ``directed order''). A discussion of the
letters relevant to this proposal is below. See infra Section II.F.
---------------------------------------------------------------------------

    In the absence of a Commission rule, some institutional customers
today have taken steps to acquire more information about the nature and
number of venues to which their orders are routed or exposed.\42\ For
example, some institutional customers, using detailed questionnaires,
request and receive information regarding order routing strategies used
by their broker-dealers and the venues to which their broker-dealers
route orders. In addition, more sophisticated institutional customers
often request and receive granular data about the handling of
individual orders.\43\ The level of detail of the information provided
by broker-dealers tends to vary depending on both the broker-dealer and
the particular institutional customer, some of which may have the
ability and desire to digest and evaluate voluminous individual order
handling information and some of which may not. Of concern to the
Commission, however, is the risk that some smaller institutional
customers may not have the bargaining power to demand relevant order
handling information from their broker-dealers. The Commission also
understands that while some broker-dealers are willing and able to
provide order handling information, the non-standardized and non-
transparent nature of the data limits its effectiveness. Moreover, from
the standpoint of the broker-dealers, responding to different
institutional customers could be time-consuming and costly, as the
broker-dealers typically need to prepare custom responses to

different questions from each institutional customer who requests order
handling information.\44\ Accordingly, the Commission preliminarily
believes that by requiring standardization of such reports, order
handling data could potentially be generated in a more efficient and
cost-effective manner, and provided as a matter of course to the
benefit of all institutional customers.
---------------------------------------------------------------------------

    \42\ See Associations Letter, supra note 5, at 2.
    \43\ See, e.g., Memorandum from the Division of Trading and
Markets regarding a March 4, 2011, meeting with representatives of
Morgan Stanley with regard to the Concept Release on Equity Market
Structure, dated May 7, 2011 (``TM Memo re Morgan Stanley I'').
    \44\ The Commission acknowledges that some institutional
customers, particularly those that are larger and more
sophisticated, may continue to request a customized report, even
with the availability of standardized reports. The Commission
understands that broker-dealers may respond to such requests for
competitive reasons or provide such benefits as a service to its
customers. Accordingly, the potential cost and time savings benefits
of standardized reports would be reduced for these broker-dealers.
---------------------------------------------------------------------------

2. Assessing Best Execution
    Broker-dealers have a variety of types of institutional customers
that use their order routing services, including pension funds, mutual
funds, investment advisers, insurance companies, investment banks, and
hedge funds.\45\ Due to the large size in which they trade,
institutional customers generally are focused on ensuring that their
broker-dealers are achieving best execution for their orders. Broker-
dealers are legally required to obtain best execution of all customers'
orders.\46\ FINRA rules specifically require FINRA members to use
reasonable diligence to ascertain the best market for the security, and
to buy or sell in that market so that the resultant price to the
customer is as favorable as possible under prevailing market
conditions.\47\ Under FINRA's rules, some of the factors a FINRA member
must consider in determining whether it has used ``reasonable
diligence'' are: (1) The character of the market for the security, such
as the price, volatility, relative liquidity, and pressure on available
communications; (2) the size and type of transaction; (3) the number of
markets checked; (4) the accessibility of the quotation; and (5) the
terms and conditions of the order which result in the transaction.\48\
---------------------------------------------------------------------------

    \45\ See supra note 1.
    \46\ A broker-dealer's duty of best execution derives from
common law agency principles and fiduciary obligations, and is
incorporated in self-regulatory organization rules and, through
judicial and SEC decisions, the antifraud provisions of the federal
securities laws. See Regulation NMS Adopting Release, supra note 16,
at 37538. FINRA has codified a duty of best execution into its
rules. See FINRA Rule 5310. Accordingly, violations by a broker of
its duty of best execution expose the broker to potential liability
under the antifraud provisions of the Exchange Act as well as
potential discipline under applicable self-regulatory organization
rules.
    \47\ See FINRA Rule 5310(a)(1) (Best Execution and
Interpositioning).
    \48\ Id.
---------------------------------------------------------------------------

    Some institutional customers have direct relationships with their
broker-dealers, whereas other institutional customers, such as mutual
funds and pension funds, often employ investment advisers to buy and
sell securities on their behalf. Investment advisers are fiduciaries to
their clients (e.g., mutual funds, pension funds) and have an
obligation to act in the best interests of their clients.\49\ Several
obligations flow from an investment adviser's fiduciary duties,
including, among other things, the obligation to seek best execution of
clients' transactions where the investment adviser has the authority to
select broker-dealers to execute client transactions.\50\ As discussed
above, however, the Commission preliminarily believes it has become
more challenging in today's highly automated, complex, and dispersed
markets for institutional customers and their advisers, in the absence
of additional, standardized disclosure, to monitor the extent to which
their broker-dealers are achieving best execution.
---------------------------------------------------------------------------

    \49\ See, e.g., Section 206(2) of the Investment Advisers Act of
1940 that prohibits an investment adviser from engaging in any
transaction, practice, or course of business, which operates as a
fraud or deceit upon any client or prospective client. As such,
investment advisers must act in ``utmost good faith,'' provide full
and fair disclosure of all material facts, and employ reasonable
care to avoid misleading clients and prospective clients. SEC v.
Capital Gains Research Bureau, Inc., 375 U.S. 180, 194, 201 (1963).
    \50\ See Interpretive Release Concerning the Scope of Section
28(e) of the Securities Exchange Act of 1934 and Related Matters,
Securities Exchange Act Release No. 23170 (April 23, 1986). An
investment adviser must seek to obtain the execution of client
transactions in such a manner that the client's total cost or
proceeds are the most favorable under the circumstances. In
particular, when seeking best execution, an adviser should consider
the full range and quality of a broker's services when selecting
broker-dealers to execute client trades, including, among other
things, the broker's execution capability, commission rate,
financial responsibility, responsiveness to the adviser, and the
value of any research provided. See id. See also Delaware Mgmt. Co.,
43 SEC 392, 396 (1967).
---------------------------------------------------------------------------

    Today, broker-dealers are not required by rule to disclose specific
order handling information regarding institutional orders. Instead, as
noted above, the order handling information obtained by institutional
customers is the subject of individualized negotiations with their
broker-dealers, with the result that only a subset of institutional
customers obtain order handling information and the scope of the
information received varies widely. Accordingly, institutional
customers and their advisers today monitor broker-dealers for best
execution with substantially different levels of information, and
potentially with varying degrees of effectiveness. For example, larger
institutional customers may be better able to leverage their market
size and position to obtain more detailed and complete disclosures from
their broker-dealers, whereas smaller institutional customers may lack
sufficient bargaining power to do so.
    The Commission preliminarily believes that requiring enhanced order
handling disclosures for all institutional orders would not only place
small institutional customers on a more level playing field with large
institutional customers, but also would create a uniform baseline for
all institutional customers to obtain information on how large orders
are handled. Widespread institutional access to standardized
information could help institutional customers to more effectively
assess the performance of their broker-dealers in handling their
orders. This, in turn, could help improve the quality of broker-dealer
routing practices, by, among other things, introducing more competitive
forces so that broker-dealers are actively competing with each other to
offer routing services that minimize information leakage and mitigate
conflicts of interest.
3. Conflicts of Interest
    The Commission has recognized that in a market structure with many
competing trading centers, broker-dealers play a critical role in
deciding where to route a customer's non-directed orders.\51\ The
Commission also has noted that a competitive environment may spur a
trading center to offer economic incentives to broker-dealers to induce
the routing of order flow to that trading center.\52\ The Commission
has recognized that broker-dealer order routing practices can
significantly affect the competition among markets, and in adopting
Rule 606 noted that the purpose of requiring disclosures concerning the
relationships between a broker-dealer and the venues to which it routes
orders was to inform customers to potential conflicts of interest that
may influence the broker-dealer's order routing practices.\53\ The
Commission further explained that providing quantitative data to
customers would provide them a clearer

understanding of a broker-dealer's order routing practices.\54\ While
these previous statements were made in the context of retail order
routing, the Commission preliminarily believes they are equally
applicable to institutional order routing in today's equity market.
---------------------------------------------------------------------------

    \51\ See Fragmentation Release, supra note 17, at 10582.
    \52\ Id.
    \53\ See Rule 606 Predecessor Adopting Release, supra note 15,
at 75427. The Commission has historically taken a disclosure-based
approach when addressing conflicts of interest that arise from
economic and other incentives provided to broker-dealers to induce
the routing of order flow to a trading center, rather than
prohibiting such incentives. See, e.g., id.
    \54\ See id.
---------------------------------------------------------------------------

    There are a number of potential conflicts of interest that arise
for broker-dealers in the handling of institutional orders that may
influence their order routing practices. One potential conflict of
interest a broker-dealer may face in the handling of institutional
orders involves the different pricing structures of trading centers. A
prevalent pricing model in the current market structure is the so-
called ``maker-taker'' model, which involves the use of access fees and
rebates.\55\ To incentivize market participants to provide liquidity, a
trading center employing a maker-taker fee structure generally pays a
per-share rebate to its members or participants to encourage them to
display non-marketable liquidity-providing orders on its limit order
book. If an execution occurs, the broker-dealer placing the liquidity-
providing order (the ``maker'') generally receives a rebate. In
contrast, the marketable order that removes liquidity (the ``taker'')
generally is charged a slightly higher fee, to fund the rebate to the
maker and provide a profit for the trading center.\56\
---------------------------------------------------------------------------

    \55\ See, e.g., Memorandum from the SEC Division of Trading and
Markets to the SEC Equity Market Structure Advisory Committee
(October 20, 2015) (``Maker-Taker Memo''), available at https://www.sec.gov/spotlight/emsac/memo-maker-taker-fees-on-equities-exchanges.pdf. See also Stanislav Dolgopolov, The Maker-Taker
Pricing Model and Its Impact on Securities Market Structure, 8 Va.
L. & Bus. Rev. 231, 232-33 (June 27, 2014) (``Dolgopolov''),
available at http://bit.ly/1mfme9M.
    \56\ In contrast to the widespread typical maker-taker model
described above, a few trading venues have adopted an inverted
taker-maker pricing model, in which market participants are assessed
a fee to provide liquidity in securities and provided a rebate to
remove liquidity in securities. See, e.g., NASDAQ OMX BX Fee
Schedule (as of September 2015).
---------------------------------------------------------------------------

    Broker-dealers that are members of an exchange or participants of
an ATS with a maker-taker model pay fees to, and receive rebates from,
the venue for each order, including an institutional order, that is
executed on it, but generally do not directly pass those fees or
rebates back to their institutional customers.\57\ In situations where
a broker-dealer can earn a rebate or pay a lesser fee for routing its
customer's orders to a particular venue, a conflict of interest may
exist between the broker-dealer's duty of best execution and its own
direct economic interest.\58\ Understanding how a broker-dealer manages
this conflict of interest to ensure that its own self-interest does not
compromise its best execution obligations is pertinent to institutional
customers in evaluating execution quality.\59\
---------------------------------------------------------------------------

    \57\ See, e.g., Robert Battalio, Shane A. Corwin, and Robert
Jennings, Can Brokers Have it All? On the Relation between Make-Take
Fees and Limit Order Execution Quality, at 3 (March 31, 2015)
(``Battalio, Corwin, and Jennings Paper''), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2367462.
    \58\ See, e.g., Maker-Taker Memo, supra note 55, at 16. Finance
professors Robert Battalio, Shane Corwin, and Robert Jennings'
analysis of selected market data has suggested that a significant
number of retail firms route non-marketable orders to the venue
offering the highest rebate, and do so in a manner that the authors
felt might not be consistent with the brokers' duty of best
execution. See Battalio, Corwin, and Jennings Paper, supra note 57,
at 31. Payment for order flow, including payments made to retail
brokers from wholesale broker-dealers, presents a similar conflict
of interest. The sale of order flow has been described by some
industry participants as a revenue center that permits firms to
receive payments from market makers for such order flow when they
would otherwise have to pay taker fees. See, e.g., Letter to Joseph
Dear, Chairman, Investor Advisory Committee, SEC from Joseph Saluzzi
and Sal Arnuk, Partners and Co-founders, Themis Trading LLC, dated
January 27, 2014, available at https://www.sec.gov/comments/265-28/26528-55.pdf, at 2.
    \59\ See, e.g., Maker-Taker Memo, supra note 55, at 18. This
conflict may present itself despite the obligation of FINRA members
to conduct a regular and rigorous review of their order routing to
evaluate which trading venues offer the most favorable terms of
execution, including execution price, execution speed, and the
likelihood that the trade will be executed. See, e.g., FINRA Rule
5310, Supplementary Material .09(b).
---------------------------------------------------------------------------

    For example, with respect to non-marketable orders, the trading
centers that pay the highest rebate for providing liquidity generally
charge the highest fee for removing liquidity.\60\ These venues are
generally lower on the routing table \61\ for broker-dealers seeking to
remove liquidity due to the high take fee.\62\ Thus, if a broker-dealer
places an order seeking to provide liquidity at such a venue, the order
may not receive an execution (or receive an execution only when the
market moves against the order) due to the venue's low position on
routing tables for removing liquidity because of the venue's high take
fee. High rebate venues also are likely to attract a large number of
non-marketable orders, so that the customer queue position, and
likelihood of execution, may be lower than on low rebate venues.
---------------------------------------------------------------------------

    \60\ See, e.g., Maker-Taker Memo, supra note 55, at 18.
    \61\ Routing table refers to a broker-dealer's automated process
for determining the specific trading venues to which a broker-dealer
routes orders and the sequence in which the orders are routed.
    \62\ See, e.g., Battalio, Corwin, and Jennings Paper, supra note
57, at 1; Maker-Taker Memo, supra note 55, at 18.
---------------------------------------------------------------------------

    A similar conflict of interest may exist for marketable orders.\63\
Broker-dealers may seek to minimize trading costs by first routing
orders to trading centers with the lowest take fees. However, these
venues are likely to offer liquidity providers relatively low rebates
so the available liquidity may be less than at a high rebate venue.
Accordingly, the liquidity available to a marketable order routed to a
low rebate venue may offer less size or fewer opportunities for price
improvement than may be available at high rebate venues. Even where the
broker-dealer ultimately routes a marketable order to other high take
fee venues, prices can move quickly in today's highly automated,
electronic markets, and broker-dealers may miss trading opportunities
for an institutional customer by prioritizing low take fee venues in
their routing tables.
---------------------------------------------------------------------------

    \63\ See, e.g., Maker-Taker Memo, supra note 55, at 19.
---------------------------------------------------------------------------

    Another potential conflict of interest may arise when a broker-
dealer internalizes order flow,\64\ routes order flow to affiliated
venues, or routes order flow to venues with which it has payment for
order flow arrangements. While constrained by its best execution
obligation, a broker-dealer still may be incentivized to internalize
customer order flow or route to an affiliated venue so that it can
benefit from the execution by, among other things, capturing the
trading profits or transaction fees. Internalization or execution at
affiliated venues, however, may not offer the most favorable terms of
execution. Likewise, a broker-dealer may be incentivized to first route
customer order flow to venues with which it receives payment for order
flow. Again, execution at such venues may not maximize the best
execution opportunities of institutional orders. Accordingly,
opportunities for internalization, or execution at affiliated venues or
those with which the broker-dealers has payment for order flow
arrangements, create additional potential conflicts of interest between
the broker-dealer's duty of best execution and its own direct economic
interest.\65\
---------------------------------------------------------------------------

    \64\ Internalization is the process in which a broker-dealer
fills an order to buy a security from its own inventory, or fills an
order to sell by taking a security into its inventory.
    \65\ The Commission notes that it recently proposed amendments
to the regulatory requirements in Regulation ATS of the Exchange Act
applicable to certain ATSs that would require detailed public
disclosures about the trading operations of the ATS and the
activities of the broker-dealer that operates the ATS and its
affiliates. See NMS Stock ATS Proposing Release, supra note 41.
---------------------------------------------------------------------------

    As discussed further below, the Commission preliminarily believes

these conflicts of interest could be better evaluated if institutional
customers had access to additional information about their broker-
dealers' order handling practices.
4. Information Leakage
    The Commission has acknowledged ``the need of investors executing
large size trades to control the information flow concerning their
transactions.'' \66\ Executing a large order in today's complex
electronic markets poses many of the same issues and risks for
institutional customers as existed in the manual markets they replaced,
but also poses new challenges because of the variety of ways in which
information leakage can occur in today's equity market structure. As a
result, it continues to be challenging for institutional customers to
trade in large size while minimizing the risks from information
leakage. As noted above, institutional customers historically would use
exchange floor brokers or upstairs block positioners to execute large
orders.\67\ In today's electronic markets, however, the manual handling
of institutional orders is increasingly rare, and has been replaced by
sophisticated institutional order execution algorithms and smart order
routing systems. At the same time, sophisticated market participants
closely monitor order and execution activity throughout the markets,
looking for patterns that signal the existence of a large institutional
order, so that they can use that information to their trading
advantage.
---------------------------------------------------------------------------

    \66\ See Securities Exchange Act Release No. 60997 (November 13,
2009), 74 FR 61208, 61219 (November 23, 2009) (``Regulation of Non-
Public Trading Interest Proposing Release''). For example, Rule
604(b) of Regulation NMS exempts specialists and over-the-counter
market makers from displaying customer block size orders. See 17 CFR
242.604(b)(4). A block size order is an order of at least 10,000
shares or for a quantity of stock having a market value of at least
$200,000. 17 CFR 242.600(b)(9).
    \67\ See supra notes 34-35 and accompanying text.
---------------------------------------------------------------------------

    Each time an order is routed to a venue, and each time an
actionable indication of interest is sent to a market participant,
information is revealed about that order and the potential existence of
a larger institutional order from which it may be derived. Accordingly,
broker-dealers must balance the need to sufficiently expose the
customer's trading interest to achieve execution, with the risk that
such exposure might cause prices to move in a less favorable direction
to the detriment of execution quality. Indeed, institutional customers
have expressed concern that excessive routing \68\ of their orders may
increase the risk of information leakage without a commensurate benefit
to execution quality.\69\ Because information leakage may lead to
higher execution costs for large size orders, the Commission
preliminarily believes that additional disclosure would inform
investors as to whether a broker-dealer's order routing strategy is
potentially resulting in excessive routing and information leakage. As
noted above, the Commission preliminarily believes that institutional
order handling now has become more susceptible to the type of standard
disclosures originally contemplated by Rule 606, and technological
developments have made it easier for broker-dealers to produce it.
Accordingly, standardized order handling disclosures should improve the
ability of institutional customers to assess the potential risk of
information leakage of their orders through a more detailed assessment
of the number and types of venues to which their broker-dealers are
routing their orders or transmitting actionable indications of
interest, and the quality of executions that result therefrom.
---------------------------------------------------------------------------

    \68\ In this context, excessive routing occurs when an order is
routed more than may be necessary to obtain full execution of the
order. Each additional route of an order reveals information about
that order.
    \69\ See, e.g., Jacob Bunge, A Suspect Emerges in Stock-Trade
Hiccups: Regulation NMS, Wall Street Journal, January 27, 2014
(``Bunge Article''), available at http://www.wsj.com/articles/SB10001424052702303281504579219962494432336 (noting that in order to
purchase 2.5 million shares of a stock, an institutional investor's
brokers had to offer to purchase 750 million shares of the stock).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the amendments to Rule
606 it is proposing today would help institutional customers more
efficiently and effectively operate in the current equity market
structure. As discussed in more detail below, the required disclosures
would provide standardized information for institutional customers so
that they can better: (1) Discern where their orders are exposed,
routed, and executed; (2) assess their broker-dealers for best
execution by examining order execution statistics; (3) monitor
conflicts of interest of their broker-dealers with the additional
financial incentives disclosures; and (4) assess information leakage
with the routing of their orders.

D. Need for Public Reporting of Aggregated Institutional Order
Information

    As discussed above, there are no legal requirements for a broker-
dealer to disclose institutional order handling information to its
customers, either privately or publicly. The Commission preliminarily
believes that the dearth of public information about each broker-
dealer's institutional order handling practices may make efficient and
effective comparisons about the nature and quality of services offered
by broker-dealers more difficult. Without required public disclosure of
aggregated institutional order handling information, institutional
customers do not have information that could be used to evaluate, among
other things, the venues to which broker-dealers route orders, the
execution quality achieved at such venues, and the overall fees paid
and rebates received for such executions. Public information on a
broker-dealer's institutional order handling practices could both
assist institutional customers in selecting one or more broker-dealers
for order routing services and foster increased competition among
broker-dealers to provide order routing services. Indeed, if
institutional order handling information were publicly available to
review and analyze, the Commission preliminarily believes that
additional competitive forces could be brought to bear on broker-dealer
institutional order routing services, thereby potentially enhancing the
quality of such services.\70\
---------------------------------------------------------------------------

    \70\ In adopting Rule 606 in 2000, the Commission stated that
public disclosure of order execution and order routing information
could provoke more vigorous competition on execution quality and
order routing performance. See Rule 606 Predecessor Adopting
Release, supra note 15, at 75417.
---------------------------------------------------------------------------

E. Need for Enhanced Disclosures for Retail Orders

    As discussed above, the U.S. equity markets have evolved in recent
years to become more automated, dispersed, and complex, and the
resulting competition among trading centers has intensified practices
to attract order flow, including retail order flow. Historically,
trading centers have offered payment for order flow or other financial
inducements to broker-dealers based upon whether the retail order flow
is marketable or non-marketable. As a result, broker-dealers generally
handle marketable and non-marketable retail orders differently. Indeed,
whether a retail order is marketable or non-marketable will often
determine where the broker-dealer routes the order. Certain broker-
dealers route a large portion of marketable retail orders to OTC market
makers with whom they have payment for order flow or other
arrangements.\71\ Non-

marketable retail orders, on the other hand, are more frequently routed
to exchanges with a ``maker-taker'' fee schedule, to capture a rebate
when the non-marketable order is executed.\72\
---------------------------------------------------------------------------

    \71\ See Concept Release on Equity Market Structure, supra note
2, at 3606 (noting that Rule 606 statistics reveal that brokers with
significant retail customer accounts send the great majority of non-
directed marketable orders to OTC market makers that internalize
executions, often pursuant to payment for order flow arrangements).
    \72\ As an example, during a fiscal quarter one large retail
broker-dealer routed all non-marketable orders to one of two venues
that ``offered the highest rebates available in the market.'' See
Conflicts of Interest, Investor Loss of Confidence, and High Speed
Trading in U.S. Stock Markets: Hearing Before the Permanent
Subcommittee on Investigations of the Committee on Homeland Security
and Governmental Affairs, U.S. Senate, 113th Cong. 48 (2014)
(``Senate PSI Hearing'') (testimony of Steven Quirk, Senior Vice
President, TD Ameritrade). In addition to fee incentives that may
affect routing decisions, another reason non-marketable retail
orders may be routed to exchanges is the requirements of Rule 604 of
Regulation NMS. Rule 604 of Regulation NMS requires, among other
things, exchange specialists and OTC market makers to immediately
display in their bid or offer both the price and the full size of
each customer limit order that would improve their quoted price in a
particular security. See 17 CFR 242.604.
---------------------------------------------------------------------------

    Currently, Rule 606(a) does not require broker-dealers to segment
their quarterly disclosures for limit orders between marketable and
non-marketable orders. By only showing aggregated data on retail limit
orders, customers have less visibility into the extent to which broker-
dealers differentiate between marketable and non-marketable limit
orders in their routing practices, and, if so, the potential impact of
such practices. Accordingly, the Commission preliminarily believes that
customers could better evaluate execution quality and potential
conflicts of interest if broker-dealers were required to separately
disclose more comprehensive information about how they route marketable
and non-marketable limit orders to individual trading centers.
    In addition, financial inducements to attract order flow from
broker-dealers that handle retail orders have become more prevalent and
for some broker-dealers such inducements may be a significant source of
revenue.\73\ The Commission understands that most broker-dealers that
handle a significant amount of retail orders receive payment for order
flow in connection with the routing of retail orders or are affiliated
with an OTC market maker that executes the orders.\74\ The Commission
preliminarily believes that providing market participants with greater
disclosure regarding the specific financial inducements received by a
broker-dealer from various trading centers would enable market
participants to better assess potential conflicts of interest its
broker-dealers face when routing retail orders.
---------------------------------------------------------------------------

    \73\ See, e.g., Bradley Hope and Julie Steinberg, Payments to
Big Brokers Under Fresh Scrutiny, Wall Street Journal, June 13,
2014, available at http://blogs.wsj.com/moneybeat/2014/06/13/payments-to-big-brokers-under-fresh-scrutiny/ (stating that TD
Ameritrade received $236 million in payment for order flow in 2013;
that a spokesman for Charles Schwab Corporation estimated payment
for order flow revenues of $100 million in 2013; and that E*Trade
Financial Corporation stated in a regulatory filing it received
$72.5 million in such revenues in 2013).
    \74\ Id.
---------------------------------------------------------------------------

    Under the quarterly disclosure obligations in current Rule 606(a),
broker-dealers are required to discuss the material aspects of their
relationship with each Specified Venue, including a description of any
arrangement for payment for order flow or profit-sharing relationship.
The current disclosure informs the market participants of a potential
conflict of interest the broker-dealer may face, but the current rule
does not require the broker-dealer to disclose specifics on the
conflict, including financial inducements received from each Specified
Venue, or transaction rebates received from exchanges and other trading
centers.\75\ The lack of detailed disclosure on the specifics of the
financial inducements received from each Specified Venue make it more
difficult for customers to assess a broker-dealer's management of any
conflict of interest and the quality of its broker-dealer's routing and
execution services.
---------------------------------------------------------------------------

    \75\ See Rule 606(a); see also Rule 606 Predecessor Adopting
Release, supra note 15, at 75427.
---------------------------------------------------------------------------

    Accordingly, the Commission preliminarily believes that requiring
broker-dealers to report more detailed disclosure on the payments
received and fees paid for marketable limit orders, non-marketable
limit orders, and other order types at each Specified Venue would
enable market participants to better assess the extent to which the
broker-dealer is effectively managing the potential conflicts of
interest, as well as the quality of their broker-dealer's retail order
routing and execution services. The Commission also preliminarily
believes that the description of any payment for order flow
arrangements and profit-sharing relationships required to be disclosed
in the quarterly report should be more comprehensive. As such, the
Commission preliminarily believes that it would be appropriate to
require broker-dealers to describe in their quarterly disclosure any
terms of payment for order flow arrangements and profit-sharing
relationships with each Specified Venue that may influence their order
routing decisions.
    Separately, in adopting Rule 606, the Commission required that
retail routing reports be divided into three separate sections for NMS
stocks listed on: NYSE, NASDAQ, and American Stock Exchange LLC.\76\
The listing markets are now dominated by electronic trading and the
handling of NMS stocks no longer varies materially based on the primary
listing market.\77\ As such, the Commission preliminarily believes that
the requirement to separate the retail routing reports by primary
listing market is outdated and does not provide useful information to
customers. Accordingly, the Commission preliminarily believes that
requiring retail routing reports to disclose the required information
for NMS stocks as a whole would better inform market participants about
the manner in which retail orders are routed in today's markets and
should simplify the burdens to comply with the rule.
---------------------------------------------------------------------------

    \76\ See Rule 606 Predecessor Adopting Release, supra note 15.
The American Stock Exchange is now known as NYSE MKT LLC. In October
2008, the American Stock Exchange LLC was renamed ``NYSE Alternext
US LLC.'' See Securities Exchange Act Release No. 58673 (September
29, 2008), 73 FR 57707 (October 3, 2008) (SR-Amex-2008-62). In March
2009, NYSE Alternext US LLC was renamed ``NYSE Amex LLC.'' See
Securities Exchange Act Release No. 59575 (March 13, 2009), 74 FR
11803 (March 19, 2009) (SR-NYSEALTR-2009-24). In May 2012, NYSE Amex
LLC was renamed ``NYSE MKT LLC.'' See Securities Exchange Act
Release No. 67037 (May 21, 2012), 77 FR 31415 (May 25, 2012) (SR-
NYSEAmex-2012-32).
    \77\ See Letter to Secretary, Commission, from Manisha Kimmel,
Managing Director, Financial Information Forum, dated October 22,
2014 (``FIF Letter''), at 3 (noting that with the introduction of
automated trading centers and smart order routing as a result of
Regulation NMS, order routing practices are no longer based on
listing market).
---------------------------------------------------------------------------

F. Comments on Equity Market Structure

    The Commission periodically has examined the regulatory regime for
order routing disclosure. The Commission published the Concept Release
on Equity Market Structure in 2010, which requested comment on a wide
range of issues. Among the issues specifically highlighted for comment
were: (1) Whether Rule 606 should be updated and, if so, in what
respects; (2) whether Rule 606 reports continue to provide useful
information for investors and their broker-dealers in assessing the
quality of order execution and routing practices; (3) whether Rule 606
should be updated to address the interests of institutional customers
in efficiently executing large orders and, if so, what metrics would be
useful; (4) whether institutional customers have sufficient information
about the smart order routing services and order execution algorithms
offered by their broker-dealers; and (5) whether a regulatory
initiative to improve disclosure of these broker-dealer services would
be useful

and, if so, what type of initiative the Commission should pursue.\78\
---------------------------------------------------------------------------

    \78\ See Concept Release on Equity Market Structure, supra note
2.
---------------------------------------------------------------------------

    The Commission received twenty-eight comment letters \79\ that
directly addressed order routing disclosures. The commenters provided a
wide range of recommendations and many commenters made multiple
recommendations regarding order routing disclosures.
---------------------------------------------------------------------------

    \79\ See Letters to Secretary, Commission, from Michael J.
Friedman, General Counsel & Chief Compliance Officer, Trillium,
dated November 7, 2014 (``Trillium Letter''); from Theodore R. Lazo,
Managing Director and Associate General Counsel, SIFMA, dated
October 24, 2014 (``SIFMA Letter II''); Associations Letter, supra
note 5; KOR Trading Letter II, supra note 41; FIF Letter, supra note
77; BlackRock Letter, supra note 41; from Micah Hauptman, Financial
Services Counsel, Consumer Federation of America, dated September 9,
2014 (``CFA Letter''); KOR Trading Letter I, supra note 41; from
Senator Edward E. Kaufman, United States Senate, dated August 5,
2010 (``Kaufman Letter''); from Greg Tusar, Managing Director,
Goldman Sachs Execution & Clearing, L.P and Matthew Lavicka,
Managing Director, Goldman, Sachs & Co., dated June 25, 2010
(``Goldman Sachs Letter II''); from James J. Angel, Ph.D., CFA,
Associate Professor of Finance, Georgetown University, McDonough
School of Business, dated April 30, 2010 (``Angel Letter II''); STA
Letter, supra note 41; NASDAQ Letter, supra note 19; SIFMA Letter I,
supra note 41; SAM Letter, supra note 41; from Eric W. Hess, Esq.,
General Counsel for Direct Edge, dated April 28, 2010 (``Direct Edge
Letter''); NYSE Euronext Letter, supra note 41; from Jonathan D.
Corpina, President, Organization of Independent Floor Brokers;
Jennifer Lee, Vice President, Organization of Independent Floor
Brokers; and Stephen O'Shaughnessy, Director, Organization of
Independent Floor Brokers, dated April 21, 2010 (``IFB Letter'');
Wolverine Trading Letter, supra note 39; Credit Suisse Letter, supra
note 41; ICI Letter, supra note 41; T. Rowe Price Letter, supra note
41; TD Ameritrade Letter, supra note 19; IAA Letter, supra note 41;
from Alan R. Shapiro, President and Chairman, The Transaction
Auditing Group, Inc., dated April 19, 2010 (``TAG Letter'');
Liquidnet Letter, supra note 41; from James J. Angel, Associate
Professor, McDonough School of Business, Georgetown University;
Lawrence E. Harris, Fred V. Keenan Chair in Finance, Professor of
Finance and Business Economics, Marshall School of Business,
University of Southern California; Chester S. Spatt, Pamela R. and
Kenneth B. Dunn Professor of Finance, Director, Center for Financial
Markets, Tepper School of Business, Carnegie Mellon University,
dated February 23, 2010 (``Angel Letter I''). See also TM Memo re
Morgan Stanley I, supra note 43; Memorandum from the Division of
Trading and Markets regarding a May 22, 2013, meeting with
representatives of Morgan Stanley, dated May 22, 2013 (``TM Memo re
Morgan Stanley II''); Memorandum from the Division of Trading and
Markets regarding an October 1, 2015, meeting with representatives
of Morgan Stanley, dated October 1, 2015 (``TM Memo re Morgan
Stanley III''); Memorandum from the Office of Commissioner Walter
regarding a June 30, 2010, meeting with representatives of the
Managed Funds Association, dated July 19, 2010 (``Walter Memo'').
The Commission also received one letter relevant to this proposal in
response to requests for comment on the NMS Stock ATS Proposing
Release, supra note 41. See Markit Letter, supra note 41.
---------------------------------------------------------------------------

1. General Need to Update Rule 606
    A few commenters referred generally to existing drawbacks in Rule
606 and the need for improvements to Rule 606 without making specific
recommendations. These commenters raised concerns regarding certain
conflicts of interest present in order routing practices and the
sufficiency of current disclosures under Rule 606, and stated that
improvements to Rule 606 would provide more insight to investors and
that the utility of Rule 606 was limited by a lack of disclosure.\80\
Most commenters focused on specific recommendations to update various
aspects of Rule 606.
---------------------------------------------------------------------------

    \80\ See IFB Letter, supra note 79, at 2 (questioning the
existing inherent conflicts in the payment for order flow practice
and asking whether disclosure requirements under existing Rule 606
are legally sufficient, and also noting that the required
disclosures under Rule 606 do not shed light on fiduciary duties);
Direct Edge Letter, supra note 79, at 2 (stating that ``improvements
to existing Rules 605 and 606 can be made to provide more detailed
insight to investors''); TAG Letter, supra note 79, at 3 (stating
``utility of the combination of Rules 605 and 606 to the individual
investor is limited since the Rule 606 routing percentages coupled
with the overall execution quality statistics in Rule 605 only give
a general indication as to the results an individual investor can
expect,'' and ``[r]outing information and the associated material
aspects of the relationship concerning the broker's arrangements, if
any, with the various trading centers to which they route does not
provide sufficient data to assess and compare'').
---------------------------------------------------------------------------

2. Need for Rule 606 to be Modernized to Maintain Pace with
Technological Advances
    Many commenters cited technological changes in market structure as
the basis for updating Rule 606.\81\ These commenters touched upon the
common theme that the disclosures required by Rule 606 had not kept
pace with the technological advances that had taken place since the
Rule's inception.
---------------------------------------------------------------------------

    \81\ See, e.g., NASDAQ Letter, supra note 19, at 20-21 (noting
that Rule 606 has ``never been amended despite changes that have
revolutionized trading and the national market system, including the
advent of decimal trading, the demise of trading floors and other
manual trading, proliferation of private linkages, adoption of
Regulation NMS, refinement of smart routers, modernization of high
frequency trading and automation of dark pools,'' stating that 605
and 606 have ``lagged behind technological advances that enhance
market quality and consequently render the metrics utilized in Rule
605 and 606 less useful to investors,'' and questioning whether Rule
606 continues ``to provide the level of transparency necessary to
exert meaningful pressure on market centers to provide superior
execution quality and routing practices.''); NYSE Euronext Letter,
supra note 41, at 12 (commenting that ``as detailed in the Concept
Release [on Equity Market Structure], the U.S. equity market
structure has changed substantially and, as a result, we believe
[Rule 606 has] become outdated''); see also KOR Trading Letter II,
supra note 41, at 2, 5 (commenting that ``[o]ver time and in
particular with the adoption of Regulation NMS, [Rules 605 and 606]
became increasingly outdated,'' and that Rule 606 has ``eroded due
to the increasing complexity of order-types as well as speed and
routing practices in today's marketplace''); BlackRock Letter, supra
note 41, at 3 (commenting that ``rising complexity in market
structure has made the existing reporting inadequate''); CFA Letter,
supra note 79, at 21 (stating ``it is unreasonable to expect that
given the changes in speed, technology, complexity, and dark trading
in our markets, retail investors would ever utilize them
productively''); KOR Trading Letter I, supra note 41, at 1 (noting
that while outdated, Rule 606 serves as the only current means to
analyze routing behavior); STA Letter, supra note 41, at 8
(commenting that ``technological advances have made some of the
measurements in the rule less meaningful'' and suggesting that Rule
606 metrics be reviewed, amended, and updated, as needed); SIFMA
Letter I, supra note 41, at 16 (commenting that in its current form,
Rule 606 does not provide ``useful and meaningful comparative
information to market participants, particularly individual
investors, or regulators, and that the [rule] should be either
modified or rescinded in light of market developments''); SAM
Letter, supra note 41, at 7 (noting that while order handling used
to be a transparent and simple process, ``transparency has been
sacrificed in the name of technological advancement and the
evolution of market microstructure,'' and stating that the
``enormous complexity introduced by this process has clouded order
handling to the point where even educated customers are never
completely confident how or why their orders are routed to specific
venues in a specific way''); Wolverine Trading Letter, supra note
39, at 4 (noting that ``the information currently required by [Rule
606] reports is not as meaningful in the context of today's
markets'' and that Commission staff should determine the types of
statistics to add in order to improve usefulness of the reports);
Credit Suisse Letter, supra note 41, at 9 (stating with regard to
Rule 606 that ``equity markets have unequivocally changed since 2000
when the rules were adopted, resulting in the need to update the
reports,'' and providing the example that ``the shortest execution
report time category in the reports is 0-9 seconds. In today's
trading, where market centers have begun clocking their executions
in microseconds (millionths of a second) because milliseconds
(thousandths of a second) were too slow, categorizing a 9 second
execution in the top speed category renders the reports less
meaningful than intended''); ICI Letter, supra note 41, at 7 (noting
that ``complexities in the current market structure and the
associated difficulties in assessing market performance for
investors''); TM Memo re Morgan Stanley III, supra note 79 (noting
that ``Order Handling and Execution Disclosure Rules have not been
updated to address technological advances'').
---------------------------------------------------------------------------

3. Requests for Specific Information and Standardized Disclosures
    Most commenters identified specific metrics that broker-dealers
should disclose, proposed model templates for disclosure, or called for
disclosures to be made in a standardized fashion. Commenters generally
requested additional information regarding order type usage and fill
rates, marketable and non-marketable limit orders, and the use of
indications of interest (``IOI''). Many commenters also requested more
detailed disclosure of payment for order flow, including fees paid and
rebates received.\82\
---------------------------------------------------------------------------

    \82\ See, e.g., Markit Letter, supra note 41, at 6 (Rule 606
statistics should be enhanced to include basic metrics of execution
quality for all categories of executed orders, separately report on
routed and executed orders broken down by marketability, and
quantify net fees paid and rebates received by marketability
category); Associations Letter, supra note 5, at Annex A (attaching
proposed template for enumerated, customer-specific institutional
order routing disclosure); BlackRock Letter, supra note 41, at 3
(stating that revised Rule 605/606 ``disclosures should provide
greater transparency on marketable and non-marketable limit orders,
order fill rates, sub-second execution horizons, pre-/post-trade
price movement, alternative order type usage and total fees/rebates
paid or received'' and that such ``metrics should also be available
in a standardized template for individual customer activity, not
just at an aggregate level by broker-dealer''); KOR Trading Letter
I, supra note 41, at 5 (proposing a list of updates to Rule 606
including, et al., information on marketable limit orders, total
payments or charges to broker-dealers, reporting of the execution
venue of all orders, and require average payments to be reported out
to one one-hundredth of one penny (i.e., four decimal places));
Goldman Sachs Letter II, supra note 79, at 10-11 (proposing
disclosure of order routing information for orders that do not
receive execution); Angel Letter II, supra note 79, at 7-9
(providing sample broker ``report card'' with eight metrics
including percentage of orders executed inside the bid-ask spread);
SAM Letter, supra note 41, at 7 (proposing eight categories of
information that brokers/venues should disclose, including aggregate
broker-level detail regarding specific venue market share based on
both shares routed and shares executed and ``payments, rebates, fees
and fee breakpoints (all costs and payment for order flow
arrangements) related to execution venues (routing broker or routing
venue to venue)''); ICI Letter, supra note 41, at 7 (proposing the
Commission require improved disclosure regarding order routing,
including policies and procedures regarding the dissemination of
information about a customer's order and trade information to
facilitate a trade, including the use of IOIs, ``external venues to
which a broker routes, . . . the percentage of shares executed at
each external venue, any ownership and other affiliations between
the broker and any venues to which the broker routes orders,'' and
``payments and other incentives provided or received (such as
rebates) to direct order flow to particular trading venues''); TD
Ameritrade Letter, supra note 19, at 7-8 (recommending, among other
things, that Rule 606 disclosures include order type categories for
'' ``Opening,'' ``Marketable Limit,'' ``Odd-lot,'' ``Mixed Lot,''
``Stop Orders'' and ``IOC/IOI'' and ``Spreads'' for Options,'' and
``require brokers that internalize order-flow to include additional
disclosure of payments made and overall profitability generated by
the internalizing subsidiary internalizing that order-flow''); see
also Trillium Letter, supra note 79, at 3 (suggesting that ``Rule
606(b) should be enhanced to simply require brokers to disclose the
unabridged order logs of requesting customers''); SIFMA Letter II,
supra note 79, at 13 (suggesting that the Commission should consider
a rule to ``require broker-dealers to publish on their Web sites, on
a monthly basis, a standardized disclosure report that provides an
overview of key macro issues that are of interest to clients,
potentially including: (i) Venues accessed, (ii) order types used on
exchanges, (iii) order types supported on the broker-dealer's ATS
(if applicable), (iv) fill rates (including internalization numbers,
if applicable), (v) location of ATS/co-location footprint, and (vi)
market data structure''); FIF Letter, supra note 77, at 3
(suggesting that market open, market close, stop orders, and odd
lots be removed from the ``other'' category and listed in their own
categories); KOR Trading Letter II, supra note 41, at 2 (suggesting
Rule 606 should be expanded to mandate uniform disclosure); CFA
Letter, supra note 79, at 21 (suggesting the reporting metrics in
Rule 606 ``should be modernized to provide the most relevant
information that will allow market participants, regulators, and
third-party analysts to assess the quality of order execution
practices''); TM Memo re Morgan Stanley II, supra note 79,
PowerPoint at 6 (suggesting Rule 606 should be modified to require
standardized reports providing an ``order life cycle audit trail,
not just ultimate execution or first route venue''); Walter Memo,
supra note 79, at 50-51 (the MFA suggested that Rule 606 could be
updated to require a brokerage firm to ``provide statistics giving
execution times along with the percentages of orders filled at the
quote, better than the quote, and worse than the quote, for
different size buckets including odd lots''); STA Letter, supra note
41, at 8 (suggesting a ``standardized set of metrics which might
include revised speed of execution data, linkages and access to
markets and other measurable data the disclosure of which will
provide investors and traders with adequate information upon which
to make execution and routing decisions''); NYSE Euronext Letter,
supra note 41, at Appendix I (suggesting that the ``percentage of
volume routed and executed internally by a broker-dealer should be
indicated, and the criteria used in order routing decisions should
be identified''); IAA Letter, supra note 41, at 3-4 (noting the
format and the presentation of information in 606 reports make the
information difficult to analyze); Liquidnet Letter, supra note 41,
Annex F, at F-1 to F-3 (suggesting the Commission consider modifying
Rule 606 reports to ``include data on execution quality for orders
received and handled by the routing broker, in particular, data
regarding execution time and price improvement''); Kaufman Letter,
supra note 79, at 6 (suggesting generally that ``brokers should be
required to provide detailed descriptions of their order-routing
procedures, including information on payments and rebates
received''); TM Memo re Morgan Stanley III, supra note 79 (including
a proposed venue analysis template with enumerated, specific
disclosures to be reported).

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    Some commenters expressed concern regarding information leakage and
identified various metrics that could help customers determine whether
a broker-dealer's routing strategy leaves orders vulnerable to
information leakage.\83\ Additionally, several industry commenters
recommended disclosing separately routing statistics for marketable and
non-marketable orders.\84\
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    \83\ See, e.g., ICI Letter, supra note 41, at 8-9 (stating that
broker-dealers should be required to disclose policies and
procedures to control leakage of information regarding a customer's
order and other confidential information and policies and procedures
regarding the dissemination of information about a customer's order
and trade information to facilitate a trade, including the use of
indications of interest); Liquidnet Letter, supra note 41, at 2
(stating that if institutional investors are appropriately informed
as to how broker-dealers route their orders, they will make the best
decisions as to how their large orders should be handled).
    \84\ See BlackRock Letter, supra note 41, at 3 (stating that
revised Rule 605/606 disclosures should provide greater transparency
on, among other things, marketable and non-marketable limit orders
and order fill rates); KOR Trading Letter I, supra note 41, at 5
(proposing a list of updates to Rule 606 including requiring
disclosure of statistics on marketable limit orders and greater
transparency around broker-dealer internal order routing practices
and decisions); TD Ameritrade Letter, supra note 19, at 6-7
(proposing to change the order classification in Rule 606
disclosures to include, among other things ``Marketable Limit'').
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4. Requests for Specific Disclosures for Institutional Orders
    A number of commenters recommended specific order routing
disclosures for institutional customers or questioned the usefulness of
the current disclosure requirements to retail or institutional
customers given that large orders are excluded from the rule.\85\ Many
commenters called specifically for the disclosure of order routing
information to institutional customers, noting in various ways that the
existing Rule 606 disclosures do not cover large orders and as a result
institutional customers may not receive meaningful information about
how their orders are routed.
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    \85\ See Associations Letter, supra note 5 (calling for
customer-specific order routing disclosures for institutional
investors); SIFMA Letter II, supra note 79, at 13 (stating that the
Commission should require broker-dealers to provide standardized
reports to institutional clients); KOR Trading Letter II, supra note
41, at 1 (stating that the public would be well served by
``expanding Rule 606 to cover all orders and mandating uniform
disclosure''); BlackRock Letter, supra note 41, at 3 (stating that
``[b]roker-dealers should be required to provide periodic
standardized reports on order routing and execution metrics to
retail and institutional investors''); NYSE Euronext Letter, supra
note 41, at 12 (noting that ``Rule 606 reports do not capture
information concerning large block transactions''); ICI Letter,
supra note 41, at 10 (noting that Rule 606 was drafted primarily
with the interests of individual investors in mind and large-sized
orders are excluded from the rule); T. Rowe Price Letter, supra note
41, at 3 (opining that Rule 606 reports are ``rarely used by
institutional investors''); IAA Letter, supra note 41, at 4 (stating
that the ``exclusion of large orders in these [Rule 606] reports
limits the value of these reports to institutional investors'');
Liquidnet Letter, supra note 41, at 2 (stating that
``[i]nstitutional and retail investors do not have sufficient
information regarding how their orders are handled'' and suggesting
Rule 606 be modified to ``[m]andate disclosure of specific order
routing practices by institutional brokers''); TM Memo re Morgan
Stanley III, supra note 79 (suggesting that broker-dealers should be
required to ``[p]rovide institutional clients with mandated
transparency around order handling practices in today's
environment'' including an ``objective and meaningful standardized
venue analysis template'').
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5. Comments on Actionable Indications of Interest
    As noted above, some comments on the Concept Release on Equity
Market Structure called for the disclosure of information relating to a
broker-dealer's use of IOIs.\86\ The Commission has considered these
comments, in addition to comments noted above on the Regulation of Non-
Public Trading Interest Proposing Release, and is proposing to define
actionable IOI.\87\
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    \86\ See TD Ameritrade Letter, supra note 19, at 6 (stating that
the order classification status should be changed to include IOIs);
ICI Letter, supra note 41, at 8 (suggesting the Commission consider
requiring disclosure of policies and procedures regarding the
dissemination of information about a customer's order and trade
information to facilitate a trade, including the use of
``indications of interest'' or ``IOIs''); KOR Trading Letter II,
supra note 41, at 1 (stating Rule 606 should be expanded to include
information on IOIs on dark pools).
    \87\ See infra Section III.A.10.
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    As discussed below, the Commission proposes to define the term
``actionable

indication of interest'' (``actionable IOI'').\88\ In 2009, the
Commission proposed rules to regulate non-public trading interest,\89\
which described characteristics of actionable IOI.\90\ The Commission
received a number of comment letters that addressed the
characteristics.\91\ Most of these commenters either noted in some form
that the proposal did not expressly define ``actionable IOI'' or
criticized the guidance.\92\ A few of these commenters offered their
own definitions or understanding of an actionable IOI.\93\
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    \88\ See proposed Rule 600(b)(1).
    \89\ See Regulation of Non-Public Trading Interest Proposing
Release, supra note 66, at 61219. Among other things, the Commission
proposed to amend the Exchange Act quoting requirements to apply
expressly to actionable IOIs. See id., at 61211.
    \90\ ``[A]n IOI would be actionable if it effectively alerted
the recipient that the dark pool currently has trading interest in a
particular symbol, side (buy or sell), size (minimum of a round lot
of trading interest), and price (equal to or better than the
national best bid for buying interest and the national best offer
for selling interest).'' Id., at 61226.
    \91\ See Letters to Elizabeth M. Murphy, Secretary, Commission,
from Senior Vice President--Legal & Corporate Secretary Office of
the General Counsel, NYSE Euronext, dated February 22, 2010 (``NYSE
Euronext IOI Letter''); from John A. McCarthy, General Counsel,
GETCO, LLC, dated February 22, 2010 (``GETCO Letter''); from P. Mats
Goebels, Managing Director and General Counsel, Investment
Technology Group, Inc., dated February 22, 2010 (``ITG Letter'');
from Vivian A. Maese, Esq., General Counsel and Corporate Secretary,
BIDS Trading, LP, New York, New York, dated February 18, 2010
(``BIDS Trading Letter''); from Greg Tusar, Managing Director,
Goldman Sachs Execution & Clearing, L.P. and Matthew Lavicka,
Managing Director, Goldman Sachs & Co., dated February 17, 2010
(``Goldman Sachs Letter''); from Kimberly Unger, Esq., Executive
Director, Security Traders Association of New York, Inc., New York,
New York, dated February 17, 2010 (``STA IOI Letter''); from Patrick
D. Armstrong, Co-President, Alliance of Floor Brokers, New York, New
York, dated January 29, 2010 (``AFB Letter''); from Matthew K.
Samelson, Principal, Woodbine Associates, Stamford, Connecticut,
dated October 23, 2009 (``Woodbine Letter'').
    \92\ See NYSE Euronext IOI Letter, supra note 91, at 4 (stating
that the Commission should provide clear guidance as to what
constitutes an actionable IOI, perhaps in the form of a non-
exclusive list of examples); ITG Letter, supra note 91, at 3
(stating that that the Commission should provide a more precise and
predictable definition of ``actionable IOI''); BIDS Trading Letter,
supra note 91, at 2 (noting the uncertainty regarding the definition
of an ``actionable'' IOI); Goldman Sachs Letter, supra note 91, at 2
(expressing concern that an explicit definition of actionable IOIs
will not be sufficiently broad to encompass the evolving range of
messaging and communications that might satisfy the definition of an
actionable IOI); STA IOI Letter, supra note 91, at 2 (stating that
the proposed guidance appears to deem an IOI actionable with
specific mention of price, size, or side, and that such a definition
is too broad); AFB Letter, supra note 91, at 2 (noting that the
Commission's proposal does not specifically define ``actionable
IOI''); Woodbine Letter, supra note 91, at 2-3 (stating that the
Commission's guidance on what constitutes an ``actionable IOI'' is
not clear).
    \93\ See GETCO Letter, supra note 91, at 3 (actionable IOIs
explicitly or implicitly convey information that there is actionable
trading interest in a symbol); AFB Letter, supra note 91, at 2 (an
actionable IOI is a bid or offer that can be accessed by one set of
market participants that is not publicly disseminated).
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    The Commission has considered these comments discussed in this
Section II.F., and, for the reasons set forth throughout this release,
is proposing the amendments to Rules 600, 605, 606, and 607 as
described herein. Moreover, as noted earlier, the Commission is
proposing amendments to other rules to update cross-references as a
result of this proposal.\94\
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    \94\ The Commission is proposing to amend Rule 3a51-1(a) under
the Exchange Act; Rule 13h-1(a)(5) of Regulation 13D-G; Rule
105(b)(1) of Regulation M; Rules 201(a) and 204(g) of Regulation
SHO; Rules 600(b), 602(a)(5), 607(a)(1), and 611(c) of Regulation
NMS; and Rule 1000 of Regulation SCI.
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III. Proposed Amendments to Rule 600, Rule 605, Rule 606, and Rule 607

A. Disclosures for Institutional Orders

    The Commission proposes to amend Rule 606 to require a broker-
dealer that receives institutional orders in NMS stocks to, upon
request, provide customer-specific reports regarding the venues to
which the institutional orders are either routed or exposed through an
actionable IOI.\95\ Such disclosures would provide a broad range of
statistical data regarding the broker-dealer's handling of
institutional orders, including order routing and execution information
for those orders at each trading center in the aggregate and by order
routing strategy. The disclosure of such information would provide
customers with standardized information about institutional order
routing and order execution quality and serve as a baseline for further
analysis and comparison of broker-dealers. In addition, the disclosures
would assist customers in reviewing order routing practices, assessing
execution quality, managing potential conflicts of interest, and
handling information leakage. The Commission preliminarily believes
that increased, uniform transparency should assist customers in
determining the quality of their broker-dealer's services.
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    \95\ See proposed Rule 606(b)(3).
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1. Definition of Institutional Order in Proposed Rule 600(b)(31)
    Currently, Rule 606 of Regulation NMS limits the required public
disclosure of a broker-dealer's order routing information to non-
directed orders in NMS securities that are in amounts less than (i)
$200,000 for NMS stocks, and (ii) $50,000 for option contracts.\96\ In
proposing Rule 606, the Commission discussed the thresholds in
connection with its proposed definition of ``customer order'' \97\ and
noted that ``[l]arge orders are excluded in recognition of the fact
that statistics for where orders are routed and general descriptions of
order routing practices are more useful for smaller orders that tend to
be homogenous.'' \98\ Thus, while customers and market participants
have access to publicly-available order execution quality statistics
and order routing information for small orders pursuant to Rule 605 and
606 of Regulation NMS,\99\ institutional customers have observed that
there is a lack of corresponding information for larger orders.
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    \96\ See 17 CFR 242.606. See also supra note 7 and accompanying
text.
    \97\ See supra note 7 and accompanying text.
    \98\ See Rule 606 Predecessor Proposing Release, supra note 15,
at 48417. The Commission cited the heterogeneity of larger orders,
and the difficulty in effectively reducing that heterogeneous
universe into summary statistics, as the primary reason for
excluding those orders from the coverage of the Rule. See supra
notes 21 and 22 and accompanying text. Today, institutional orders
are still not homogenous; however the manner in which they are
handled has become increasingly systematized, thus making it more
practical to categorize them. The Commission preliminarily believes
that the current market structure and advances in routing and
execution technology, which automatically and electronically record
order routing information, have made statistics for where
institutional orders are routed more useful and disclosure of such
statistics more practicable.
    \99\ 17 CFR 242.605-606.
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    To facilitate enhanced transparency around the handling of larger
orders in NMS stocks, the Commission is proposing to amend Rule 600 to
include a definition of ``institutional order.'' \100\ Specifically,
under proposed Rule 600(b)(31) of Regulation NMS, an institutional
order would be defined as an order to buy or sell a quantity of an NMS
stock having a market value of at least $200,000, provided that such
order is not for the account of a broker-dealer.\101\
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    \100\ See proposed Rule 600(b)(31).
    \101\ As proposed, the definition of institutional order would
only apply to orders for NMS stocks, and, therefore, would not
include orders in NMS securities that are options contracts. Due to
differences in the current market structure for NMS securities that
are options contracts, in particular the lack of an over-the-counter
market in listed options, the Commission preliminarily believes that
the same market structure complexities do not exist at this time to
warrant the institutional order handling disclosures proposed
herein. See Securities Exchange Act Release No. 61902 (April 14,
2010), 75 FR 20738, 20740 (April 20, 2010) (stating that all orders
in the listed options market are currently executed on registered
national securities exchanges). Specifically, since listed options
are limited to trading on the 14 registered options exchanges, the
number of venues to which listed options could be routed and
executed is significantly less than the over 253 venues for NMS
stocks. See supra notes 31-32 and accompanying text. In addition,
the broker-dealer ownership and affiliation concerns with over-the-
counter venues do not exist in the listed options market. The
Commission preliminarily believes that at this time the current
listed options market structure does not present the same concerns
regarding fiduciary responsibilities, information leakage, and
conflicts of interest as the market structure for NMS stocks.

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    The proposed definition of ``institutional order'' is intended to
complement the current definition of ``customer order.'' \102\ The
proposed dollar threshold for an institutional order would dovetail
with the definition of ``customer order'' such that all orders in NMS
stocks routed by broker-dealers for their customers, whether retail- or
institutional-sized, would be encompassed by order routing disclosure
rules.\103\ As noted above, institutional orders are generally divided
into smaller orders and routed to various trading centers. The
Commission notes that, as discussed below, the proposed institutional
order handling reports would include the routing of all smaller orders
derived from institutional orders.
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    \102\ See infra Section III.A.1.
    \103\ See id. The Commission notes that the proposed definition
of ``institutional order'' was referred to as ``large orders'' in
the Rule 606 Predecessor Proposing Release and Rule 606 Predecessor
Adopting Release. See supra note 15.
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    The Commission preliminarily believes that defining institutional
order in relation to the dollar amount of the order is an appropriate
means to differentiate between small orders that are typically
characterized as orders of $200,000 or less and larger-sized orders
that are generally categorized as orders of $200,000 or more.\104\
Since ``customer order'' is currently defined using $200,000 as an
upper threshold, the Commission preliminarily believes that market
participants are accustomed to considering an order of $200,000 or more
as an institutional order rather than a customer order. In addition,
the Commission preliminarily believes that rather than proposing a new
monetary value to define large-sized orders generally placed by
institutional customers, administration would be more straightforward
for broker-dealers using a defined standard that is commonly recognized
in the industry. Therefore, the Commission preliminarily believes that
the $200,000 threshold continues to be a reasonable threshold to
accommodate such distinction between small orders and large orders,
which are generally handled in a different manner by broker-
dealers.\105\
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    \104\ See, e.g., 17 CFR 242.606 (defining block size with
respect to an order to include an order for a quantity of stock
having a market value of at least $200,000).