Rule 606(b)(3) reports under the adopted rule, whereas these orders
would have been included in the customer-specific reports under the
proposed $200,000 threshold. Thus, some customers that send held orders
of a market value of at least $200,000 will not benefit from the order
handling transparency under Rule 606(b)(3). However, a customer could
request the disclosures set forth in Rule 606(b)(1) for these orders,
which would maintain the status quo. Also, customers could switch to
sending not held orders from held orders in order to receive the
benefits of the Rule 606(b)(3) reports, which could result in a worse
execution quality for these orders, assuming customers currently
optimize their decision on when to request that an order be handled as
not held. However, the Commission recognizes that if the benefits of
including large held orders in the standardized customer-specific
report under adopted Rule 606(b)(3) outweigh the execution quality cost
of requesting not held handling of such orders, the customer could
submit such orders as not held.
ii. Costs
    As discussed in detail below, the Commission recognizes that the
scope of orders eligible for the Rule 606(b)(3) reports influences the
compliance and other costs of the adopted amendments. First, broker-
dealers will incur costs to ensure the Rule 606(b)(3) reports cover the
required orders and to implement the de minimis exceptions set forth in
Rule 606(b)(4) and Rule 606(b)(5). The Commission believes the
compliance costs associated with identifying not held orders are lower
than the compliance costs associated with the proposed $200,000
threshold. In addition, the Commission believes that the two de minimis
exceptions will reduce the costs to broker-dealer of producing the
customer-specific reports of Rule 606(b)(3), but acknowledges that
broker-dealers might incur costs in producing the customer-specific
reports in Rule 606(b)(1) for the orders that, due to the de minimis
exceptions, are not eligible for the customer-specific reports of Rule
606(b)(3). Further, the Commission acknowledges additional costs that
will originate from the

uncertainty created by the de minimis exceptions and from potential
behavior changes of broker-dealers and customers. The Commission
quantifies the costs where possible and provides qualitative discussion
when quantifying costs and benefits is not feasible. Many, but not all,
of the costs of the adopted amendments to Rules 600, 605, and 606
involve a collection of information, and these costs and burdens are
discussed in the Paperwork Reduction Act Section above, with those
estimates being used in the economic analysis below.\660\
---------------------------------------------------------------------------

    \660\ See supra Section IV.
---------------------------------------------------------------------------

1. Compliance Costs
    The requirement for customer-specific order handling disclosure
under Rule 606(b)(3) based on not held or held orders will create
compliance costs, as broker-dealers will need to prepare the customer-
specific reports for not held orders required by Rule 606(b)(3).\661\
The estimates of the related compliance costs are encompassed in the
cost estimates discussed in Section V.C.1.b.ii.3. The adopted approach
will create compliance costs for broker-dealers to implement a process
to identify not held orders for inclusion in Rule 606(b)(3) reports and
for the processing time to screen order data for not held orders when
generating the reports.\662\ However, the Commission believes that the
adopted approach is targeted to moderate compliance burdens. In
particular, as discussed in Section V.C.1.a.i, multiple commenters
stated that broker-dealers are already familiar with the held and not
held order type classifications and orders are already marked as held
or not held.\663\ Therefore, classifying orders as held or not held
would not create other additional implementation or ongoing costs for
broker-dealers.
---------------------------------------------------------------------------

    \661\ The staff's supplemental analysis found that when all of
the orders broker-dealers receive are on a not held basis, about 46%
of total shares are less than $200,000. In addition, when the ratio
of not held orders that broker-dealers receive from customers is 50%
or less excluding broker-dealers receiving a firm-level de minimis
exception, about 14% of total shares of orders included in the
analysis have a market value of at least $200,000 and are not held
orders. As a result, the analysis suggests that the reporting costs
could vary depending on the amount of not held orders that the
broker-dealers receive.
    \662\ The adopted approach will also create initial compliance
costs for market centers and the broker-dealers that will have to
review and update compliance manuals and written supervisory
procedures and update citation references to any such defined term.
The estimates of the related compliance costs are encompassed in the
cost estimates discussed in Section IV.D.5.
    \663\ See Citadel Letter at 3; Markit Letter at 3, 7-8; KCG
Letter at 4; Capital Group Letter at 2-3; SIFMA Letter at 3.
---------------------------------------------------------------------------

    The Commission also acknowledges that the de minimis thresholds in
adopted Rules 606(b)(4) and (b)(5) will also create compliance costs to
the extent a broker-dealer avails itself of one or both of the
exceptions. Specifically, to apply the de minimis thresholds, broker-
dealers will need to create systems to identify whether the amount of
not held orders broker-dealers receive from customers would meet the
threshold of either the firm-level or the customer-level de minimis
exception. Broker-dealers will also need to conduct extra data
processing to determine whether they or any customers are excepted and
to screen out any excepted orders when creating the Rule 606(b)(3)
reports.
    The amended rule would also impose additional compliance costs on
broker-dealers from the requirement set forth in Rule 606(b)(1) prior
to today's amendments. As discussed above, Rule 606(b)(1), as amended,
requires a broker-dealer, upon customer request, to provide the
disclosures set forth in Rule 606(b)(1) for orders in NMS stock that
are submitted on a held basis, and for orders in NMS stock that are
submitted on a not held basis and for which, under the de minimis
exceptions, the broker-dealer is not required to provide the customer a
report under Rule 606(b)(3). As discussed above, Rule 606(b)(1), as
amended, does not modify any of the customer-specific disclosure
requirements prior to today's amendments but rather modifies the
categories of orders to which the disclosure applies. Under this
modification, Rule 606(b)(1) includes held orders and not held orders
subject to the de minimis exceptions. Therefore, broker-dealers that
receive such orders could incur costs to respond to customer requests
as required by Rule 606(b)(1). However, to the extent that broker-
dealers already have systems in place to prepare the reports required
by the rule prior to these amendments, the amended rule should not
create substantial new costs to these broker-dealers to create a new
system to prepare Rule 606(b)(1) reports. Additionally, because broker-
dealers would need to prepare Rule 606(b)(1) reports only when
customers request such reports, and, as discussed above, to the extent
that customers typically placing held orders may not value customer-
specific reports required by Rule 606(b)(1) and therefore would not
frequently request such reports, Rule 606(b)(1) would not impose
significant ongoing compliance costs to broker-dealers.
    The Commission also analyzed how the compliance costs of the
adopted rule compare to the anticipated compliance costs of the
proposed rule. Under the adopted approach, broker-dealers will need to
prepare Rule 606(b)(3) reports for not held orders of any dollar value,
including not held orders with a market value less than $200,000, and
will need to, upon request, prepare Rule 606(b)(1) reports for held
orders of any dollar value and for not held orders covered by the de
minimis exceptions under Rule 606(b)(4) or 606(b)(5). As discussed in
Section V.C.1.a.i., the adopted rule will include more orders in the
Rule 606(b)(3) reports than under the proposed rule. The staff's
supplemental analysis also found that among the orders of less than
$200,000 in the sample data, about 45% of the total shares and about
33% of the total number of orders are not-held.\664\ These orders were
considered ``retail-sized orders'' under the proposed rule. Thus,
broker-dealers would have not been required to prepare Rule 606(b)(3)
reports for these orders, but would have been required to prepare
public order routing reports and Rule 606(b)(1) reports upon request.
The Commission believes that the adopted approach should moderate
processing costs for broker-dealers compared to the proposed rule. To
the extent that broker-dealers already have a system to generate Rule
606(b)(1) reports pursuant to the previously existing rule, broker-
dealers would need to modify existing systems to prepare Rule 606(b)(3)
reports without the need to create entirely new systems to process
customer orders. Additionally, as discussed above, broker-dealers that
receive an insignificant amount of not held order flows will receive
exceptions in preparing for Rule 606(b)(3) reports under Rule 606(b)(4)
and 606(b)(5), which could limit the scale of order processing costs on
certain broker-dealers to provide Rule 606(b)(3) reports. The
Commission also believes that the adopted rule would impose lower
implementation and processing costs on broker-dealers relative to the
Proposal. To the extent that some orders are unpriced, under the
proposed rule broker-dealers would have needed to estimate the current
market price of NMS stocks when the orders were received to identify
the value of the orders for comparison to the $200,000 threshold in the
Proposal. This would require broker-dealers to create systems to
estimate the value of unpriced orders. Under the adopted rule, however,
consistent with the Commission's analysis immediately above, broker-
dealers would not incur such

compliance costs because orders are currently identified as held or not
held.
---------------------------------------------------------------------------

    \664\ See supra notes 642 and 643.
---------------------------------------------------------------------------

2. Influence of De Minimis Exceptions on Compliance Costs
    The Commission believes that the two de minimis exceptions to the
adopted rule will further limit the scale of compliance costs on
certain broker-dealers to provide Rule 606(b)(3) reports. Specifically,
the Commission believes that adopted Rule 606(b)(4), which provides for
a firm-level de minimis exception for broker-dealers, will limit the
costs to broker-dealers that rarely handle not held NMS stock order
flow. Absent a firm-level de minimis threshold, every broker-dealer
that handles not held orders, regardless of its customer base and core
business, would be subjected to compliance costs to create the systems
and processes to generate and deliver the Rule 606(b)(3) reports. The
supplemental staff analysis found that among the 342 broker-dealers
that receive not held orders from customers in the sample data, about
8% (28 broker-dealers) would qualify for the firm-level de minimis
exception from Rule 606(b)(3)'s requirements. Accordingly, the firm-
level de minimis exception in Rule 606(b)(4) would result in
approximately 8% of broker-dealers not incurring the compliance costs
associated with the standardized customer-specific order handling
reports required by Rule 606(b)(3). As discussed in Section
V.C.1.a.i.2., the number of orders that will be excluded under the de
minimis exception would be minimal compared to the current reporting
requirement and to the proposal. The minimal amount of not held orders
excluded under the firm-level de minimis exception suggests that there
would be only limited benefits of Rule 606(b)(3) in circumstances where
broker-dealers handle a minimal amount of not held orders, and that the
resulting benefits of customer-specific order handling disclosures
required by Rule 606(b)(3) may not be as great as intended.
    The Commission also believes that the adopted approach of including
a de minimis exception at the customer-level under the adopted Rule
606(b)(5) will also limit the compliance costs of broker-dealers
associated with the new customer-specific order handling disclosures
under Rule 606(b)(3). This exception, therefore, could reduce
compliance costs for broker-dealers of processing orders to produce and
to deliver Rule 606(b)(3) reports for numerous customers that do not
actively place not held orders.
    The Commission also believes that the three-month grace period
included in the firm-level de minimis exception could further limit the
scale of compliance costs of broker-dealers. As discussed in Section
III.A.1.b.iv., Rule 606(b)(4) allows broker-dealers to have a grace
period of up to three calendar months to provide the new customer-
specific disclosures the first time a broker-dealer meets or exceeds
the 5% de minimis threshold. The adoption of the grace period will
provide time for broker-dealers to create the systems necessary to
prepare the 606(b)(3) reports, which could allow the broker-dealers to
manage their implementation and ongoing compliance costs. In addition,
once the broker-dealers set up the system to comply with the rule
during the grace period, the broker-dealers could use the system in the
future, which could help reduce the on-going reporting costs in
preparing additional Rule 606(b)(3) reports.
    The Commission acknowledges that the two de minimis exceptions may
create uncertainty as to whether a customer would have access to the
Rule 606(b)(3) report and as to whether a broker-dealer would be
required to produce Rule 606(b)(3) reports on request. The staff's
supplemental analysis found that a small number of broker-dealers fell
slightly outside the 5% de minimis threshold during a recent sample
period.\665\ Specifically, eight broker-dealers receive not held orders
greater or equal to 5% and less than 10% of the total shares of their
orders in the sample. These broker-dealers would not qualify for the
firm-level de minimis exception despite not predominantly receiving not
held orders, and thus would not be excepted from preparing Rule
606(b)(3) reports for not held orders under the adopted rule.
Additionally, the staff analysis found that five broker-dealers that
meet the de minimis exception receive not held orders greater or equal
to 2.5% and less than 5% of the total shares of their orders in the
sample. These results indicate that the threshold for the firm-level de
minimis exception could create uncertainty for broker-dealers as to
whether they might receive enough not held orders to qualify for the de
minimis exception and for how long they would qualify for the de
minimis exception. However, the Commission believes that the firm-level
de minimis exception under Rule 606(b)(4) could mitigate the
uncertainty that is discussed above. As discussed in Section
V.C.1.a.i.2., a supplemental staff analysis found that 23 broker-
dealers that meet the de minimis exception receive not held orders less
than 2.5% of the total shares of their orders in the sample, and among
these broker-dealers the largest ratio of not held orders as percentage
of total shares is less than 2.2%, which indicates that there is less
concern of uncertainty regarding whether they meet the firm-level de
minimis exception. Moreover, as discussed in Section III.A.1.b.iv.,
Rule 606(b)(4) requires that once a broker-dealer has equaled or
exceeded the firm-level threshold based on its not held NMS stock order
flow during a given six calendar month period, it must provide reports
pursuant to Rule 606(b)(3) for at least the next six calendar months
regardless of the nature of its order flow during the Compliance
Period. Additionally, as discussed in Section III.A.1.b.iv., if, at any
time after the end of a Compliance Period, the broker-dealer's not held
NMS stock order flow falls below the 5% threshold for the prior six
calendar months, the broker-dealer is not required to provide reports
pursuant to Rule 606(b)(3), except with respect to orders received
during the Compliance Period. These features of the firm-level de
minimis exception under Rule 606(b)(4) could mitigate the uncertainty
as to whether a broker-dealer would be required to produce Rule
606(b)(3) reports on request for the next six calendar months after the
calendar month the broker-dealer exceeded this 5% threshold.
---------------------------------------------------------------------------

    \665\ See supra notes 642 and 643.
---------------------------------------------------------------------------

    Further, as discussed above, the Commission acknowledges that the
customer-level de minimis exception under Rule 606(b)(5) may result in
certain customers with seasonality in their trading volume exceeding
the threshold during certain months and not during others. As discussed
above, to the extent that such customers receive net benefits from
receiving new customer-specific reports under the requirement of Rule
606(b)(3) and that such customers have flexibility in their trading
activities,\666\ customers could be willing to incur the costs to alter
trading behavior to receive the Rule 606(b)(3) reports more frequently
during the year. Because customers' trading activity can be affected by
future market conditions or unexpected events in the financial markets,
it could be difficult for customers to predict at the time they are
placing an order, whether that order could be in the standardized
customer-specific reports.
---------------------------------------------------------------------------

    \666\ The Commission believes index funds time their trades to
minimize tracking error. These institutions are concerned even about
how when they trade within a trading day affects their tracking
error. These institutions are unlikely to delay trading by a month
just to qualify to receive a report for one additional inactive
month.

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

3. Other Costs
    The Commission also acknowledges that the firm-level de minimis
exception in adopted Rule 606(b)(4) could incentivize broker-dealers to
keep their not held trading volume below the 5% threshold. As discussed
above, there are a small number of broker-dealers with not held orders
slightly below or above the 5% de minimis threshold. Specifically,
according to Table 1, for 8 broker-dealers, not held orders account for
between 5% and 10% of orders received by that broker-dealer. To avoid
the compliance costs, broker-dealers could discourage customers from
using not held orders so as not to exceed the 5% threshold and
therefore not to be subject to the obligations of providing the new
disclosures upon request. Under this scenario, customers sending not
held orders to these broker-dealers may not receive the benefit of the
disclosure of customer-specific order handling practices required by
Rule 606(b)(3) and could face additional execution costs if they
suboptimally submit held orders relative to today. However, the
Commission notes that for business reasons, some firms might choose to
provide the new customer-specific order handling disclosures to its
customers, regardless of the de minimis exception, limiting the costs
of such incentives on investors. Further, customers that value the Rule
606(b)(3) reports could be willing to incur the cost of switching to
the broker-dealers that do not receive or use the firm-level exception
in order to ensure receipt of the customer-specific reports. As a
result, the threat of losing customers could dampen the broker-dealers'
incentives to encourage their customers to use held orders.
    The Commission also acknowledges that the customer-level de minimis
threshold under Rule 606(b)(5) could result in changes in customers'
behavior, including an increase in not held orders over held orders or
a consolidation of the customer's not held order flow with one broker-
dealer in order to exceed the customer-level threshold to be entitled
to receive such reports, which could be less optimal for customers
relative to today. As discussed above, a broker-dealer will not be
obligated to provide the new Rule 606(b)(3) order handling disclosures
to any customer that trades on average each month for the prior six
months less than $1,000,000 of notional value of not held orders
through the broker-dealer. Therefore, a customer that submits more than
$1,000,000 of notional value each month, but not in not held orders or
at a single broker-dealer, could qualify for the Rule 606(b)(3) reports
by instructing brokers to handle more orders as not held and/or by
consolidating its order submission with fewer broker-dealers. However,
some firms may choose to provide the new customer-specific order
handling disclosures to its customers, regardless of the de minimis
exceptions for business reasons, and the expectation of these reports
could mitigate customers' incentives.
b. Customer Requests for Information on Customer-Specific Handling
Under Adopting Rule 606(b)(3)
i. Benefits
    The required customer-specific order handling disclosures being
adopted under Rule 606(b)(3) will provide transparency about order
routing and execution quality for not held orders placed by
customers.\667\
---------------------------------------------------------------------------

    \667\ See supra at Section III.A.1.b.iii.
---------------------------------------------------------------------------

1. Execution Quality Benefits
    The Commission believes that Rule 606(b)(3) will benefit customers,
because broker-dealers will have an additional incentive to improve
their order routing decisions for customers submitting orders on a not
held basis, who could also use the reports required by the amendments
to Rule 606 to compare routing and execution quality among broker-
dealers, which could lead to better execution quality for not held
orders. As a result, Rule 606(b)(3), as adopted, could lead to more
transparent order routing practices and execution quality disclosures,
which could enhance competition in the market for brokerage services.
The disclosures in Rule 606(b)(3) will provide customers that submit
not held orders, including investment fund managers, standardized
information regarding their broker-dealers' order routing practices and
execution quality. To the extent that the reports required by Rule
606(b)(3) increase the transparency of order routing and execution
quality for customers' not held orders, broker-dealers will be better
able to compete along the execution quality dimensions provided in the
reports, such as the fill rate, percentage of shares executed at the
midpoint and priced at the near or far side of the quote, and average
time between order entry and execution or cancellation for orders
posted to the limit order book, in addition to commissions and other
considerations on which they currently compete.
    The Commission believes that amended Rule 606(b)(3) could affect
competition between trading centers. Broker-dealers routing more orders
to the trading centers that are more beneficial for their customers
could further promote competition between trading centers and promote
innovation on execution quality. To illustrate, if broker-dealers
change their order routing decisions to focus more on execution quality
and route fewer orders to a given trading center, that trading center
will have an incentive to take measures to attract and gain back order
flow by innovating on execution quality. In addition to comparing
broker-dealers on the basis of the reports, the amended Rule 606(b)(3)
could facilitate and inform customer dialogues with their broker-
dealers about the broker-dealers' order routing practices to better
match the needs of the customers with the order routing practices of
the broker-dealers to whom they send orders. As a result, as several
commenters stated, the information on execution quality could better
enable customers placing orders on a not held basis to evaluate the
impact that routing decisions have on the quality of their order
executions and could provide information regarding broker-dealers'
potential conflicts of interest.\668\ The Commission believes that the
amended Rule 606(b)(3) will promote better order handling practices
among broker-dealers, therefore potentially promoting competition
between trading centers and ultimately incentivizing broker-dealers to
improve execution quality of not held orders.
---------------------------------------------------------------------------

    \668\ See, e.g., Capital Group Letter at 3 and 6; STA Letter at
4; FSR Letter at 4-5; HMA Letter at 10; ICI Letter at 9; Schwab
Letter at 2; Markit Letter at 9-10; Better Markets Letter at 5-8.
---------------------------------------------------------------------------

2. Benefits of Enhanced, Standardized Report
    As adopted, Rule 606(b)(3) will address the concerns that current
customer reports are not standardized. As discussed in the Proposing
Release,\669\ some customers currently request and receive reports
about order routing and execution quality of their orders from their
broker-dealers. However, these reports are not standardized and, as a
result, it may be difficult to compare broker-dealers on the basis of
those reports. In addition, the availability, detail, and quality of
such reports likely differ across customers, e.g., it might be the case
that customers placing a greater volume of not held orders have easier
access to such reports compared to customers with a smaller volume of
not held orders. Moreover, the information provided by a broker-dealer
may vary over time without any standardized or required content for the
reports. As adopted, Rule 606(b)(3) could address

both of these concerns as the reports will be standardized for all
broker-dealers and all customers placing not held orders (subject to
two de minimis exceptions) making comparisons easier and analysis more
useful. Furthermore, every customer placing orders on a not held basis
will be able to receive reports upon request from their broker-dealer.
---------------------------------------------------------------------------

    \669\ See Proposing Release, supra note 1, at 49437.
---------------------------------------------------------------------------

    The Commission believes that the benefits of the reports required
by Rule 606(b)(3) may be modest for some customers that already receive
reports from their broker-dealers on the handling of their not held
orders, depending on the information such customers currently receive
and how standardized that information is across broker-dealers. For
example, the reports that a particular customer already receives may be
more detailed and tailored to that customer. The Commission recognizes
that some current ad hoc reports also may provide additional, more
detailed, and/or more tailored information than what Rule 606(b)(3)
requires. Customers receiving such enhanced reports may not benefit
significantly from the information specified in Rule 606(b)(3).
Nevertheless, the Rule 606(b)(3) requirement that the disclosures be
standardized may allow these customers to more readily compare their
broker-dealers, particularly if their broker-dealers currently provide
disparate responses to similar requests.
    The Commission believes that Rule 606(b)(3) will enable customers
to better compare broker-dealers' order handling practices, which will
allow customers to more efficiently monitor, evaluate, and select
broker-dealers. Under Rule 606(b)(3), customers can obtain detailed
information on the broker-dealer internalization rate and payment for
order flow received. Currently, broker-dealers may prefer to
internalize uninformed order flow.\670\ Under Rule 606(b)(3) a customer
will have information on whether its order flow is being internalized
and could use this information in its relationships with its broker-
dealers. Similarly, a customer will be able to monitor whether broker-
dealers route orders to the trading center offering highest rebate or
lowest fees.\671\ Customers might be concerned if orders routed to a
high-rebate destination do not execute or do so with a delay, as
information about the order may leak into the market, thereby inducing
price impact. Rule 606(b)(3) could mitigate such concerns.
---------------------------------------------------------------------------

    \670\ See Hitesh Mittal, Are You Playing in a Toxic Dark Pool? A
Guide to Preventing Information Leakage, 3 Journal of Trading 20
(Summer 2008).
    \671\ A broker-dealer may take into account rebates when setting
its flat-rate commission by asking for a lower commission. As long
as the rebates are not passed through to the customer, however, the
broker-dealer still has the incentive to maximize rebate capture.
---------------------------------------------------------------------------

    As adopted, Rule 606(b)(3) requires the inclusion of actionable
IOIs in customer-specific order handling disclosures. As adopted, Rule
600(b)(1) defines an actionable IOI as ``any indication of interest
that explicitly or implicitly conveys all of the following information
with respect to any order available at the venue sending the indication
of interest: (1) Symbol; (2) side (buy or sell); (3) a price that is
equal to or better than the national best bid for buy orders and the
national best offer for sell orders; and (4) a size that is at least
equal to one round lot.'' The Commission believes that the inclusion of
actionable IOIs in the adopted reporting requirements of broker-dealers
should provide customers a more complete picture of how their not held
orders are handled. Since actionable IOIs can convey information
similar to that of an order, a response to an actionable IOI may result
in an execution at the venue of the IOI sender and thus can represent a
portion of the liquidity available at a given price and time. The
Commission therefore believes that actionable IOIs should be included
in the required disclosure of how not held orders are handled. In
addition, because an actionable IOI can convey information similar to
that of an order, the use of actionable IOIs may contribute to
information leakage in a way similar to that of the use of orders.\672\
Specifically, the Commission believes that such information will enable
customers in assessing whether their broker-dealers are exposing their
not held orders to the select market participants with which the
broker-dealer has affiliations or business relationships or from which
the broker-dealer receives other incentives. In addition, the
Commission believes that disclosure of this information will provide
the customer with a more complete understanding of the broker-dealer's
order handling activities for purposes of assessing the broker-dealer's
execution quality generally. Excluding actionable IOIs, therefore, will
not provide a complete picture of order routing and executions of a
customer's not held orders and could provide broker-dealers with an
incentive to use actionable IOIs instead of orders to circumvent the
adopted disclosure requirements in Rule 606.
---------------------------------------------------------------------------

    \672\ See Proposing Release, supra note 1, at 49486.
---------------------------------------------------------------------------

    The Commission considered whether adopting a definition of
actionable IOI in Rule 600(b)(1) may limit its potential benefits.
Specifically, the adopted definition is substantively similar to the
description of actionable IOI in the Regulation of Non-Public Trading
Interest Proposing Release. Comments received on the Regulation of Non-
Public Trading Interest Proposing Release indicated that some
commenters were concerned that the discussion of actionable IOIs in
that release was too stringent.\673\ If the definition of actionable
IOI is, in fact, too narrow, then some IOIs will not be included in the
definition of actionable IOI and will not be captured by the required
reports on handling of not held orders. Consequently, it is possible
that customers placing orders on a not held basis might find the
reports to be less informative on order handling than if the definition
of actionable IOIs was broader. This suggests that defining actionable
IOIs too narrowly may limit the benefits of the adopted amendments.
However, as discussed in Section III.A.2., the Commission's purpose
here is improving the usefulness of the order handling and routing
information conveyed by broker-dealers to their customers placing
orders on a not held basis, and thus the definition of actionable IOI
being adopted is appropriately tailored to serve the purpose of this
rulemaking, minimizing the concern of limiting the benefits of the
amendments.
---------------------------------------------------------------------------

    \673\ Comments on the Regulation of Non-Public Trading Interest
Proposing Release are available at http://www.sec.gov/comments/s7-27-09/s72709.shtml. Comments on actionable IOIs can be found in the
following letters: http://www.sec.gov/comments/s7-27-09/s72709-46.pdf and http://www.sec.gov/comments/s7-27-09/s72709-48.pdf.
---------------------------------------------------------------------------

    Several commenters stated that the proposed definition for
actionable IOIs is unclear, specifically as to whether the definition
of actionable IOI excludes conditional orders.\674\ The inclusion of
conditional orders in the Rule 606(b)(3) report could have benefits
because broker-dealers would include additional information in the Rule
606(b)(3) reports, which therefore could increase the benefits
resulting from increased transparency. However, as discussed in Section
III.A.2., many market participants distinguish conditional orders from
actionable IOIs, because conditional orders are not firm
representations of trading interest and may require additional
negotiation before a trade can be executed. Therefore, the Commission
acknowledges that the inclusion of conditional orders in the definition
of actionable IOI may cause confusion in

producing and consuming order handling reports, which could limit the
benefits of Rule 606(b)(3) reports.
---------------------------------------------------------------------------

    \674\ See BIDS Letter at 4-5; Bloomberg Letter at 3-4; Capital
Group Letter at 3; FIF Letter at 7; Markit Letter at 11-12; NYSE
Letter at 2; SIFMA Letter at 6.
---------------------------------------------------------------------------

    The Commission is adopting a modification to Rule 606(b)(3) that
requires broker-dealers to disclose the fact that actionable IOIs were
sent to customers placing not held orders but not the identity of such
customers. The Commission believes that such modification should help
ensure that customers receive detailed information in their report,
while protecting the identity of institutions providing liquidity. The
Commission believes that disclosing the specific venue or venues to
which a broker-dealer exposed a not held order by an actionable IOI
will be useful for the customer to further assess the extent of
information leakage of their orders and potential conflicts of interest
facing their broker-dealers. Specifically, the Commission believes that
such information will enable customers to assess whether their broker-
dealers are exposing their not held orders to the select market
participants with which the broker-dealer has affiliations or business
relationships or from which the broker-dealer receives other
incentives. In addition, the Commission believes that disclosure of
this information will provide the customer with a more complete
understanding of the broker-dealer's order handling activities for
purposes of assessing the broker-dealer's execution quality generally.
Under the proposed Rule 606(b)(3), the Commission believed that
requiring broker-dealers to identify the institutions to which they
routed actionable IOIs would allow customers to receive additional
details in their reports so that customers could better compare their
broker-dealers. Regarding the requirement that broker-dealers identify
the institutions to which they routed actionable IOIs, commenters
expressed concerns that such identification may discourage institutions
from providing liquidity if they do not wish their names to be
disclosed to protect their proprietary information.\675\ The Commission
acknowledges that such identification may discourage such institutions
from providing liquidity or induce broker-dealers to compromise the
identity of their customers placing not held orders, which could reduce
the benefits of disclosing actionable IOIs in the customer-specific
reports. Thus, the modification to Rule 606(b)(3), as adopted, should
help reduce the potential for information leakage and conflicts of
interest between broker-dealers and their customers placing not held
orders without discouraging institutions to provide liquidity.
---------------------------------------------------------------------------

    \675\ See STA Letter II at 3; FIF Letter at 7; Fidelity Letter
at 4; Markit Letter at 11.
---------------------------------------------------------------------------

    The Commission also recognizes that, relative to proposed Rule
606(b)(3), this modification could result in customers receiving fewer
details in their reports. While customers could have used such details
to better compare their broker-dealers, the Commission does not believe
that the identities of particular customers placing not held orders
would significantly influence customers' decisions. Therefore, this
modification does not significantly reduce benefits compared to the
Proposal.
3. Additional Benefits
    An additional benefit of Rule 606(b)(3), and specifically the
benefit of having the standardized customer-specific order handling
information available upon request, is that customers placing orders on
a not held basis could combine the order handling information with
existing TCA or enhance their TCA. As noted above, customers sending
not held orders often work with independent third-party vendors to
perform TCA as a means of evaluating the cost and quality of brokerage
services. Customers sending not held orders can also conduct their own
TCA in-house. TCA, whether conducted in-house or by a third-party,
generally analyzes data on the parent orders, but typically cannot
analyze data on the child orders because of the lack of standardization
of the current ad hoc order handling information. As a consequence,
existing TCA typically does not incorporate information on how many
child orders exist, a broker-dealer's order routing strategy of not
held orders, or cost, routing, and execution quality for individual
child orders. The disclosures required by adopted Rule 606(b)(3) will
close this informational gap, so that customers will have more
information on how broker-dealers handle and execute parent and child
not held orders.
    With this additional information, customers placing orders on a not
held basis or their third-party vendors could combine the routing
information with execution information to conduct a more thorough TCA
than they can currently. In particular, the information in adopted Rule
606(b)(3) may be a factor that can explain transaction cost variations,
and thus the reports from the adopted amendments could be combined with
TCA to help explain differences in transaction costs and in performance
as measured by TCA across broker-dealers. For example, TCA often
includes transaction cost measures such as implementation shortfall,
but adopted Rule 606(b)(3) will not.\676\ With TCA alone, a customer
may observe different implementation shortfalls across broker-dealers.
The adopted amendments could allow the customers or their third-party
vendors to correlate implementation shortfall with the routing
decisions of the broker-dealers. This could assist the customers in
assessing the execution quality provided by their broker-dealers. In
summary, the Commission believes that Rule 606(b)(3) may complement and
enhance all customers' evaluations of order handling quality of not
held orders, including those of customers that use TCA.
---------------------------------------------------------------------------

    \676\ For example, Rule 606(b)(3) will not require reports to
contain any information on implementation shortfall costs of parent
orders, which are a key focus for investors placing not held orders.
In general, the amendments, as adopted, are not intended to replace
TCA and, therefore, do not include many metrics common to TCA.
However, the Commission recognizes that the ability to use the
adopting amendments to enhance TCA may make TCA more valuable and
increase the incentives for customers to use TCA, either in-house or
through a third-party vendor.
---------------------------------------------------------------------------

    Rule 606(b)(3) also requires the customer-specific order handling
report to be divided into separate sections for the customer's directed
not held orders and non-directed not held orders, with each section
containing the disclosures regarding the customer's order flow with the
broker-dealer specified in Rule 606(b)(3), as well as the disclosures
for each venue to which the broker-dealer routed not held orders
specified in Rules 606(b)(3)(i) through (iv). Commenters suggested that
directed not held orders be clearly segregated in the reports because
this distinction could provide a more qualitative level of transparency
and provide a more accurate description of broker-dealer's order
routing practices, which could enable customers to better compare and
monitor broker-dealers' order routing practices.\677\ Specifically,
commenters stated that to the extent that broker-dealers have more
discretion on routing non-directed orders, dividing reports into
directed and non-directed orders could bring greater transparency to
customers placing not held orders. The Commission believes that
reporting separate order handling statistics for the directed and non-
directed not held orders will provide more valuable information to
customers than if the statistics combined these orders. In particular,
this will allow customers to specifically observe how the broker-
dealers exercise routing discretion, which should increase the benefits
of

order disclosure by better informing customers of potential leakage and
conflicts of interest. By providing the order handling information
separately for non-directed not held orders, the Rule 606(b)(3) report
will provide a customer with a more precise reflection of how and where
its broker-dealer is routing the customer's not held orders pursuant to
the discretion it is afforded. Otherwise, with directed not held orders
and non-directed not held orders commingled in the report, it would be
more difficult for a customer to differentiate routing behavior for
which its broker-dealer exercised discretion from routing behavior that
the customer itself directed. Therefore, the Commission believes that
customers also will benefit from being able to analyze Rule 606(b)(3)
order handling disclosures that are specific to their directed orders.
---------------------------------------------------------------------------

    \677\ See supra note 245.
---------------------------------------------------------------------------

    The Rule 606(b)(3) reports also require the broker-dealer to
disclose, among other things, information on not held order
execution.\678\ This information will be relevant to a customer
assessing its broker-dealer's execution of its directed orders,
including a customer interested in validating that its broker-dealer is
routing its directed not held orders consistent with the customer's
instructions. These enhanced disclosures will better enable customers
to analyze not held order routing and execution quality provided by
broker-dealers, which will allow customers to more efficiently monitor,
evaluate, and select broker-dealers. In addition, customers and broker-
dealers will be able to evaluate execution quality of not held orders
on different trading centers more efficiently. Therefore, the
Commission believes that customers will benefit from the enhanced
transparency in Rule 606(b)(3) reports.
---------------------------------------------------------------------------

    \678\ See supra Section III.A.6.
---------------------------------------------------------------------------

    Finally, Rule 606(b)(1) and Rule 606(b)(3) will require reports to
be made available using an XML schema and associated PDF renderer
published on the Commission's website.\679\ The benefits, as well as
the costs associated with this requirement, are discussed in Section
V.C.4.
---------------------------------------------------------------------------

    \679\ See supra Section III.A.5.c.
---------------------------------------------------------------------------

ii. Costs
    The required customer-specific order handling disclosures being
adopted under Rule 606(b)(3) will require broker-dealers to provide,
upon request, standardized reports on not held order handling, which
include more detailed information on broker-dealers' order routing
practices. These requirements will result in initial and ongoing
compliance and reporting costs to broker-dealers. These costs are
quantified in Section V.C.1.b.ii.3. Additionally, the customer-specific
order handling disclosure requirement under Rule 606(b)(3) could alter
the information content of the report if broker-dealers already provide
more information than is required by the adopted amendment or broker-
dealers try to disguise order routing behavior to avoid customers'
monitoring.
1. The Potential for Less Information
    As discussed above, some customers currently request reports about
the handling of their not held orders from their broker-dealers and
those reports may be less or more detailed and provide different, and
potentially less or potentially more, information than Rule 606(b)(3)
will require. If broker-dealers currently provide more detailed or
additional information to customers, reporting requirements under Rule
606(b)(3) could impose a cost on such customers if the broker-dealers
stop providing the more detailed or additional information and instead
provide only the data required for customer-specific order handling by
Rule 606(b)(3). The Commission believes that this scenario is not very
likely because, following Rule 606(b)(3)'s implementation, customers
could still request additional information or customized reports from
their broker-dealers and broker-dealers are likely to satisfy such
requests, to the extent they currently do, to retain their customers.
As discussed above, the willingness of broker-dealers to provide such
customized reports to customers and the level of detail in such a
report might depend on the business relationship between the broker-
dealer and the customer. Customers that send or may send a large number
of orders to broker-dealers might be able to get customized reports
that they can more easily compare than customers that send fewer
orders; and those reports might be more detailed, compared to reports
that customers that send fewer orders receive. While Rule 606(b)(3)
reduces this discrepancy, in that all customers will be able to request
the standardized reports required by Rule 606(b)(3), the Commission
recognizes that, to the extent large customers placing orders on a not
held basis are able to receive customized reports that provide
information not contained in the required reports, those large
customers placing not held orders will continue to have an advantage
over smaller customers placing not held orders who are not able to
receive the same reports.
2. Skewed Routing Practices
    In addition, the greater transparency provided as a result of Rule
606(b)(3) might lead broker-dealers to change how they handle not held
orders. Given that broker-dealers will be aware of the metrics to be
used a priori, they might route not held orders in a manner that
promotes a positive reflection on their respective services but that
may be suboptimal for their customers. Any changes to broker-dealers'
order routing decisions resulting from the Commission's adoption of
Rule 606(b)(3) may be intended to benefit customers placing not held
orders, but if broker-dealers and customers focus exclusively on the
metrics in the reports required by Rule 606(b)(3), the order routing
decisions could also be viewed as suboptimal for some customers.
    For example, if a broker-dealer routes not held orders so that the
orders execute at lower cost with a higher fill rate, shorter duration,
and more price improvement than the broker-dealer's competitors, in
order to achieve these objectives she might route the majority of non-
marketable limit order shares to the trading center offering the
highest rebate. A customer placing not held orders that reviews the
order handling report might suspect that the broker-dealer acted in its
self-interest by selecting the highest rebate venue in order to
maximize rebates when, in fact, the broker-dealer made the decision on
the basis of other variables, which might not be completely reflected
in the amended reports. Under the amendments to Rule 606, the broker-
dealer may be concerned about the perception of acting on a conflict of
interest, when the broker-dealer is in fact acting in the customers'
interests. As a result, a broker-dealer may be incentivized to route
fewer non- marketable limit order shares to the trading center offering
the highest rebate, even if this imposes additional costs on the
broker-dealer's customers, in an effort to ensure that a customer does
not misconstrue the intent behind the broker-dealer's routing
decisions. Such a potential outcome could reduce the intensity of
competition between broker-dealers on the dimension of execution
quality.
3. Compliance Costs
    The disclosure requirements of Rule 606(b)(3) will also impose
compliance costs, as the required disclosures could entail some
reprogramming by broker-dealers that execute or route orders subject to
the customer-specific disclosures required by Rule 606(b)(3). A broker-
dealer would have to program

its systems to filter their order data by a condition using a held or a
not held indicator, subject to two de minimis exceptions. In addition
to reprogramming, receiving and processing customer requests, as well
as preparing and transmitting the data to customers on request, will
impose costs.
    The Commission estimates and discusses compliance burdens and costs
for broker-dealers that routes orders subject to the customer-specific
disclosures required by Rule 606(b)(3) in Section IV.D.1.ii. The
Commission estimates total initial implementation costs for all broker-
dealers that route orders subject to the customer-specific order
handling disclosures required by Rule 606(b)(3) and that do not
currently retain order handling information required by the adopted
rule to program systems to comply with the adopted rule change is
24,070 hours, resulting in a monetized total cost burden of
$7,789,300.\680\ In addition these broker-dealers would incur an
additional cost of $5,660,000 \681\ to engage the third-party service
providers and to purchase hardware and software upgrades.
---------------------------------------------------------------------------

    \680\ See supra note 510.
    \681\ See id.
---------------------------------------------------------------------------

    The Commission estimates and discusses compliance burdens and costs
for broker-dealers responding to a Rule 606(b)(3) request (for broker-
dealers that handle their own responses) in Section IV.D.1.b. The total
annual cost for all 200 broker-dealers that route orders subject to the
customer-specific order handling disclosures required by Rule 606(b)(3)
to comply with the customer response requirement in Rule 606(b)(3) is
estimated to be 67,000 hours, resulting in a cost of $14,928,000, plus
an additional fee of $1,300,000 to compensate third-party service
providers for producing the reports.\682\ The Commission recognizes
that the hours and costs that it has estimated could be lower if this
report function is outsourced to a third-party to the extent that a
third-party is specialized in preparing the order handling reports and
has a system in place. In particular, economies of scale could help
lower the costs incurred by third-parties relative to the broker-
dealers themselves, and, therefore, the third parties could charge some
broker-dealers less to produce the reports than the broker-dealers
would incur to produce the reports themselves.
---------------------------------------------------------------------------

    \682\ See supra notes 525.
---------------------------------------------------------------------------

    As discussed in Section III.A.6, Rule 606(b)(3) requires the
inclusion of actionable IOIs in the reports on order handling that
broker-dealers will provide to their customers. The Commission expects
that broker-dealers will incur costs from the inclusion of actionable
IOIs in the reports as a result of having to process data and run
calculations related to actionable IOIs. The estimated cost of
including actionable IOIs in the customer-specific order handling
reports required by Rule 606(b)(3) is included in the aggregate costs
described in the discussion above and in greater detail in Section
IV.D.1.
    Additionally, as noted above, adopted Rule 606(b)(3) requires
segregated reporting of directed not held orders and non-directed not
held orders. The Commission expects that broker-dealers will incur
costs from separately reporting directed and non-directed not held
orders as a result of having to process additional data and run
additional calculations. The estimated cost of separate reporting is
included in the aggregate costs described in the discussion below and
in greater detail in Section IV.D.1.
    As discussed above, Rule 606(b)(1), as amended, does not modify any
of the current customer-specific disclosure requirements but modifies
the categories of orders to which the disclosure applies. Current Rule
606(b)(1) applies to all customer orders, i.e., orders having a market
value of less than $200,000. However, broker-dealers must now modify
their systems to provide the disclosures for the following types of
orders, regardless of market value: (i) Orders in NMS stocks that are
submitted on a held basis; (ii) orders in NMS stocks that are submitted
on a not held basis and are excepted from the disclosure requirements
of Rule 606(b)(3); or (iii) orders in NMS securities that are option
contracts.
    The Commission believes that it is reasonable to estimate that one
third of the 292 broker-dealers that route orders subject to the
disclosures required by Rule 606(b)(1)--97 broker-dealers--will
implement these changes in-house, while the remaining number--195
broker-dealers--will engage a third-party vendor to do so.\683\ The
Commission estimates the initial burden for a broker-dealer that will
program its systems in-house to comply with Rule 606(b)(1) as 24
hours.\684\ The Commission estimates the initial burden for a broker-
dealer that will engage a third-party vendor to program its systems to
comply with the rule as 3 hours and $979.\685\
---------------------------------------------------------------------------

    \683\ See supra note 560.
    \684\ See supra note 578.
    \685\ See supra note 579.
---------------------------------------------------------------------------

    Therefore Commission estimates the total initial burden for all 292
broker-dealers to program their systems to comply with Rule 606(b)(1)
as 2,913 hours \686\ and $975,000.\687\
---------------------------------------------------------------------------

    \686\ See supra note 581.
    \687\ See supra note 582.
---------------------------------------------------------------------------

4. Other Potential Costs
    Further, as a result of adopting Rule 606(b)(3), broker-dealers
that route not held NMS stock orders will likely reevaluate their best
execution methodologies to take into account the availability of new
statistics and other information that may be relevant to their decision
making. This may impose a cost only to the extent that broker-dealers
choose to build the required statistics into their best execution
methodologies. In addition, they may choose to do so only if the
benefits justify the costs.
    Another potential cost of adopted Rule 606(b)(3) is that the
reports could be viewed as a replacement of TCA and therefore have a
negative impact on the market for TCA. Specifying a minimum length of
time for making the Rule 606 reports publicly available may further
impose a cost on third-party vendors that plan to aggregate the time
series of the reports. For example, suppose that a customer chooses to
no longer purchase TCA once Rule 606(b)(3) reports become available,
because the customer decides that the information contained in the Rule
606(b)(3) reports is sufficient. If fewer customers purchase TCA, it
will have a negative impact on third-party providers of TCA as well as
third-party data vendors, because of a reduction in the demand for
their services, for example. Further, the quality of TCA provided by
third-parties may decrease because third-party providers of TCA might
have fewer resources for the development and maintenance of their
product offerings and because fewer customers would reduce the amount
of data that the third-party providers would use to build their
models.\688\ However, as discussed in Section V.C.1.b.i, the reports
required by adopting Rule 606(b)(3) will provide information that could
be complementary to TCA. As discussed above, in fact, adopted Rule
606(b)(3) could make TCA more useful and provide incentives for
customers to use TCA. As a result, the Commission believes that adopted
Rule 606(b)(3) will not replace TCA.
---------------------------------------------------------------------------

    \688\ As stated in the proposing release, the Commission
understands that customers of third-party TCA providers typically
transmit their execution data to their TCA providers. The third-
party TCA providers in turn base their models on the data they
receive from all their customers. Having more data to base models on
is generally beneficial and may result in better models.
---------------------------------------------------------------------------

    The Commission considered whether the customer-specific order
handling

reports of adopted Rule 606(b)(3) could impose costs on broker-dealers
by revealing sensitive, proprietary information about broker-dealers'
order handling techniques. Rule 606(b)(3) does not require public
disclosure, so the Commission believes that there would be minimal risk
of information leakage to the public. Moreover, as some commenters
stated, to the extent that the customer-specific order handling
disclosures will aggregate information to be disclosed across all of
the customer's not held NMS stock orders, the information leakage risk
is low because reverse engineering specific order routing strategies
from such aggregated data would be extremely difficult.\689\
---------------------------------------------------------------------------

    \689\ See Capital Group Letter at 5; Markit Letter at 19.
---------------------------------------------------------------------------

    To the extent it is likely for customers choose to make the
disclosure public, order routing practices of not held NMS stock orders
of the customers' broker-dealers could become available publicly, which
other customers placing not held NMS stock orders could use in
comparing their broker-dealers' order routing. To the extent that the
order routing reports could reveal sensitive, proprietary information
about broker-dealers' order handling techniques, the broker-dealers'
trading strategies could be used by their competitors, specifically,
putting smaller broker-dealers at a competitive disadvantage relative
to larger broker-dealers, as the majority of their trading strategies
could more easily be revealed to other market participants. However,
because the customer-specific order handling disclosure required by
Rule 606(b)(3) could reveal highly sensitive proprietary information
about the revealing customers' trading strategy, it is unlikely that
customers would make their own reports public. In addition, even if the
customer did share its report, the fact that the information in it is
aggregated obscures the broker-dealer's order handling decision for any
particular order. Therefore, the Commission believes the risk that the
customer-specific order handling disclosure required by Rule 606(b)(3)
would reveal sensitive, proprietary information about broker-dealers'
order handling techniques would be minimal.
2. Public Order Handling Report
    Rule 606(a) requires each broker-dealer to make publicly available
quarterly reports on its routing of non-directed orders in NMS
securities.\690\ The Commission believes that the amendments to Rule
606(a), as adopted, will increase the level of transparency about order
routing and execution quality for non-directed orders in NMS stocks
that are submitted on a held basis through the enhanced disclosure of
data regarding order routing and execution.\691\
---------------------------------------------------------------------------

    \690\ The Commission had proposed, but is not adopting, a
similar requirement for broker-dealers to provide public quarterly
reports broken down by calendar month on the order routing and
execution quality of institutional orders by each broker-dealer. See
infra Section V.D.3 for an analysis of the proposed amendments for
institutional orders that the Commission is not adopting.
    \691\ See supra Section III.C. and Adopted Rule 606(a)(1)(iv).
---------------------------------------------------------------------------

    The benefits and costs of each of these amendments are discussed
below. Wherever possible, we quantify cost estimates for a given
amendment. For the remaining amendments concerning non-directed orders
in NMS stocks that are submitted on a held basis, we provide total
quantitative cost estimates for these amendments in Section V.C.2.f.
a. Orders Subject to Rule 606(a) Public Disclosures
i. Benefits
    As adopted, Rule 606(a) applies to NMS stock orders of any size
that are submitted on a held basis. Rule 606(a) also continues to apply
to any order (whether held or not held) for an NMS security that is an
option contract with a market value less than $50,000, as the
Commission did not propose, and is not adopting, any modifications to
Rule 606's coverage of option orders.\692\ Specifically, Rule
606(a)(1), as amended, states that every broker-dealer must make
publicly available for each calendar quarter a report on its routing of
non-directed orders in NMS stocks that are submitted on a held basis
and in non-directed orders that are customer orders in NMS securities
that are option contracts during that quarter broker down by calendar
month. As noted above,\693\ the Commission is adopting a modified
definition of the term ``non-directed order'' that no longer includes a
dollar-value limitation on NMS stock orders,\694\ but continues to
exclude orders from a broker-dealer.\695\
---------------------------------------------------------------------------

    \692\ See supra notes 37 and 38.
    \693\ See supra Section III.A.1.b.vii.
    \694\ See Rule 600(b)(49). Consistent with this modification,
Rule 606(a)(1)(i) also is revised to no longer refer to the defined
term ``customer order.''
    \695\ See supra Section III.A.1.b.
---------------------------------------------------------------------------

    Under the scope of public order handling reports prior to these
amendments, held orders with market value of at least $200,000 were not
included in public order routing reports and broker-dealers may
voluntarily provide some information on routing and execution quality
in response to requests by these customers that submit such orders.
Because the amended rule requires public order routing reports for held
orders of all sizes, these orders will be included in the public order
routing reports. In addition, pursuant to Rule 606(b)(1), customers
sending held orders of at least $200,000 in market value will continue
to receive the same information from the pre-existing customer-specific
order routing disclosure rule.
    The staff's supplemental analysis found that more than 80% of
shares and more than 88% of orders received from individual accounts
\696\ are held orders, suggesting that the amended Rule 606(a) would
provide public order routing disclosure for the types of orders that
retail investors are more likely to use, which would make the public
reports more relevant to these investors. The staff analysis also found
that among the orders of less than $200,000, about 55% of total shares
and about 67% of number of the orders in the sample are held orders.
The analysis indicates that the public order routing reports prior to
these amendments are likely to reflect not held orders in addition to
held orders, and therefore, the amendments would result in public order
routing reports better reflecting held orders but lessen the relevance
of the reports for not held orders. The staff analysis also showed that
about 10% of total shares and about 0.4% of total numbers of orders in
the sample are held orders with a market value of at least $200,000.
These orders will receive public order routing reports under the
amendment in addition to the disclosures required by Rule 606(b)(1).
---------------------------------------------------------------------------

    \696\ See supra notes 642 and 643.
---------------------------------------------------------------------------

    The Commission believes that, compared to the scope of public order
handling reports prior to the amendments, Rule 606(a)(1), as amended,
could make the public order routing reports more informative and
therefore could improve the value of the public order routing reports.
To the extent that broker-dealers generally handle not held orders
differently from held orders, and to the extent that typically
institutional customers use not held orders,\697\ the information
pertinent to understanding broker-dealers' order handling practices for
not held orders is not the same as for held orders. Moreover, as
discussed above, the staff analysis showed that orders received from
institutional accounts are more likely to be not held orders than
orders received from individual accounts, suggesting that the amended
public reports would target customers distinct from institutional
investors. As

discussed in Section V.C.1.a.i, commenters suggested that the held and
not held order type classifications would be effective proxies for
distinguishing institutional investor orders and retail investor orders
because retail investor orders are generally held to the market and
institutional investor orders are generally not held to the
market.\698\ Moreover, as discussed in Section V.C.1.a.i, because
broker-dealers have discretion on time and price for not held orders
and do not on held orders, customers placing held orders would have a
different level of sophistication than customers that typically place
not held orders. In addition, to the extent that the previously
existing public order routing reports were in aggregate forms and
therefore the customer could not distinguish the order routing
practices of held orders from not held orders, replacing public order
routing reports with customer-specific reports for not held orders
could provide different scopes of benefits of order routing disclosure
to the customers. As previously discussed, customers sending not held
orders may have a different preference on order routing and a different
level of sophistication in understanding the price, time, and other
discretion embedded in not held orders. As a result, the amended rule
may better serve customers that do not require an understanding of the
price, time, and other discretion embedded in not held orders and
therefore would allow these customers to better understand the reports
and more efficiently monitor, evaluate, and select broker-dealers.
Additionally, the amended 606(a) could provide more effective order
routing reports for customers and inform customers of different scopes
of disclosure that could address the extent of discretion that the
broker-dealers exercise in order handling. Therefore, the Commission
believes that relative to the baseline and the proposed definition of
retail orders, the amendment to Rule 606(a) could make the public order
routing reports more informative, and may better target the information
needed by investors that typically use held orders, thus making
available more useful public order routing reports to customers and
increasing the benefits from improved public order routing reports.
With more targeted information, the Commission believes that customers
will be able to better compare and monitor broker-dealers' order
routing practices, which will promote competition among broker-dealers
and improve the benefits of public information on order routing of held
orders.
---------------------------------------------------------------------------

    \697\ See supra Section III.A.1.b.ii.
    \698\ See Ameritrade Letter at 2; BlackRock Letter at 2; Citadel
Letter at 2-3; Markit Letter at 4; Schwab Letter at 3; Capital Group
Letter at 2-3; KCG Letter at 4; FIF Letter at 2-3; FIF Addendum at
2; STA Letter II at 2. One commenter noted its belief that the vast
majority of orders entered by institutional customers are with not-
held instructions and the vast majority of orders entered by retail
investors have held instructions. See STA Letter at 4.
---------------------------------------------------------------------------

    The Commission believes that the amended rule will enhance benefits
for customers sending held orders having a market value of at least
$200,000 relative to the baseline and the proposed definition of retail
orders. As discussed above, to the extent that the majority of orders
from individual accounts are held orders, customers sending held orders
of at least $200,000 will receive information from public order routing
reports that better reflect held orders under the amended rule. Because
the amended rule includes held orders of all sizes, the public order
routing reports will include all relevant orders and therefore
customers could use the reports to compare and monitor broker-dealers
order routing practices. As a result, customers sending held orders of
at least $200,000 could use the information from the public order
routing reports in assessing broker-dealers' order routing practices,
which could promote better execution quality and competition among
broker-dealers. In addition, from the disclosures set forth in Rule
606(b)(1), customers sending held orders of at least $200,000 in market
value will continue to receive the same information from the pre-
existing customer-specific order routing disclosure rule, in addition
to the information from the public order routing reports.
ii. Costs
    Amended Rule 606(a) will create compliance costs, as broker-dealers
will need to distinguish held orders from all customer orders they
receive and prepare public order routing reports regarding these held
orders and prepare reports, subject to the de minimis exceptions in
Rules 606(b)(4) and (b)(5). The related compliance costs are discussed
in Section V.C.2.f. The costs related to Rules 606(b)(4) and (b)(5) are
discussed in Section V.C.1.a.ii.
    The Commission believes that the amended Rule 606(a) will result in
implementation costs but might not create substantial ongoing costs for
broker-dealers. As discussed in detail in Section V.C.1.a.i., broker-
dealers' familiarity with held and not held orders would facilitate
compliance with and may contain potential compliance costs imposed on
broker-dealers because broker-dealer could use less processing time to
identify held orders as compared to the proposed $200,000 threshold.
The staff's supplemental analysis \699\ found that among the sample
orders of less than $200,000, about 55% of shares and 67% of number of
orders are held orders, suggesting that these broker-dealers would be
already engaged in public reporting of orders less than $200,000 and
therefore would not need to develop entirely new systems for the public
reports for held orders. The staff analysis also found that the total
held orders that are newly included in the public order routing reports
are about 10% of total shares and less than 0.5% of total number of
orders in the sample of NMS stocks in the analysis, suggesting that the
implementation costs would not be significant for broker-dealers as a
whole that newly need to prepare public order routing reports.
Additionally, to the extent that broker-dealers would have a system in
place to prepare the customer-specific reports under the scope of
public order handling reports prior to these amendments, broker-dealers
would need to modify their existing systems rather than build an
entirely new system. Further, to the extent that broker-dealers would
not need to identify the market value of orders, the amended rule could
require fewer processing time for broker-dealers as compared to the
proposed $200,000 threshold. Therefore, the Commission believes that
the amended rule would not impose significant compliance costs to the
broker-dealers as a whole to prepare the public order routing reports
for held orders of all sizes.
---------------------------------------------------------------------------

    \699\ See supra notes 642 and 643.
---------------------------------------------------------------------------

    The Commission also acknowledges that the amended rule will create
additional compliance costs for broker-dealers that receive held orders
of at least $200,000. As discussed above, under the amended rule,
broker-dealers would need to prepare for the reports, subject to the de
minimis exceptions in Rules 606(b)(4) and (b)(5), for all held orders,
in addition to the public order routing reports. As previously
discussed, the staff analysis showed that close to 23% of total shares
and about 36% of total numbers of orders that are not included in the
scope of public order handling reports prior to these amendments will
be included under the amended rule subject to the de minimis exceptions
set forth in Rules 606(b)(4) and (b)(5). The staff analysis also
suggests that depending on the amount of held orders relative to total
orders that broker-dealers receive, the compliance costs would vary
across

broker-dealers.\700\ Although broker-dealers will incur cost in
switching between pre-existing customer-specific order routing reports
and public order routing reports, the Commission believes that the
amended rule may limit certain costs. For example, as the staff
analysis found, when all of the orders broker-dealers receive are on a
held basis, about 19% of total shares have a market value of at least
$200,000 and the rest of 81% of total shares of orders in the sample
data have a market value less than $200,000.
---------------------------------------------------------------------------

    \700\ For example, based on the staff's supplemental analysis,
when all of the orders broker-dealers receive are on a held basis,
about 19% of total shares have a market value of at least $200,000.
In addition, when the ratio of not held orders that broker-dealers
receive from customers is greater than 50% and less than 100%, less
than 4% of total shares of orders in the analysis are on a held
basis and have a market value of at least $200,000.
---------------------------------------------------------------------------

    The Commission believes that the broker-dealers already have a
system to produce public order routing reports and therefore may simply
send the received orders of at least $200,000 to the system they use to
generate public order routing reports without a creating a completely
creating a new system to capture held order with a market value of at
least $200,000. Furthermore, as discussed in Section V.C.1.a.i.,
because broker-dealers are already familiar with held and not held
distinction, and broker-dealers already characterize on a held or not
held basis to comply with Rule 605's covered order requirement and
other rules such as FINRA Rule 5320, broker-dealers would not incur
additional costs in distinguishing held orders from not held orders.
Additionally, as the staff analysis indicates, to the extent that
broker-dealers receiving orders of both at least $200,000 and less than
$200,000 value would already have systems in place to prepare for the
reports required by the previously existing, the amended rule would not
create substantial costs to these broker-dealers that are subject to
reporting requirement of both amended Rule 606(a) and 606(b)(1).
Therefore, the Commission believes that the amended rule would not
impose significant compliance costs to the broker-dealers that need to
include held orders having a market value at least $200,000 to the
public order routing reports.
    The Commission also believes amended Rule 606(a) would not impose
substantial costs on the customers whose orders would have been
included in public order routing reports under the baseline and the
proposed definition of retail orders but will not be included in the
reports under the amendment. The staff's supplemental analysis found
that among the orders of less than $200,000 in market value, about 45%
of total shares and about 33% of the total number of orders in the
sample of 120 NMS stocks will not be included in aggregated public
order routing reports under the adoption, whereas these orders would
have been included in the public routing reports under the baseline and
the proposed definition of retail orders. Thus, customers that send not
held orders of less than $200,000 in market value would not receive the
benefit from the enhanced order handling transparency provided in the
public order routing reports under the amended Rule 606(a). Instead,
the orders that were included in the public routing reports under the
baseline and the proposed definition of retail orders and are not
included under the amended rule are subject to Rule 606(b)(3) and
therefore would be included in the customer-specific reports required
by Rule 606(b)(3). As discussed above, customers placing not held
orders likely have a different level of sophistication in understanding
the price and time discretion embedded in not held orders. Moreover,
the enhanced Rule 606(b)(3) reports will be very detailed and of more
value to those likely to make special requests of their broker-dealers,
such as those who use not held orders. As a result, under the
amendment, customers placing not held orders of less than $200,000 in
market value would receive reports that target their needs and
sophistication. Moreover, as discussed above, to the extent that the
amendment to Rule 606(a) could better target the public order routing
to the needs of investors that typically use held orders, the amended
would not affect customers typically placing not held orders.
Therefore, even though a customer's not held orders are not included in
the public routing reports, the customer would receive Rule 606(b)(3)
reports and therefore would receive the benefit of increased
transparency from the customer-specific order handling disclosure
required by Rule 606(b)(3).
b. Marketable Limit Orders and Non-Marketable Limit Order
i. Benefits
    The Commission believes that the amendments to Rule 606(a) that
require broker-dealers to differentiate marketable and non-marketable
limit orders will create an opportunity for more detailed analysis.
    In particular, the amendments could allow the public, including
customers placing orders subject to Rule 606(a)(1), to better
understand the potential conflicts of interest broker-dealers face when
routing such orders,\701\ which could incentivize broker-dealers to
better manage these and other potential conflicts of interest, which
may result in improved order routing decisions and execution quality
for orders.\702\ In addition, if the amended disclosure results in
broker-dealers improving their order routing for orders subject to Rule
606(a)(1), which, in turn, may change which trading centers the broker-
dealers route such orders to, the amended disclosure could further
promote competition among trading centers.\703\ In addition, adopting
this new disclosure may lead to innovation by existing trading centers
and may attract new entrants and the formation of new trading
centers.\704\
---------------------------------------------------------------------------

    \701\ Academic research has identified indications of such
routing behavior for orders that retail investors typically use. On
examining the order routing of 10 broker-dealers, the researchers
find that 4 of the broker-dealers sell market orders to market
makers and route limit orders to market makers or exchanges offering
the largest liquidity rebates. In addition, their study indicates
that a negative relation exists between take fees and the likelihood
that a limit order fills and the speed and realized spread of the
associated fill. For more details, see Battalio, Corwin, and
Jennings Paper, supra note 368. See also Proposing Release, supra
note 1, at 49492.
    \702\ See Proposing Release, supra note 1, at 49492 and
Transaction Fee Pilot Proposing Release, supra note 2, at 13310.
Several commenters agreed that the separation of marketable and non-
marketable limit orders in the Rule 606(a) disclosures could provide
customers with more useful information they can use when assessing
if and how well broker-dealers manage the potential conflicts of
interest. See, e.g., CFA Letter at 4-5, 9; Fidelity Letter at 8-9;
Ameritrade Letter at 3.
    \703\ See Proposing Release, supra note 1, at 49492.
    \704\ In particular, a trading center that loses order flow to
venues that offer better execution quality will have the incentive
to innovate to improve its execution quality. Therefore, because the
amended disclosures may encourage broker-dealers to route for better
execution quality, they may lead to innovation on trading centers.
---------------------------------------------------------------------------

ii. Costs
    As adopted, the amendments to Rule 606(a) requiring broker-dealers
to differentiate between marketable and non-marketable limit orders
will impose costs on broker-dealers. Specifically, broker-dealers will
incur new compliance and reporting costs if they do not currently break
down marketable and non-marketable limit orders and will need to break
out this information in their internal systems. The estimates for
compliance costs are contained in the estimates for the costs of
producing the reports discussed in Section V.C.2.f. One commenter
indicated that the amendment will require broker-dealers to obtain a
searchable, historical store of all NMS quotes to be integrated into
the reporting system, so that marketability

of orders can be determined.\705\ The Commission believes that whether
to use a historical store of quotes depends on how broker-dealers
capture marketable and non-marketable limit orders as required by the
public order handling reports prior to today's amendments. Some broker-
dealers already have to break down marketable and non-marketable for
Rule 605 reports. To do so, some of these broker-dealers capture quotes
in real-time and some broker-dealers match orders up with quotes later.
Only the latter approach requires setting up an historical store of
quotes for broker-dealers and broker-dealers likely will select the
system with lesser costs to them. The Commission expects that any
broker-dealers that are not already separating marketable and non-
marketable orders for Rule 605 reports, will also likely manage costs
by selecting the system with lesser costs to them and, therefore, would
not necessarily need to set up an historical store of quotes. The
Commission estimated the costs associated specifically with
implementation of systems to allow the marketability of orders to be
determined to comply with the requirement that the Rule 606(a)(1). The
estimates for the costs of producing the reports discussed in Section
IV.D.4.a.ii. contain the estimates for the compliance costs that
consider the two most likely approaches discussed above.
---------------------------------------------------------------------------

    \705\ See Markit Letter at 33.
---------------------------------------------------------------------------

c. Net Payment for Order Flow and Transaction Fees and Rebates by
Specific Venue
i. Benefits
    As discussed above in Section V.C.2.b.i., the information required
by Rule 606(a)(1)(iii) could also allow the public, including customers
placing orders covered by Rule 606(a)(1), to better understand the
potential conflicts of interest broker-dealers face when routing such
orders which could incentivize broker-dealers to better manage these
and other potential conflicts of interest, which may result in improved
order routing decisions and execution quality for orders.\706\
---------------------------------------------------------------------------

    \706\ See Proposing Release, supra note 1, at 49438-40, for an
example of routing decisions being affected by conflicts of
interest.
---------------------------------------------------------------------------

    Under Rule 606(a)(1)(iii), customers and the public could use
information on net payment for order flow, payment from any profit-
sharing relationship received, transaction fees paid, and transaction
rebates received per share and in total to gauge whether payments for
order flow or maker-taker fees affect the order routing decisions of
broker-dealers.\707\ Brokerage commissions, which are known to the
customer, may depend on the rebates and take fees collected or paid by
broker-dealers.\708\ For example, broker-dealers that collect more in
rebates may pass this income on to customers by charging lower
commissions. However, routing solely to maximize rebates or minimize
take fees may result in lower execution quality than other routing
strategies. Without the new disclosure requirements, customers might
take only brokerage commissions into account and might, therefore, sub-
optimally choose the lowest commission broker-dealer, without
considering other relevant costs. Such customers could, in fact, end up
paying higher net costs if the lower commission broker-dealers do not
obtain good execution quality for the orders. The information required
by adopted Rule 606(a)(1)(iii), together with the other adopted
amendments to Rule 606(a), will give customers additional information
to make decisions on the basis of more than the brokerage commissions.
---------------------------------------------------------------------------

    \707\ See, e.g., Battalio, Corwin, and Jennings Paper, supra
note 368.
    \708\ The Commission does not believe that fees and rebates are
the only determinants of brokerage commissions.
---------------------------------------------------------------------------

    In addition, as discussed in Section V.C.2.b.i., if broker-dealers
improve their order routing for orders covered by Rule 606(a)(1), which
may result in changes to which trading centers they route such orders
to, it could promote competition between trading centers, leading to
innovation or new entrants to the market. The trading centers may
change their fees or attempt otherwise to attract such order flow, and
the quarterly public reports that are broken down by calendar month
will allow them to see effects of any changes they implement.
    Commenters in general indicated that information on any payment for
order flow, payment from any profit-sharing relationship received, the
transaction fees paid, and transaction rebates in the report as
required by Rule 606(a)(1) could allow customers to better assess their
broker-dealers' order routing practices and provide additional
incentives to broker-dealers to monitor the potential conflicts of
interest.\709\ As discussed above and in the Proposing Release, the
Commission believes requiring broker-dealers to modify or provide
additional information in the order routing reports will enhance the
benefits of improved transparency.\710\
---------------------------------------------------------------------------

    \709\ See, e.g., Better Markets at 3-5, 7; FSR Letter at 7; HMA
Letter at 11; Schwab Letter at 2.
    \710\ See Proposing Release, supra note 1, at 49442-43.
---------------------------------------------------------------------------

    Some commenters raised concerns that enhanced reporting
requirements under Rule 606(a)(1)(iii) will generate extensive
information and may undermine the Commission's transparency goals.
Specifically, some commenters stated that the Commission's transparency
goals may be limited because the disclosure presents too much
information and could create more confusion than provide clarity to
retail investors.\711\ In addition, one commenter stated that the
additional information may not help customers better evaluate broker-
dealers and may not promote competition among broker-dealers unless
investors are educated on the interpretation of the information on the
reports.\712\ The Commission continues to believe that retail customers
will benefit from the increased transparency and information being made
available under the new Rule 606(a)(1)(iii). The Commission believes
that to the extent a customer does not understand these disclosures,
the customer could ask their broker-dealer for a better explanation of
the arrangement, which may help mitigate some commenters' concerns that
transparency goals may be limited because of too much information.
Additionally, to the extent retail investors would like more
information regarding these disclosures, they could seek such
information from all available resources.
---------------------------------------------------------------------------

    \711\ See Fidelity Letter at 5; STA Letter at 3.
    \712\ See Harvan Letter.
---------------------------------------------------------------------------

ii. Costs
    Adopted Rule 606(a)(1)(iii) will impose initial compliance costs on
broker-dealers in creating a new process to complete the reports and
increase ongoing costs related to incorporating additional information
into the reports. The estimates for the compliance costs are contained
in the estimates for the costs of producing the reports discussed in
Section V.C.2.f.
    In addition to compliance costs, amended Rule 606(a)(1)(iii) could
result in costs to broker-dealers or investors, depending on how
broker-dealers and investors adjust their behavior in response to the
increased transparency. Increased transparency from adopted Rule
606(a)(1)(iii) about the net aggregate amount of any payment for order
flow, payment from any profit-sharing relationship, transaction fees
paid, and transaction rebates received, and subsequent scrutiny by
customers--

in particular retail customers, the public, academics, regulators, and
the financial media, might lead broker-dealers to decrease the degree
to which they internalize orders and route orders to high-rebate or
low-fee exchanges to avoid the perception of conflicts of interest.
Broker-dealers might do this if they perceive that the potential costs
from increased public scrutiny resulting from the enhanced disclosures
to be relatively high, compared to the benefit from sending such orders
to internalizers or routing orders to high-rebate and low-fee trading
centers. If this were to occur then these orders might be more likely
to be routed to trading centers other than internalizers, such as
exchanges or alternative trading systems,\713\ regardless of potential
execution quality differences such as relatively less price
improvement, or they might be more likely to be routed to other lower
rebate or higher fee venues, regardless of the potential execution
quality differences. In addition, if broker-dealers were to reduce the
order flow sent to internalizers who pay for it, the broker-dealers
would receive less payment for such order flow and might pass the lost
payments on to their customers by raising brokerage commissions or
other fees. Similarly, if broker-dealers were to route such orders to
trading centers with lower rebates and higher fees, they might pass the
reduction in rebate revenue and increase in fee costs on to their
customers by raising brokerage commissions or other fees.
---------------------------------------------------------------------------

    \713\ A ``trading center'' is defined in Rule 600 of Regulation
NMS. See 17 CFR 242.600(b)(78).
---------------------------------------------------------------------------

    Increased transparency Rule 606(a)(1)(iii) about net payment for
order flow and payments from profit-sharing relationships, and
subsequent scrutiny by customers, the public, academics, regulators,
and the financial media, might also lead broker-dealers to alter their
payment for order flow or profit-sharing relationships or not enter
into such relationships. Broker-dealers might do this if they perceive
the potential costs from increased public scrutiny to be relatively
high compared to a broker-dealer's benefit from such relationships.
This could lead to lower payments received from such relationships. The
affected broker-dealers might offset these lower revenues or higher
costs by increasing brokerage commissions or other fees for customers.
d. Discussion of Arrangement Terms With a Specified Venue
i. Benefits
    The Commission believes that the additional information provided by
Rule 606(a)(1)(iv) will help ensure consistent, accurate, and
comprehensive disclosure of terms of payment for order flow and profit-
sharing relationships that influence broker-dealer order routing
decisions. This will make the public reports required by amended Rule
606(a) more useful to customers and the public, and the benefits of the
description required by Rule 606(a)(1)(iv) are similar to the benefits
of the disclosures of the net payment for order flow and transaction
fees and rebates by Specified Venue required by Rule 606(a)(1)(iii) and
discussed in Section V.C.2.c.i.
    Consistent with the limit order disclosure discussion above,\714\
the disclosures required by Rule 606(a)(1)(iv) could allow the public,
including retail customers placing held NMS stock orders, to better
understand the potential conflicts of interest broker-dealers face when
routing such orders, incentivize broker-dealers to improve order
routing, and promote competition in the market.\715\
---------------------------------------------------------------------------

    \714\ See supra Section V.C.2.b.i.
    \715\ See Proposing Release, supra note 1, at 49438-40, for an
example of routing decisions being affected by conflicts of
interest.
---------------------------------------------------------------------------

    The Commission agrees with comments that stated that the disclosure
of any agreement that may influence a broker-dealer's routing decisions
could be useful for customers to assess the potential conflicts of
interest facing broker-dealers when implementing their order routing
decisions and the enhanced disclosures provide more complete
information for customers to better understand and evaluate a broker-
dealer's order routing decision.\716\ Therefore, the Commission
believes that the disclosure requirements in Rule 606(a)(1)(iv) could
motivate broker-dealers to improve execution quality of orders.
---------------------------------------------------------------------------

    \716\ See, e.g., Better Markets Letter at 4-6; CFA Letter at 9;
Fidelity Letter at 7; HMA Letter at 11; Markit Letter at 31.
---------------------------------------------------------------------------

    Some commenters indicated that voluminous information may limit the
transparency benefits for customers because it may not be easy to find
or use the information to assess and compare broker-dealers.\717\ As
discussed in Section V.C.2.c.i., the Commission believes that the
requirements would provide information that would not be overly
voluminous or difficult to comprehend for customers, in particular
retail customers. Additionally, the requirements in Rule 606(a)(1)(iv)
are already substantially improving transparency compared to the
reporting practices prior to these amendments. Therefore, the
Commission believes that the reporting requirement under the adopted
Rule 606(a)(1)(iv), as adopted, will make the public reports required
by amended Rule 606(a) more useful to customers and the public, and the
benefits of the description required by Rule 606(a)(1)(iv) are similar
to the benefits of the disclosures by Rule 606(a)(1)(iii) that are
discussed in Section V.C.2.c.i.
---------------------------------------------------------------------------

    \717\ See, e.g., Fidelity Letter at 9; STA Letter at 3.
---------------------------------------------------------------------------

ii. Costs
    The Commission recognizes that the amendments to Rule 606(a)(1)(iv)
will impose initial and ongoing compliance costs on broker-dealers. As
discussed in Section IV.D.4.b.ii., the Commission estimates the total
initial paperwork cost for complying with Rule 606(a)(1)(iv), as
adopted, to be 2,920 hours, resulting in a cost of $986,960.\718\ In
addition, as discussed in Section IV.D.4.b.ii, the Commission estimates
the total annual paperwork cost for complying with Rule 606(a)(1)(iv),
as adopted, to be 4,380 hours, resulting in a cost of $1,093,540.\719\
---------------------------------------------------------------------------

    \718\ See supra note 576.
    \719\ See supra note 591.
---------------------------------------------------------------------------

    More detailed disclosure about payment for order flow arrangements
and profit-sharing relationships might impose other costs to customers
that submit orders covered by Rule 606(a)(1) if it leads broker-dealers
to decrease the amount of internalization used in the execution of
market and marketable limit orders and to alter such arrangements and
relationships. Broker-dealers have a variety of choices for order
routing and execution, and the venue that a broker-dealer chooses may
have a tangible effect on the execution quality of an order. Broker-
dealers face conflicts of interest when routing orders, such as
affiliations with trading centers, receipt of payment for order flow or
receipt of payment from any profit-sharing relationship, and liquidity
rebates. Similar to the discussion in Section V.C.2.c.ii., increased
transparency from adopted Rule 606(a)(1)(iv) about payment for order
flow arrangements and profit-sharing relationships could lead to
subsequent scrutiny by customers and the public might lead broker-
dealers to decrease the degree to which they internalize orders and
route orders to high-rebate or low-fee exchanges to avoid the
perception of conflicts of interest. If broker-dealers were to perceive
the

potential costs from increased transparency resulting from the enhanced
disclosures to be relatively high compared to the benefit from sending
orders to internalizers, then these orders might be more likely to be
routed to trading centers other than internalizers, such as exchanges
or alternative trading systems, regardless of potential execution
quality differences such as relatively less price improvement, or they
might be more likely to be routed to other lower rebate or higher fee
venues, regardless of the potential execution quality differences. In
addition, if broker-dealers were to reduce the order flow sent to
internalizers who pay for it, the broker-dealers would receive less
payment for such order flow and might pass the lost payments on to
their customers by raising brokerage commissions or other fees.
Similarly, if broker-dealers were to route such orders to trading
centers with lower rebates and higher fees, they might pass the
reduction in rebate revenue and increase in fee costs on to their
customers by raising brokerage commissions or other fees.
e. Additional Amendments to Rule 606(a)(1) Disclosures
    In addition to the amendments discussed above, the Commission is
adopting other amendments to Rule 606(a)(1) reports.\720\ The benefits
and costs of these additional amendments are discussed below.
---------------------------------------------------------------------------

    \720\ See supra Sections III.B.4, 5 and 6.
---------------------------------------------------------------------------

i. Replacement of Division of Rule 606(a)(1) Reports by Listing Market
Division by S&P 500 Index and Other NMS Stocks
1. Benefits
    The Commission believes that S&P 500 inclusion is an important
determinant of execution quality and, therefore, is important for order
routing strategies. In particular, a Commission staff analysis finds
that the amendment to divide the Rule 606(a)(1) order routing reports
required by securities included in the S&P 500 Index and other NMS
stocks could provide customers with relevant information on how their
orders are routed. Because the S&P 500 index is correlated with certain
liquidity and trading characteristics (which are a determinant of
execution quality),\721\ the reports under the amendment could more
meaningfully reflect how broker-dealer routing varies with trading
characteristics than do the public order handling reports prior to
today's amendments.\722\
---------------------------------------------------------------------------

    \721\ S&P 500 stocks are in general larger and have more trading
volume than non-S&P 500 stocks. Academic literature has shown that
stocks with larger size and greater trading volume have smaller
transaction costs than smaller stocks with lower trading volume. For
example, see Tarun Chordia, Richard Roll, and Avanidhar
Subrahmanyam, Commonality in liquidity, 56 Journal of Financial
Economics 3-28 (2000); David Easley, Soeren Hvidkjaer, and Maureen
O'Hara, Is Information Risk a Determinant of Asset Returns?, 57
Journal of Finance, 2185-2221 (2002).
    \722\ The Commission recognizes that dividing such reports by
three separate sections based on listing markets would still produce
information that is useful to investors and, therefore, replacing
the division of Rule 606(a)(1) reports by listing venues with a
division by securities included in the S&P 500 Index and other NMS
stocks could result in costs. These costs are discussed in Section
V.C.2.e.i.2.
---------------------------------------------------------------------------

    Specifically, the Commission staff analyzed execution quality as
measured by effective spreads from Rule 605 reports (``Rule 605 data'')
for common stocks with S&P 500 index inclusion and on different market
centers \723\ to determine whether the execution quality of executing a
market or a marketable limit order for common stock varies across
market centers and S&P 500 index inclusion.\724\ The staff's analysis
controls for stock and order characteristics.\725\ Accordingly, the
staff's analysis considers whether execution quality depends on S&P 500
index inclusion, and specifically which market centers provide better
execution, as a means to assess the degree to which the amendment
provides useful information.
---------------------------------------------------------------------------

    \723\ The analysis uses historical data from market centers as
they existed during the indicated time period. The Commission notes
that the names of some of the market centers have since changed.
    \724\ The Commission purchased the Rule 605 data from CoreOne
Technologies, a provider of financial data. The data used in this
analysis spans from January 1, 2012, through September 30, 2017. The
CRSP U.S. Stock Database from Wharton Research Data Services
contains daily and monthly market and corporate action data for
securities and is used to estimate control variables.
    \725\ Specifically, to capture the effect of stock and order
characteristics on execution quality, the analysis uses a regression
analysis that controls for stock characteristics, such as dollar
volume, market capitalization, and mean variance of daily returns,
and order characteristics such as order type and order size. The
regression analysis also controls for years to mitigate the effect
of time variation on execution quality. In addition, the Rule 605
data weight the effective spread statistics equally by stock.
Therefore, these effective spreads appear larger than if they were
weighted by dollar volume or by share volume. The purpose of the
analysis is to estimate the relative rankings of transaction costs
across exchanges; therefore, the use of equally weighted effective
spread has no impact on the economic analysis in a qualitative
manner.
---------------------------------------------------------------------------

    While the staff's analysis is not a direct test of whether order
routing differs for stocks included in S&P 500 versus those not
included in the S&P 500,\726\ it does directly measure one important
factor in whether such routing information will be useful--differences
in execution quality. Information on both execution quality and routing
allows customers (or someone acting on behalf of customers) to assess
the extent to which their broker-dealer routes customer orders to the
market centers that provide better execution quality. If execution
quality, as measured by effective spreads, shows that S&P 500 index
inclusion matters for which market centers offer better execution
quality, then including the index information could enhance the ability
of customers to assess one of the components of best execution. Hence,
the staff's analysis provides some indication of whether dividing the
reports by S&P 500 inclusion, as required by the adopted amendment,
would provide customers and the public with useful information
regarding the impact of routing decisions.\727\
---------------------------------------------------------------------------

    \726\ The direct test would be whether order routing differs for
stocks included in S&P 500 versus those not included in the S&P 500,
which would require quarterly reports for orders required by Rule
606(a). However, the quarterly reports are not filed with the
Commission, and the staff was unable to obtain aggregated 606
reports from a vendor. Therefore, the Commission staff did not
analyze 606 reports prior to today's amendments to see if routing
differs by listing exchange of the stock.
    \727\ The staff used Alphabets in Table 2 and Table 3 for each
market center so that the identity of exchange is not revealed.

  Table 2--Regression Results for the Association Between Execution Venue and Mean Effective Spread for Common
                                                     Stocks
----------------------------------------------------------------------------------------------------------------
                                                                           Mean effective spread (bp)
                                                               -------------------------------------------------
                      Dependent variable                                  (1)                      (2)
                                                               -------------------------------------------------
                                                                  Jan. 2012-Aug. 2016      Oct. 2016-Sept. 2017
----------------------------------------------------------------------------------------------------------------
Intercept.....................................................                *** 21.55                *** 20.28
Market Center
    A.........................................................                *** 20.34                *** 17.84

    B.........................................................                *** 17.02                *** 18.45
    C.........................................................                *** 24.34                *** 12.28
    D.........................................................                *** 33.93
    E.........................................................                *** 15.43                 *** 8.69
    F.........................................................                *** 20.40                *** 17.58
    G.........................................................                *** 26.28                *** 22.79
    H.........................................................                *** 43.36                *** 10.35
    I.........................................................                *** 19.38
    J.........................................................                *** 18.47                ***-16.07
    K.........................................................                *** 86.64               *** 104.04
    L.........................................................                *** 21.55                *** 13.78
    M.........................................................                 *** 5.89                  ** 0.89
    N.........................................................  .......................                *** 19.70
S&P500 Index..................................................                ***-12.40                ***-18.96
Interaction Terms
    S&P500 Index * A..........................................                ***-20.95                ***-18.44
    S&P500 Index * B..........................................                ***-18.44                ***-17.72
    S&P500 Index * C..........................................                ***-25.47                ***-14.34
    S&P500 Index * D..........................................                ***-34.23
    S&P500 Index * E..........................................                ***-10.50                 ***-4.32
    S&P500 Index * F..........................................                ***-21.22                ***-17.93
    S&P500 Index * G..........................................                ***-27.18                ***-23.26
    S&P500 Index * H..........................................                ***-44.40                ***-13.43
    S&P500 Index * I..........................................                ***-20.90
    S&P500 Index * J..........................................                ***-19.75                 ***17.74
    S&P500 Index * K..........................................                ***-84.79               ***-100.83
    S&P500 Index * L..........................................                ***-21.55                ***-13.34
    S&P500 Index * M..........................................                 ***-6.95                   *-2.14
    S&P500 Index * N..........................................  .......................                ***-18.54
Observations..................................................               29,141,050                3,963,474
Adjusted R \2\................................................                    5.06%                    6.29%
----------------------------------------------------------------------------------------------------------------
Note: Data is from the Rule 605 reports and CRSP and includes years from 2012 to 2017. The variable categories
  that are dropped are: Market orders, one trading venue, order size from 100-499 shares, and the 2012 calendar
  year (for the regression using data from January 2012 through August 2016). Note that the regression using
  data from October 2016 through September 2017 included quarter-fixed effects instead of year-fixed effects.
  Also, note that for the regression from October 2016 through September 2017, the analysis did not include CBSX
  and NSX data because these two exchanges stopped operating. The control variables are indicators for
  marketable limit order; order size for 500-1,999 shares, 2,000-4,999 shares, and >=5,000 shares; and security
  specific variables including dollar volume, market capitalization, and daily return variance. T-statistics are
  estimated from White standard errors. *** indicates significance of a 2-tailed test at the 1% level, ** at the
  5% level, and * at the 10% level. The Chi-square tests are used to test the null hypothesis that all of the
  exchange coefficients, with the exception of the intercept coefficient, are jointly zero. The pairwise F tests
  are used to test the null hypothesis that pairs of the exchange coefficients, with the exception of the
  intercept coefficient, are zero.

    Table 2 presents the results of the staff's analysis of effective
spreads for common stocks traded on all existing exchanges and off
exchange, after controlling for differences due to stock and order
characteristics. The methodology in the staff analysis does not allow
the analysis to treat IEX as a separate market center for the entire
period because IEX data became available from September 2016, so the
analysis divides the analysis into two subperiods.\728\ Column 1
reports the result for the first sub-sample period, and column 2
reports the result for the second sub-sample periods. The market center
rows in the table report the basis point difference between the average
effective spreads on that market center and the average effective
spreads on the NYSE. The S&P 500 index rows in the table report the
basis point difference between the average effective spreads on S&P 500
stocks and the average effective spreads on non-S&P 500 stocks. The
rows for interaction terms of each market center and the S&P 500 index
in the table report the basis point difference between the average
effective spreads of S&P 500 stocks on that market center and the
average effective spreads on the NYSE.
---------------------------------------------------------------------------

    \728\ The staff did several analyses because CBSX data is
available until January 2014 and NSX data is available until May
2014. Staff conducted similar analysis without these two exchanges
and during the time period that all the exchanges in the sample were
operating. These regression analyses change the estimated
coefficients in the regression analysis; however it does not change
the conclusion that reporting divided by S&P 500 index and other NMS
securities, as in the adopted amendment, could provide relevant
information on execution quality to customers and the public. The
additional analyses provide more robust analysis to support the
staff's conclusion.
---------------------------------------------------------------------------

    For illustration, the intercept in Column 1 indicates that the
average effective spread for market order NMS stocks that are executed
on the NYSE is 21.55 basis points. The 20.34 estimate for Exchange A
indicates that the effective spreads on Exchange A are 20.34 basis
points greater than those on the NYSE. The estimate -12.04 for S&P 500
index indicates that the effective spreads for S&P 500 stocks are 12.04
basis points less than non-S&P 500 stocks. And, the estimate for the
interaction between Exchange A and the S&P 500 index indicates that the
effective spreads for S&P 500 stocks traded on Exchange A are 20.95
basis

points lower than NYSE stocks on average.\729\
---------------------------------------------------------------------------

    \729\ For perspective, a one-penny effective spread on a $40
stock is 2.5 basis points. A 2.5 basis point cost on a 100-share
trade in a $40 stock would be $1.00.
---------------------------------------------------------------------------

    The analysis of Table 2 suggests that partitioning the Rule 606
reports by S&P 500 index inclusion will be useful. Specifically, the
structure of the regressions in Table 2 allows for a ranking of the
exchanges by effective spread to gauge whether the exchanges that
provide the better execution quality in S&P 500 stocks are different
than those that provide the better execution quality in other NMS
stocks. If the relative ranking of exchanges in S&P 500 stocks is
similar to the relative ranking in other NMS stocks, then partitioning
the order routing reports by S&P 500 inclusion would not provide
information useful for considering the impact of broker-dealer routing
on execution quality.
    Upon examination, Table 2 shows that the ranking of the market
centers by effective spreads is different depending on stocks in that
market center being included in the S&P 500 index. For example, the
five market centers with the best execution quality relative to the
NYSE traded stocks are Exchange M, E, B, J, and I, in descending order.
However, in comparing S&P 500 stocks that are traded in these five
trading centers, the ranking of the market centers for S&P 500 stocks
by effective spreads changes. For S&P 500 stocks, the five market
centers that have the best execution quality relative to the NYSE
traded stocks are stocks traded on Exchange I, A, J, C, and M, in
descending order.\730\ This indicates that there seem to be differences
between market centers in terms of effective spreads for stocks,
depending on whether they are included in the S&P 500 index, which may
inform customers in assessing the execution quality their broker-
dealers provide.
---------------------------------------------------------------------------

    \730\ The analysis in Table 2 uses an indicator for each market
center, an indicator for being included in the S&P 500 index, and an
interaction term between each market center and the S&P 500 index.
To obtain the rankings for execution quality for S&P 500 stocks,
Commission staff summed the three estimates and compared the
relative magnitudes of the summed estimates across market centers.
---------------------------------------------------------------------------

    Commenters suggested removing the requirement that the report be
divided by listing market and separating reports by S&P 500 and non-S&P
500 stocks because the division based on the S&P 500 index could give
retail customers more meaningful data, as S&P 500 stocks have the
largest market capitalization and have significant retail customer
interest. Commenters mentioned that S&P 500 stocks, therefore, could
have a different correlated execution quality level than lower volume
issuances, providing useful information to retail customers.\731\
Therefore, the staff's analysis indicates that reporting divided by the
S&P 500 index and other NMS securities, as in the adopted amendment,
could provide relevant information about execution quality to customers
and the public.
---------------------------------------------------------------------------

    \731\ See, e.g., Schwab Letter at 3 and Fidelity Letter at 9.
---------------------------------------------------------------------------

2. Costs
    The amendment to Rule 606(a)(1), as adopted, will result in initial
compliance costs to prepare separate disclosures and ongoing costs to
adjust reporting when the constituents of the S&P 500 change. The
Commission acknowledges that the S&P 500 index is a proprietary index,
which is accessible via a fee-based subscription. The Commission also
notes that the list of S&P 500 index stocks is readily available on the
internet on many free websites and thus obtaining the constituents of
the index should be at a minimal cost to broker-dealers. Moreover, as
discussed in Section III.B.5.b., many data dissemination services
obtain this information from the S&P and redistribute this information
as part of data packages consumed by broker-dealers as a part of the
broker-dealers normal course of business. Thus, the Commission believes
that there will be few or no additional data costs to broker-dealers
resulting from this requirement.
    Additionally, on the basis of staff analysis, not separating order
routing reports by primary listing market could also reduce some
informational value relative to the public order handling reports prior
to today's amendments. In particular, the staff analysis indicates that
removal of primary listing exchanges could reduce the value of the
606(a)(1) reports for monitoring execution quality from broker-dealers,
because reporting by listing exchange still provides information
distinct from the S&P 500 index.

           Table 3--Regression Results for Association Between Execution Venue and Mean Effective Spread for Common Stocks by Listing Exchange
--------------------------------------------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------------------------------------------------------
Dependent variable                                                                          Mean effective spread (bp)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Time Period.............................................            Jan. 2012 through Aug. 2016
                                                                   Oct. 2016 through Sept. 2017
                                                         -----------------------------------------------------------------------------------------------
Listing Exchange........................................        (1)             (2)             (3)             (4)             (5)             (6)
                                                               NYSE           NASDAQ           AMEX            NYSE           NASDAQ           AMEX
--------------------------------------------------------------------------------------------------------------------------------------------------------
Intercept...............................................       *** 18.60       *** 84.35      *** 161.47       *** 21.56       *** 37.48      *** 122.29
Market Center:
    A...................................................        ***-3.47       ***-28.39       ***-35.13        ***-8.26        *** 9.29       ***-21.38
    B...................................................        ***-5.94       ***-31.49       ***-39.39        ***-5.93        *** 9.40       ***-20.29
    C...................................................        ***-1.21       ***-22.82       ***-29.22        ***-8.80        *** 3.51       ***-18.16
    D...................................................        *** 1.91       ***-11.55       *** 17.93
    E...................................................           -0.33       ***-33.79         *-12.66        ***-6.66           -0.56        **-13.72
    F...................................................        ***-4.14       ***-28.61       ***-34.00        ***-6.77        *** 8.83       ***-20.01
    G...................................................        ***-3.84       ***-21.70       ***-28.93        ***-6.38       *** 14.40       ***-18.29
    H...................................................        *** 1.31  ..............           -0.76       ***-11.02  ..............       ***-24.29
    I...................................................        ***-2.60       ***-31.09       ***-38.77
    J...................................................        ***-5.85       ***-30.22       ***-41.11        ***-3.40       ***-18.52       ***-19.06
    K...................................................  ..............       ***-41.56  ..............  ..............         **-7.89
    L...................................................        ***-2.93       ***-27.01       ***-33.85        ***-9.86        *** 5.08       ***-28.33
    M...................................................        ***-2.56       ***-48.71       ***-69.04       ***-11.74       ***-11.35       ***-39.14
    N...................................................  ..............  ..............  ..............        ***-4.73       *** 11.52       ***-16.31
S&P500 Index............................................       ***-12.86       ***-72.80  ..............       ***-18.44       ***-42.56

Interaction Terms:
    S&P500 Index * A....................................        *** 2.73       *** 29.10  ..............        *** 6.95        ***-4.94
    S&P500 Index * B....................................        *** 4.33       *** 31.40  ..............        *** 6.21        ***-4.14
    S&P500 Index * C....................................        *** 0.50       *** 22.69  ..............        *** 7.23         **-1.43
    S&P500 Index * D....................................        ***-0.67       *** 11.56
    S&P500 Index * E....................................        *** 4.34       *** 44.30  ..............       *** 10.26       *** 11.49
    S&P500 Index * F....................................        *** 3.40       *** 28.77  ..............        *** 6.02        ***-4.43
    S&P500 Index * G....................................        *** 2.99       *** 21.97  ..............        *** 5.57       ***-10.07