Commission estimates the total monetized burden for this requirement
to be $813,240 ($537,500 for broker-dealers who currently capture
the information required by proposed Rule 606(a) and will format
their systems to create reports to comply with the proposed rule in-
house + $275,940 for broker-dealers who currently capture such
information who will hire a third-party service provider to format
their systems to comply with the proposed rule = $813,240). See
supra notes 307 and 310.
    \313\ See supra note 311.
---------------------------------------------------------------------------

    Therefore, the Commission estimates that the total initial burden
to comply with the proposed modifications to Rule 606(a) for all 266
broker-dealers which the Commission estimates route retail orders is
5,524 hours \314\ and $466,000.\315\
---------------------------------------------------------------------------

    \314\ 2,500 hours for broker-dealers who need to update their
systems and prepare a report + 3,124 hours for broker-dealers who
currently capture the information required by proposed Rule 606(a)
and need to format their systems to create reports to comply with
the proposed rule = 5,524 hours. The Commission estimates the total
monetized burden for this requirement to be $1,529,065 ($715,850 for
broker-dealers who need to update their systems and prepare a report
+ $813,240 for broker-dealers who currently capture the information
required by proposed Rule 606(a) and need to format their systems to
create reports to comply with the proposed rule = $1,529,065). See
supra notes 304 and 312.
    \315\ $250,000 for broker-dealers who will engage a third-party
to perform necessary upgrades + $216,000 for broker-dealers who will
engage a third-party to format reports to comply with the proposed
rule = $466,000. See supra notes 305 and 311.
---------------------------------------------------------------------------

    Finally, the Commission proposes to amend Rule 606(a)(1)(iv) \316\
to require broker-dealers to describe specific aspects of any terms of
payment for order flow arrangements and profit-sharing relationships,
whether written or oral, with a Specified Venue that may influence
their order routing decisions, including information relating to
specific incentives or volume minimums.\317\ The Commission estimates
that the initial burden for a broker-dealer that routes retail orders
to review, assess, and disclose its payment for order flow arrangements
and profit-sharing relationships would be 10

hours \318\ and that all 266 broker-dealers who route retail orders
would describe such agreements and arrangements themselves. Therefore,
the total initial burden for all broker-dealers who route retail orders
to review, assess, and disclose its payment for order flow arrangements
and profit-sharing relationships is estimated to be 2,660 hours.\319\
---------------------------------------------------------------------------

    \316\ Renumbered from Rule 606(a)(1)(iii).
    \317\ See proposed Rule 606(a)(1)(iv).
    \318\ The Commission estimates the monetized burden for this
requirement to be $3,155. The Commission derived this estimate based
on per hour figures from SIFMA's Management & Professional Earnings
in the Securities Industry 2013: (Sr. Business Analyst at $251 per
hour for 5 hours) + (Attorney at $380 per hour for 5 hours) = 10
hours and $3,155.
    \319\ 10 hours per broker-dealer that routes retail orders x 266
such broker-dealers = 2,660 hours. The Commission estimates the
total monetized burden for this requirement to be $839,230 ($3,155
per broker-dealer that routes retail orders x 266 such broker-
dealers = $839,230). See id.
---------------------------------------------------------------------------

b. Annual Reporting and Recordkeeping Burden
    Rule 606(a) currently requires brokers-dealers that route retail
orders to make available reports on the routing of all non-directed
orders. The proposed changes to Rule 606(a)(1) will: (1) Eliminate the
requirement that such reports be divided based on primary listing
market and instead aggregate all NMS stocks into a single section; (2)
add requirements that the reports contain information relating to the
routing of marketable and non-marketable orders, as well as average
payment for order flow for different types of orders; (3) require
broker-dealers to describe any terms of payment for order flow
arrangements and profit-sharing relationships with a Specified Venue
that may influence their order routing decisions; and (4) require that
such reports be made available using the most recent versions of the
XML schema and the associated PDF renderer as published on the
Commission's Web site.\320\ The proposed amendments do alter the
information currently collected under an existing collection of
information requirement. The Commission preliminarily believes that
once the initial burdens, described above, have been incurred to allow
the broker-dealer to obtain the required information, the ongoing
burden to produce a quarterly report would remain the same. However,
broker-dealers would need to monitor payment for order flow and profit-
sharing relationships and potential SRO rule changes that could impact
their order routing decisions and incorporate any new information into
their reports. Thus, the Commission estimates the average annual burden
for a broker-dealer to comply with the proposed amendments to Rule
606(a)(1)(i)-(iii) would be 10 hours.\321\ Thus, the total annual
burden for all broker-dealers to comply with the proposed amendments is
estimated to be 2,660 hours.\322\
---------------------------------------------------------------------------

    \320\ See supra Section III.B.
    \321\ The Commission estimates the monetized burden for this
requirement to be $3,155. The Commission derived this estimate based
on per hour figures from SIFMA's Management & Professional Earnings
in the Securities Industry 2013: (Sr. Business Analyst at $251 per
hour for 5 hours) + (Attorney at $380 per hour for 5 hours) = 10
hours and $3,155.
    \322\ 10 hours per broker-dealer that routes retail orders x 266
such broker-dealers = 2,660 hours. The Commission estimates the
total monetized burden for this requirement to be $839,230 ($3,155
per broker-dealer that routes retail orders x 266 such broker-
dealers = $839,230). See id.
---------------------------------------------------------------------------

    Proposed Rule 606(a)(1)(iv) would require broker-dealers to
describe any terms of payment for order flow arrangements and profit-
sharing relationships with a Specified Venue that may influence their
order routing decisions. Current Rule 606(a)(1)(iii), being renumbered
as proposed Rule 606(a)(iv), requires broker-dealers to provide a
discussion of the material aspects of the broker-dealer's relationship
with each Specified Venue, including a description of any arrangement
for payment for order flow and any profit-sharing relationship.
Therefore, the proposed changes would require broker-dealers to
describe any terms of payment for order flow arrangements and profit-
sharing relationships with a Specified Venue that may influence their
order routing decisions, in addition to the material aspects of the
broker-dealer's relationship with each Specified Venue. Additionally,
the costs noted in this section include the impact of posting the
required reports in the specified format to an internet Web site. Once
a report is posted on an internet Web site, the Commission estimates
that there would not be an additional burden to allow the report to
remain posted for the period of time specified in the rule. The
Commission estimates that the average annual burden for a broker-dealer
that handles retail orders to describe and update any terms of payment
for order flow arrangements and profit-sharing relationships with a
Specified Venue that may influence their order routing decisions to be
15 hours.\323\ With 266 broker-dealers involved in retail order routing
practices that would be required to comply with the rule, the
Commission estimates the total annual burden for complying with
proposed Rule 606(a)(1)(iv) to be 3,990 hours.\324\
---------------------------------------------------------------------------

    \323\ The Commission estimates the monetized burden for this
requirement to be $3,500. The Commission derived this estimate based
on per hour figures from SIFMA's Management & Professional Earnings
in the Securities Industry 2013: (Jr. Business Analyst at $160 per
hour for 10 hours) + (Attorney at $380 per hour for 5 hours) = 15
hours and $3,500.
    \324\ 15 hours annually per broker-dealer that routes retail
orders x 266 such broker-dealers = 3,990 hours. The Commission
estimates the total monetized burden for this requirement to be
$931,000 ($3,500 annually per broker-dealer that routes retail
orders x 266 such broker-dealers = $931,000). See id.
---------------------------------------------------------------------------

5. Amendment to Current Disclosures Under Rule 605
    Currently, Rule 605 requires market centers make available
standardized, monthly reports of statistical information concerning
their order executions. Further, the Rule requires that such reports be
in electronic form and be made available for downloading from an
Internet Web site that is free and readily accessible to the public.
The proposed amendment to Rule 605 would require that such reports be
kept posted on an Internet Web site that is free of charge and readily
accessible to the public for a period of three years from the initial
date of posting on the Internet Web site. Because reports are already
posted to an internet Web site pursuant to current Rule 605, the
Commission estimates the proposed amendment to Rule 605 would not
impose an additional burden. The proposed amendment prescribes a
minimum period of time for which such reports that are already required
to be posted on an Internet Web site shall remain posted.

E. Collection of Information Is Mandatory

    All of the collection of information would be mandatory.

F. Confidentiality of Responses to Collection of Information

    To the extent that the Commission receives confidential information
pursuant to the collection of information, such information will be
kept confidential, subject to the provisions of applicable law.\325\
Any information required to be disclosed publicly by the proposed Rules
would not be confidential.
---------------------------------------------------------------------------

    \325\ See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x (governing
the public availability of information obtained by the Commission).
---------------------------------------------------------------------------

    The quarterly order routing reports prepared and disseminated by
broker-dealers pursuant to Rules 606(a) and 606(c), as proposed, would
be available to the public. The individual responses by broker-dealers
to customer requests for order routing information required by Rules
606(b)(1) and (b)(3), as proposed, would be made available the
customer. The Commission, SROs, and

other regulatory authorities could obtain copies of these reports as
appropriate.

G. Retention Period for Recordkeeping Requirements

    Pursuant to proposed Rule 606(a), broker-dealers shall be required
to keep quarterly retail order routing reports posted on an Internet
Web site that is free and readily accessible to the public for a period
of three years from the initial date of posting on the Internet Web
site.
    For Rule 606(b), broker-dealers shall be required to preserve all
communications required under these proposed amendments pursuant to
Rule 17a-4, as applicable.\326\ For the categorization of order routing
strategies pursuant to proposed Rule 606(b)(3)(v), broker-dealers shall
be required to preserve such records in a manner consistent with Rule
17a-4(b), specifically for a period of not less than three years, the
first two years in an easily accessible place.
---------------------------------------------------------------------------

    \326\ 17 CFR 240.17a-4. Registered brokers and dealers are
already subject to existing recordkeeping and retention requirements
under Rule 17a-4.
---------------------------------------------------------------------------

    Pursuant to proposed Rule 606(c), broker-dealers shall be required
to keep public aggregated institutional order handling reports posted
on an Internet Web site that is free and readily accessible to the
public for a period of three years from the initial date of posting on
the Internet Web site.
    Pursuant to the proposed amendments to Rule 605, market centers
shall be required to keep order execution reports posted on an Internet
Web site that is free and readily accessible to the public for a period
of three years from the initial date of posting on the Internet Web
site.

H. Request for Comments

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to:
    120. Evaluate whether the proposed collections of information are
necessary for the proper performance of the functions of the agency,
including whether the information shall have practical utility;
    121. Evaluate the accuracy of our estimates of the burden of the
proposed collection of information;
    122. Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected; and
    123. Evaluate whether there are ways to minimize the burden of
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology.
    Persons submitting comments on the collection of information
requirements should direct them to the Office of Management and Budget,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also send a copy of their comments to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090, with reference to File Number S7-14-16.
Requests for materials submitted to OMB by the Commission with regard
to this collection of information should be in writing, with reference
to File Number S7-14-16 and be submitted to the Securities and Exchange
Commission, Office of FOIA/PA Services, 100 F Street NE., Washington,
DC 20549-2736. As OMB is required to make a decision concerning the
collection of information between 30 and 60 days after publication, a
comment to OMB is best assured of having its full effect if OMB
receives it within 30 days of publication.

V. Economic Analysis

    The Commission is sensitive to the economic consequences and
effects, including costs and benefits, of its rules. The following
economic analysis identifies and considers the costs and benefits--
including the effects on efficiency, competition, and capital
formation--that may result from the proposed amendments to Rules 600,
605, and 606.\327\ These costs and benefits are discussed below and
have informed the policy choices described throughout this release.
---------------------------------------------------------------------------

    \327\ The Commission also considered the proposed amendments to
Rule 607 and preliminarily believes that there are no costs and
benefits associated with those proposed amendments. The proposed
amendments to Rule 607 replace ``customer order'' with ``retail
order'' to be consistent with the proposed amendments to Rule
600(b)(19). However, since the definition in proposed Rule
600(b)(19) remains unchanged, there are no cost and benefits to the
proposed amendments to Rule 607. The Commission is also proposing to
amend Rule 3a51-1(a) under the Exchange Act; Rule 13h-1(a)(5) of
Regulation 13D-G; Rule 105(b)(1) of Regulation M; Rules 201(a) and
204(g) of Regulation SHO; Rules 600(b), 602(a)(5), 607(a)(1), and
611(c) of Regulation NMS; and Rule 1000 of Regulation SCI, to update
cross-references as a result of today's proposal, which would not
result in costs or benefits.
---------------------------------------------------------------------------

A. Introduction

    Among the primary economic considerations for the proposed
amendments to Rule 600, Rule 605, and Rule 606 are transparency for
customers placing institutional orders, enhanced transparency for
customers placing retail orders, and enhanced access to order handling
reports.
    The Commission proposes to amend Rule 600 to include a definition
of ``institutional order'' and to amend Rule 606 to require broker-
dealers to (1) disclose standardized customer-specific institutional
order handling information to their customers, including the use of
actionable IOIs in executing institutional orders and (2) make publicly
available for each calendar quarter a report that aggregates the
information required for customer-specific institutional order handling
reports for all institutional orders they receive.
    In short, and as discussed earlier, the Commission preliminarily
believes that standardizing customer-specific institutional order
handling disclosures, as would be required by proposed Rule 606(b)(3),
would provide information to customers to enable them to: (1) Assess
the potential for information leakage with the routing of their orders;
(2) assess the conflicts of interest that may influence the broker-
dealer's order handling practices; and (3) compare institutional order
handling practices across multiple broker-dealers. The Commission also
preliminarily believes that requiring broker-dealers to disclose their
use of actionable IOIs in executing institutional orders will be useful
to customers assessing broker-dealers' order handling decisions,
particularly in regards to analyzing information leakage.
    In addition, the Commission preliminarily believes that public
disclosure by each broker-dealer of aggregated information about its
institutional order handling, as would be required by proposed Rule
606(c), would, among other things, (1) assist market participants,
including customers, in comparing the order handling services of all
broker-dealers; (2) facilitate customers' ability to make informed
decisions when engaging a broker-dealer's services; (3) provide
academics and other members of the public with access to additional
data for conducting research on institutional order routing and market
execution quality; (4) allow broker-dealers to better compare their own
services against other broker-dealers; and (5) permit trading centers
to better compare their execution statistics against other trading
centers.
    The Commission preliminarily believes that the customer-specific as
well as the public aggregated institutional order handling reports may
further incentivize broker-dealers to provide customers with higher-
quality routing services when executing their institutional orders,
thereby mitigating the potential for information leakage,

and better manage any potential conflicts of interest the broker-
dealers may face. The Commission also preliminarily believes that the
reports will promote competition among broker-dealers to capture
customers' order flow, and among trading centers for order execution.
    With respect to retail orders, the Commission proposes to amend
Rule 606(a)(1) to include new subparagraph (iii) to require that, for
each Specified Venue, the broker-dealer must report the net aggregate
amount of any payment for order flow received, payment from any profit-
sharing relationship received, transaction fees paid, and transaction
rebates received, both as a total dollar amount and on a per share
basis, for each of the following non-directed order types: (1) Market
orders; (2) marketable limit orders; (3) non-marketable limit orders;
and (4) other orders.\328\ In addition, proposed amendments to Rule
606(a)(1)(iv) would require disclosure of a description of any terms of
payment for order flow arrangements and profit-sharing relationships,
whether written or oral, with a Specified Venue that may influence a
broker-dealer's order routing decisions, including, but not limited to:
(1) Incentives for equaling or exceeding an agreed upon order flow
volume threshold, such as additional payments or a higher rate of
payment; (2) disincentives for failing to meet an agreed upon minimum
order flow threshold, such as lower payments or the requirement to pay
a fee; (3) volume-based tiered payment schedules; and (4) agreements
regarding the minimum amount of order flow that the broker-dealer would
send to a venue. The Commission preliminarily believes that these
amendments will enhance transparency on the routing of retail orders
and enhance competition among broker-dealers that route retail orders,
to the benefit of investors.
---------------------------------------------------------------------------

    \328\ See proposed Rule 606(a)(1)(iii).
---------------------------------------------------------------------------

    In addition, the Commission preliminarily believes that the
proposed amendments would allow customers to better assess the retail
order routing and execution quality offered by their broker-dealers. As
a result, the Commission preliminarily believes that these additional
disclosures may provide broker-dealers further incentives to improve
execution quality for their customers and better manage any potential
for conflicts of interest the broker-dealers may face. In addition, the
ability of customers to better assess routing and execution quality
could also lead to increased competition among broker-dealers with
respect to execution quality, which could, in turn, result in broker-
dealers providing even higher-quality retail order routing and
execution services.
    The Commission is further proposing to require that all reports on
institutional order handling and retail order routing be provided in a
consistent, structured format. The Commission preliminarily believes
that requiring the reports be provided in this format would be useful
to customers as it would allow them to more easily analyze and compare
data across broker-dealers.
    Finally, the Commission is proposing to amend Rules 605 and 606 of
Regulation NMS to require that the public order execution and order
routing reports be kept publicly available for a period of three years.
The Commission preliminarily believes that this would allow the public
to more efficiently evaluate the services of broker-dealers because it
would be easier for the public to access historic reports and analyze
the data over an extended time period. For example, at a minimum, the
public would have access to three years of historic data and may choose
to download the reports periodically to analyze data over a time period
of more than three years.
    The discussion below presents an overview of the current practices
with regards to the reporting and disclosure of order routing and
execution quality for institutional as well as retail orders, a
consideration of the costs and benefits of the proposed new reporting
requirements for institutional orders and of the proposed amendments to
the reporting requirements for retail orders, and a discussion of the
potential effects of the proposed amendments to Rule 606 on efficiency,
competition, and capital formation. This discussion will also describe
the Commission's proposal to amend Rule 605 by requiring market centers
to keep public execution reports posted on an Internet Web site that is
accessible to the public for a period of three years.

B. Baseline

    The baseline for considering the economic impact of amending Rule
606 to require reporting for institutional orders consists of: (1)
Information that customers currently receive from their broker-dealers
regarding how their institutional orders are handled; (2) the format in
which such information is currently provided to customers; (3)
conflicts of interest broker-dealers currently face; (4) the current
use of actionable IOIs; and (5) the ability to assess order routing and
execution quality currently provided by different broker-dealers and
execution quality currently provided by different trading centers.
    The baseline for considering the economic impact of amending Rule
606 for retail orders and of amending Rule 605 consists of: (1)
Information that customers currently receive under current Rules 605
and 606 or information that customers currently receive from their
broker-dealers that is not required by current Rules 605 and 606; (2)
the format in which information required by current Rule 606 for retail
orders is provided to customers; (3) conflicts of interest broker-
dealers currently face; (4) how long reports required by current Rules
605 and 606 are available to the public; and (5) the ability to assess
order routing and execution quality currently provided by different
broker-dealers and execution quality currently provided by different
trading centers.
    Further, the baseline for considering the economic impact of
amending Rule 606 for institutional and retail orders and Rule 605
comprises the current competitive landscape in the markets for
brokerage services and for execution services and any current
limitations on efficiency or capital formation relevant to the proposed
amendments. These various baseline factors are discussed in further
detail below.
1. Ad Hoc Reports for Institutional Orders
    Currently, broker-dealers may voluntarily provide some information
on routing and execution quality of institutional orders to individual
customers in response to requests by these customers. Customers may
also use third-party vendors for TCA (e.g., to analyze the execution
prices of orders compared to various benchmarks). However, the
Commission understands that TCA provided by third-party vendors
generally does not encompass an analysis of routing decisions because
the third-party vendors, similar to customers, do not have access to
the order handling information necessary to do so. Therefore, the
completeness of any analysis of institutional orders, including TCA, is
affected by a lack of specific order handling information with regard
to the various venues to which institutional orders are routed. In
addition, while TCA provided by third-party vendors may focus on
measuring and comparing execution quality of orders, TCA does so
typically at the parent order or broker-dealer level, and generally not
at the trading center level, because the third-party vendors, again, do
not have access to the information about institutional order handling
that would be necessary to do so.

    The Commission further understands that reports that institutional
customers currently receive upon request from their broker-dealers may
not provide the consistent and standardized information needed to fully
assess the performance of their broker-dealers. In particular, the
Commission understands that these reports are not prepared or presented
in a uniform manner that allows for easy comparison of institutional
order handling across different broker-dealers, and there is no
uniformity in the current disclosure of execution fees charged or
rebates paid by the trading centers to the broker-dealers. The reports
contain what the broker-dealers provide upon the requests of customers
or what the customers specifically request from the broker-dealers. As
a result, a broker-dealer will often supply reports containing
different information to different customers, and more importantly, a
customer may receive reports containing different information from
different broker-dealers. Further, even if the reports contain the same
data elements, those data elements may not be computed in the same way
or use the same terminology across different broker-dealers or over
time for the same broker-dealer. These differences make it more
difficult for institutional customers to compare broker-dealers or to
examine one broker-dealer's performance over time. In addition, as
these reports are not standardized and vary by broker-dealer or by
customer, the Commission understands that some of these reports group
order routing strategies by their aggressiveness,\329\ while other
reports do not.
---------------------------------------------------------------------------

    \329\ This grouping could be similar to the grouping into
aggressive, neutral, and passive as proposed in Rule 606(b)(3).
---------------------------------------------------------------------------

    Even if a broker-dealer voluntarily provides information about
institutional orders upon request, it may not do so with respect to all
customers. Whether a given customer receives a report and how
responsive the report is to the request likely depends on the
customer's current or potential business relationship with the broker-
dealer. A broker-dealer may be more accommodating towards customers
that send, or may send in the near future, substantial order flow. To
the extent that some customers receive reports from broker-dealers
while other customers do not or that some customers receive higher-
quality reports than other customers, the playing field may not be
level with respect to institutional order handling information.
    Moreover, the public currently does not have access to information
on the performance of broker-dealers relating to institutional orders.
Under current Rule 606, a broker-dealer is not required to provide
public reports for orders having a market value of $200,000 or more.
While an institutional customer can request ad-hoc reports from broker-
dealers about the handling of its orders, the lack of public reports
relating to institutional orders makes it infeasible for an
institutional customer to compare handling of institutional orders by
broker-dealers that the customer does not have a business relationship
with. For the broker-dealers that the customer does send orders to, the
customer is not able to compare these broker-dealers more generally
based on all orders those broker-dealers handle rather than only the
orders the customer sends to the broker-dealers.\330\ Institutional
customers and the public may use public reports for retail orders
required under current Rule 606 to evaluate broker-dealers, with the
effectiveness of that approach being dependent upon how good a proxy
the order routing for retail orders is for the order routing for
institutional orders. The Commission understands that some customers
use the reports for retail orders required by current Rule 606 to
predict, among other things, the execution quality of institutional
orders.
---------------------------------------------------------------------------

    \330\ Currently, a customer placing institutional orders can
only compare broker-dealers based on the orders it had sent to the
broker-dealers because only those are contained in the ad-hoc
reports the broker-dealers provide upon request, but cannot compare
how the broker-dealers handle the orders it had sent compared to all
of the institutional orders the broker-dealers had received. In
addition, the ad-hoc reports provided by the broker-dealers upon
request by a customer placing institutional orders may be provided
in different formats and contain different and potentially
inconsistent information, which makes the comparison of the order
routing decisions and execution quality of broker-dealers more
difficult and less useful.
---------------------------------------------------------------------------

2. Publication Period for Reports on Retail Orders Required by Current
Rules 605 and 606
    Currently, Rule 605 does not specify the minimum length of time
that market centers need to post publicly the order execution reports
and Rule 606 does not specify a minimum length of time that broker-
dealers need to post publicly the order routing reports. The Commission
understands that generally, when reports are posted, market centers and
broker-dealers will remove the previous report from their Web site and
replace it with their most recent report,\331\ though some may make
reports available for a longer period of time that varies.\332\ The
Commission understands that this may make it difficult for the public
to analyze historical data. For example, the public must download the
data regularly to have access to historical data. Alternatively, the
public may rely on third-party vendors who retrieve and aggregate Rule
605 and 606 reports from market centers and broker-dealers,
respectively, to get access to historical data.
---------------------------------------------------------------------------

    \331\ See, e.g., Morgan Stanley Rules 605 and 606 Disclosures,
available at http://www.morganstanley.com/institutional-sales/sec_rules_605_606; Wells Fargo Legal Disclosures, available at
https://www.wellsfargoadvisors.com/disclosures/legal-disclosures.htm; Charles Schwab Order Routing, available at http://www.schwab.com/public/schwab/nn/legal_compliance/important_notices/order_routing.html; TD Ameritrade Disclosures, available at https://www.tdameritrade.com/disclosure.page; Fidelity Quarterly Reports,
available at https://capitalmarkets.fidelity.com/app/item/RD_13569_21696.html.
    \332\ See, e.g., UBS Order Routing Disclosure, available at
https://www.ubs.com/us/en/wealth/misc/orderroutingdisclosure.html.
---------------------------------------------------------------------------

3. Available Information on Conflicts of Interest
    Current Rule 606 requires for retail orders, among other things, a
description of any arrangement for payment for order flow \333\ and any
profit-sharing relationships. The current required disclosure is
designed to set forth arrangements, including financial relationships,
that could lead to conflicts of interest for a broker-dealer when
routing retail orders.\334\ 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. For example, recent research analyzed the relation
between maker-taker fee schedules and order routing. According to this
study, four out of ten national brokerage firms appear to consistently
route limit orders to the

exchange(s) paying the highest rebate for those limit orders. In this
research, an analysis of proprietary limit order data and trades from
NYSE's trade and quote (``TAQ'') data showed strong empirical evidence
of a negative relation between take fees and limit order execution
quality.\335\ The Commission preliminarily believes that such financial
incentives have the potential to affect how broker-dealers route retail
orders; however, these conflicts of interest might not only affect
retail orders.
---------------------------------------------------------------------------

    \333\ In addition, Rule 10b-10 under the Exchange Act requires
broker-dealers, when acting as agent for the customer, to disclose
on the confirmation of a transaction whether payment for order flow
was received and, upon written request of the customer, to furnish
the source and nature of the compensation received. See 17 CFR
240.10b-10(a)(2)(i)(C). Accordingly, Rule 10b-10 provides disclosure
to a specific customer of whether payment for order flow was
received on a particular transaction while Rule 606 provides public
disclosure of any arrangement for payment for order flow and any
profit-sharing relationship by requiring a description of such
arrangements.
    \334\ 17 CFR 242.606(a)(1)(iii). See Rule 606 Predecessor
Adopting Release, supra note 15, at 48417 (stating that ``[t]he
purpose of requiring disclosure of any relationships between a
broker-dealer and the venues to which it routes orders is to alert
customers to potential conflicts of interest that may influence the
broker-dealer's order-routing practices.'').
    \335\ See Battalio, Corwin, and Jennings Paper, supra note 57.
The authors ``document a strong negative relation between take fees
and several measures of limit order execution quality. Based on this
evidence, [they] conclude that the decision of some national
brokerages to route all nonmarketable limit orders to a single
exchange paying the highest rebate is not consistent with the
broker's responsibility to obtain best execution for customers.''
See id.
---------------------------------------------------------------------------

    Under the quarterly disclosure obligations in current Rule 606(a),
a broker-dealer is required to discuss the material aspects of the
broker-dealer's relationship with each Specified Venue (which is
determined based on retail order routing), including a description of
any arrangement for payment for order flow, but broker-dealers are not
required to provide information on the net amount of payment for order
flow per share or by order type nor payment received for any profit-
sharing relationship. Further, current Rule 606(a) does not require
broker-dealers to disclose rebates received and access fees paid per
share or by order type nor does it require a description of the terms
of a payment for order flow arrangement or profit-sharing relationship
that may influence a broker-dealer's order routing decision. The
current information required by Rule 606(a) can be used by customers to
assess order routing and execution services of broker-dealers as well
as the potential conflicts of interest faced by broker-dealers in
providing such services and determine whether to retain the services of
broker-dealers or to discontinue the use of such services. In addition,
broker-dealers could use the current information required by Rule
606(a) as a means to evaluate and enhance their order routing and
execution services, compare their order routing and execution services
to that of other firms, and use such comparisons in selling their
services to customers.
    Moreover, current Rule 606(a) does not specify a minimum length of
time that reports must be made available from broker-dealers. As a
result, customers placing retail orders may not be able to compare the
order routing decisions of a broker-dealer through time, if past
quarterly reports are not available. Instead, customers may need to
rely on third-party vendors to provide and/or analyze past quarterly
reports.
    As noted above, conflicts of interest may affect institutional
orders in ways similar to effects on retail orders. The ad hoc nature
of the current order handling disclosures of institutional orders is
not conducive to providing institutions with information they can use
efficiently to assess conflicts of interest. In particular, a broker-
dealer for which conflicts of interest influence routing decisions may
have the incentive to obscure the conflicts of interest in the ad hoc
reports.
4. Available Information on Execution Quality for Institutional and
Retail Orders
    The Commission preliminarily believes that broker-dealers are
incentivized to provide their customers with information about the
quality of services they offer as they may lose business if their
competitors provide reports and they do not. However, as described
above, under current rules, broker-dealers are not required to provide
customers standardized reports about the handling of their
institutional orders and instead customers may receive ad-hoc reports
from broker-dealers upon request. Additionally, a broker-dealer may
have an incentive to structure its reports and provide data in a way
that is advantageous to the broker-dealer. Specifically, broker-dealers
may want to design the ad hoc reports to highlight areas where the
broker-dealer believes it compares well to others and obscure areas
where the broker-dealer may not compare well or where customers are
likely to have concerns. Separately, there are no public reports about
the handling of institutional orders for independent research and
analysis, by academic researchers, the public at large, or third-party
vendors. Due to the limitations noted above, the Commission
preliminarily believes that customers may not be able to compare the
institutional order handling performance of broker-dealers reliably and
as a result, broker-dealers may have less incentive to compete on the
quality of their institutional order handling, which may result in
broker-dealer routing practices that are suboptimal for customers,
e.g., practices that do not avoid excessive information leakage or that
may not provide the execution quality desired by the customer.
    For customers placing retail orders, current Rule 606 requires
quarterly public reports on retail order routing and disclosure of
retail order routing information upon request, but the reports do not
require information on payment for order flow received, payment from
any profit-sharing relationship received, or transaction rebates and
access fees, and they are not required to separate limit orders into
marketable and non-marketable limit orders. As a result, it may be
difficult for customers to use the information provided in the reports
to evaluate the quality of their broker-dealers' retail order routing.
Customers may therefore not be well informed as to how their broker-
dealers manage any potential conflicts of interest they may face. The
Commission preliminarily believes providing payment for order flow data
in the quarterly public reports, broken down by calendar month,
separately for marketable and non-marketable limit orders would create
an opportunity for more detailed analysis.\336\
---------------------------------------------------------------------------

    \336\ See Battalio, Corwin, and Jennings Paper, supra note 57.
---------------------------------------------------------------------------

    As noted above, the current information on retail order routing
required by Rule 606(a) may spur competition between broker-dealers on
the basis of order routing services and execution quality.\337\
Customers may use the information required by Rule 606(a) to evaluate
and retain the services of a broker-dealer or to discontinue the use of
such services. In addition, broker-dealers may use the current
information required by Rule 606(a) as a means to: (1) Evaluate and
enhance their order routing and execution services; (2) compare their
order routing and execution services to that of other firms; and (3)
use such comparison in selling their services to customers.
---------------------------------------------------------------------------

    \337\ See supra Section III.B.
---------------------------------------------------------------------------

5. Format of Current Reports for Institutional and Retail Orders
    As discussed above, broker-dealers currently may provide some
information on routing and execution quality of institutional orders to
individual customers in response to requests by these customers. The
Commission understands that broker-dealers provide these reports in a
variety of formats and a given broker-dealer may use different formats
for different customers and/or may modify their formats over time. The
formats of these reports vary from unstructured to structured formats,
such as unstructured text and PDF files to structured XML files. The
Commission is soliciting comment on whether broker-dealers currently
provide their reports in a structured or unstructured format, and which
format the broker-dealers use for these reports. For those broker-
dealers that provide their reports

in a structured format, the Commission is further soliciting comment on
how prevalent or useful the selected structured format is.
    Under current Rule 606(a), broker-dealers are required to provide
public quarterly reports on retail order routing. The current Rule
606(a) does not specify a format for these reports. The Commission
understands that broker-dealers currently provide these reports on a
Web site or downloadable as a PDF file. The reports typically are
presented as tables with one line for each listing exchange for NMS
stocks and exchange-listed options, where each row represents metrics
for a particular routing venue, but they are not in a structured
format.
6. Quality of Broker-Dealer Routing Practices for Institutional Orders
    The Commission does not have data to gauge the current level of
quality of broker-dealer routing practices for institutional orders, as
current Rule 606 only covers retail orders and not institutional
orders.\338\ As noted, customers of broker-dealers can and do request
ad-hoc reports about the handling of their orders and broker-dealers
may voluntarily provide such reports. Customers can use those reports
to evaluate their broker-dealers' routing practices. This, in turn, may
give broker-dealers additional incentives to provide high execution
quality to their customers. However, as discussed, there are
limitations to the current situation, namely, the ad-hoc reports are
not standardized across broker-dealers and there are no public reports
that would allow customers to evaluate all broker-dealers, independent
of whether they place orders with them or not.
---------------------------------------------------------------------------

    \338\ As noted above, including in Section V.B.3., current Rule
606 provides information on the quality of broker-dealer routing
practices for retail orders.
---------------------------------------------------------------------------

7. Use of Actionable IOIs in Institutional Orders
    Some broker-dealers use actionable IOIs to communicate to external
liquidity providers to send an order to the broker-dealer in response
to liquidity at the broker-dealer, generally a customer's institutional
order. As noted above, because actionable IOIs convey similar
information as an order, a response to an actionable IOI may result in
an execution at the venue of the IOI sender. Accordingly, a broker-
dealer's use of actionable IOIs creates potential information leakage
similar to the routing of orders. The Commission does not have data to
gauge the current level of use of actionable IOIs by broker-dealers to
attract orders to execute against institutional orders represented by
such actionable IOIs. In addition, current Rule 606 for retail orders
does not require the inclusion of actionable IOIs in the reports.
8. Competition, Efficiency, and Capital Formation
    The proposed amendments are likely to affect competition among
broker-dealers that route institutional and retail orders. These
broker-dealers compete in a segment of the market for broker-dealer
services. The market for broker-dealer services is highly competitive,
with most business concentrated among a small set of large broker-
dealers and thousands of small broker-dealers competing for niche or
regional segments of the market.\339\ To limit costs and make business
more viable, small broker-dealers often contract with larger broker-
dealers or service bureaus to handle certain functions, such as
clearing and execution, or to update their technology.\340\ Larger
broker-dealers typically enjoy economies of scale over small broker-
dealers and compete with each other to service the smaller broker-
dealers, who are both their competitors and their customers.\341\ Among
other services, broker-dealers provide execution and strategy services,
distribute shares from initial public offerings, and provide analyst
research on securities. Brokerage commissions typically are charged for
a broker-dealer's premium services, and represent an average, not
marginal, cost of trading.\342\
---------------------------------------------------------------------------

    \339\ See Securities Exchange Act Release No. 63241 (November 3,
2010), 75 FR 69791, 69822 (November 15, 2010) (Risk Management
Controls for Brokers or Dealers with Market Access).
    \340\ Id.
    \341\ Id.
    \342\ Brokerage commissions are fixed according to a client
agreement and pay for expected services, such as research, advice,
and execution. However, while the commissions may pay for a variety
of services, broker-dealers charge them only on a per-share basis at
the time of an order's execution. Therefore, the commissions reflect
broker-dealers' expectations of customers' average use of services
and not the cost of servicing each order execution on a per-share
basis. See Michael Goldstein, Paul Irvine, Eugene Kandel, and Zwi
Wiener, Brokerage Commissions and Institutional Trading Patterns, 22
Review of Financial Studies 5175 (December 2009).
---------------------------------------------------------------------------

    As discussed in Section IV.C., as of December 2015, there were
approximately 4,156 registered broker-dealers.\343\ Of these, the
Commission preliminarily estimates that 266 route retail orders.\344\
The Commission preliminarily estimates that 200 broker-dealers route
institutional orders, all of whom also route retail orders, and that
each broker-dealer who routes institutional orders will receive an
average of 200 requests for reports pursuant to proposed Rule 606(b)(3)
annually.\345\ All of these broker-dealers compete for business from
retail and institutional customers. The Commission also preliminarily
estimates that there are approximately 5,594 customers that may place
institutional orders.\346\
---------------------------------------------------------------------------

    \343\ See supra note 232.
    \344\ See supra note 233.
    \345\ See supra notes 234 and 251.
    \346\ The Commission preliminarily estimates the number of
customers that may place institutional orders as the number of 13F
institutions as of December 31, 2015. The Commission recognizes that
not all of these institutions necessarily trade NMS Stocks and not
all necessarily submit orders that would qualify for the definition
of institutional order. Further, some customers that submit
institutional orders may not be 13F institutions. While this
preliminary estimate may not be precise, the Commission
preliminarily believes that it approximates the number of customers
that may be affected by the proposed amendments.
---------------------------------------------------------------------------

    Among other factors, broker-dealers may compete for retail and
institutional customers by trying to offer them better terms for
trading, such as better execution quality. The emergence of discount
brokerages has encouraged full-service brokers to compete on price and
led to the unbundling of research from execution services.\347\ In
addition, the fragmentation of NMS stock trading into 12 registered
exchanges, more than 40 ATSs, and over 200 OTC market makers \348\ has
contributed to the need for broker-dealers to focus on venue selection
in executing orders. Broker-dealers may also innovate to attract new
customers by, for example, offering access to algorithms designed to
match trading or investment objectives. However, as noted above, the
information on which broker-dealers offer better terms of trade may be
non-standardized, presented inconsistently over time, or may employ
complex calculations using undisclosed methods.\349\ Further, the
format of the reports may limit the comparison of reports across
broker-dealers.\350\ As a result, customers may not be able to
efficiently identify which broker-dealers provide better execution
quality. This may reduce the incentives for broker-dealers to compete
by offering better execution quality or to innovate on execution
quality. Without the incentive

to compete by offering better execution quality, broker-dealers may
route customer orders in ways that do not necessarily promote better
execution quality.\351\ Such inefficient routing could have effects on
the market for trading services.
---------------------------------------------------------------------------

    \347\ See supra note 342.
    \348\ See supra Section II.B.
    \349\ See generally supra Sections V.B.1., V.B.4., and V.B.5.
    \350\ See supra Section V.B.5. for a discussion of current
formats. Broker-dealers provide reports in a variety of formats and
a given broker-dealer may use different structures and formats for
different customers. This makes it difficult to electronically read
reports into a system to compare multiple broker-dealers and conduct
statistical analysis across broker-dealers. Differing formats also
make it difficult to electronically search across broker-dealers for
various data points in the reports.
    \351\ See supra Section V.B.3. regarding the conflicts of
interest broker-dealers have when routing customer orders.
---------------------------------------------------------------------------

    The market for trading services, which is served by trading
centers, relies on competition among these market centers to supply
investors with execution services at efficient prices. These market
centers, which compete to, among other things, match traders with
counterparties, provide a framework for price negotiation, and provide
liquidity to those seeking to trade. As discussed in Section IV.C., the
Commission preliminarily estimates that there are 380 market centers to
which Rule 605 applies.\352\
---------------------------------------------------------------------------

    \352\ The Commission derived this estimate for purposes of the
PRA based on the following: 236 OTC market makers (not including
market makers claiming an exemption from the reporting requirements
of the Rule), plus 12 exchanges, 1 securities association, 86
exchange market makers, and 45 ATSs.
---------------------------------------------------------------------------

    These market centers compete with each other for order flow on a
number of dimensions, including execution quality. Their primary
clients are the broker-dealers who route their own or their customers'
orders for execution at the trading center. One way to attract order
flow is to offer payment for order flow. The Commission understands
that a large portion of retail order flow is sent to internalizers who
pay for retail order flow. Trading centers also may innovate to
differentiate themselves from other trading centers to attract more
order flow. For example, several exchanges recently started pilots
intended to provide better execution quality for retail orders to
attract more retail order flow.\353\ Trading centers also may adjust
fees and rebates to incent broker-dealers to route more order flow to
them. To the extent that broker-dealers route orders for reasons other
than execution quality, trading centers may have less of an incentive
to compete and innovate on execution quality. This may limit overall
execution quality and result in higher transaction costs for customers
than would exist with greater competition on execution quality.
---------------------------------------------------------------------------

    \353\ See, e.g., Securities Exchange Act Release No. 67347 (July
3, 2012), 77 FR 40673 (July 10, 2012) for the NYSE and NYSE MKT
pilot; Securities Exchange Act Release No. 68303 (November 27,
2012), 77 FR 71652 (December 3, 2012) for the Bats BZX pilot;
Securities Exchange Act Release No. 71176 (December 23, 2013), 78 FR
79524 (July 30, 2013) for the NYSE Arca pilot; and Securities
Exchange Act Release No. 73702 (November 28, 2014), 79 FR 72049
(December 4, 2014) for the Nasdaq BX pilot.
---------------------------------------------------------------------------

    Transaction costs reflect the level of efficiency in the trading
process, with higher transaction costs reflecting less efficiency.\354\
Inefficiency in the trading process creates friction, which limits the
ability for prices to fully reflect a stock's underlying value.\355\
Stoll (2000) defines friction as follows: ``Friction in financial
markets measures the difficulty with which an asset is traded.'' \356\
Stoll follows Demsetz (1968) \357\ to ``view friction as the price paid
for immediacy.'' Thus, higher transaction costs imply higher friction
in the market. Friction makes it more costly to trade and makes
investing less efficient. Further, friction limits the ability for
arbitrageurs or informed customers to push prices to their underlying
values, and thus friction makes prices less efficient.
---------------------------------------------------------------------------

    \354\ See Hans R. Stoll, Friction, 55 Journal of Finance 1479
(August 2000).
    \355\ See id.
    \356\ See id.
    \357\ See Harold Demsetz, The Cost of Transacting, 82 Quarterly
Journal of Economics 33 (February 1968).
---------------------------------------------------------------------------

    As a result of the inefficiencies discussed above, a potential
increase in transaction costs in particular, may cause customers not to
rebalance their portfolios as often as might otherwise be optimal and
security prices may less fully reflect true underlying values. This, in
turn, may limit efficient allocation and capital formation, as those
issuers that have the best ideas may not get the capital needed to fund
them. In particular, the less perfectly efficient prices are, the less
able customers are to identify the issuers with the most profitable
projects and thus the demand for the stock of those issuers may not
fully reflect these opportunities. Less demand could result in a lower
stock price, which would make it harder for these issuers to raise
capital and result in less favorable conditions for the capital they
raise.\358\
---------------------------------------------------------------------------

    \358\ The Commission also notes that less efficiently allocated
capital could result in too much relative funding available for
unprofitable projects, which erode capital. In other words,
allocative inefficiency could mean that some issuers with
unprofitable projects could raise capital too easily.
---------------------------------------------------------------------------

9. Request for Comment
    The Commission requests comments on its baseline analysis. In
particular, the Commission solicits comment on the following:
    124. Do customers currently request institutional order handling
reports from their broker-dealers? Are those reports generally provided
and if so, what information do they generally contain? Are there
differences in the responsiveness of broker-dealers to requests from
different customers and/or over time? Are there differences in the
quality or detail of the reports by different broker-dealers? If so,
what impact do the differences have on the costs and benefits of the
reports? If possible, please provide specific estimates and data.
    125. Do broker-dealers already have systems in place to produce
order handling reports?
    126. Do customers currently receive institutional order handling
reports that are comparable to the public reports as proposed by Rule
606(c)? If so, what information is contained in such reports and how,
if at all, do those reports differ from the proposed public reports?
How do the costs and benefits of those reports compare to the reports
as proposed by Rule 606(c)? Please be specific and, if possible,
provide specific estimates or data.
    127. Do commenters believe that the Commission's assessment of the
baseline for the economic analysis is correct? Why or why not? Please
be specific.
    128. Do commenters believe that the baseline discussion provides a
fair representation of current practices under Rules 600, 605, and 606?
    129. Do commenters believe that the Commission's description of the
competitive landscape for broker-dealers is accurate?
    130. Do commenters believe that the market participants identified
by the Commission as being affected by the proposed amendments to Rules
600, 605, and 606 is correct?
    131. Do commenters believe that the Commission's description of
what information market participants currently receive is accurate?
    132. Do commenters believe that the Commission's description of the
potential conflicts of interest broker-dealers face when routing
institutional or retail orders is accurate? Why or why not? Please be
specific in your response.
    133. Do commenters believe that the Commission's description of the
current quality of broker-dealer order routing practices for
institutional orders is accurate? Why or why not? Please be specific in
your response.
    134. Do commenters believe that the Commission's description of the
current use of actionable IOIs is accurate? Why or why not? Please be
specific in your response.
    135. Do commenters believe that the Commission's description of the
current level of competition, efficiency, and innovation is accurate?
Why or why not? Please be specific in your response.

C. Costs and Benefits

    The Commission preliminarily identified costs and benefits
associated with the proposed amendments to Rules 600, 605, and 606,
which are discussed in this section. Many of these costs and benefits
are difficult to quantify, especially as the practices of market
participants are expected to evolve and may change due to the
information on order routing and execution quality that is required to
be reported under the proposed amendments to Rules 600, 605, and 606.
Therefore, much of the discussion is qualitative in nature but, where
possible, the Commission quantifies the costs.
    Many, but not all, of the costs of the proposed 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 preliminary estimates being used in the economic analysis
below.\359\
---------------------------------------------------------------------------

    \359\ See supra Section IV.
---------------------------------------------------------------------------

1. Disclosures for Institutional Orders
a. Definition of Institutional Order in Rule 600(b)(31)
i. Benefits
    Proposed Rule 600(b)(31) defines an institutional order as an order
to buy or sell an NMS stock that is not for the account of a broker-
dealer and is an order for a quantity of an NMS stock having a market
value of at least $200,000. The $200,000 threshold determines the
number of institutional orders included in the proposed reporting
requirements of Rule 606, as orders less than $200,000 in market value
are excluded from Rules 606(b)(3) and (c) for reporting purposes. The
Commission preliminarily estimates that at least 5% of the total
executed volume in NMS securities would meet this threshold.\360\ The
Commission preliminarily believes that the proposed definition is
simple and straightforward, as the same threshold would be applied to
all NMS stocks independent of the liquidity and other characteristics
of the specific stock. In addition, the definition of an institutional
order in proposed Rule 600(b)(31) is the complement to the current
definition of a ``customer order,'' which would be renamed ``retail
order'' under the proposed amendment to Rule 600(b)(18) (renumbered as
600(b)(19)). Specifically, proposed Rule 600(b)(19), as amended,
defines a ``retail order'' for NMS stocks as an order to buy or sell an
NMS stock that is not for the account of a broker-dealer and is an
order for a quantity of an NMS stock having a market value of less than
$200,000. The definition of institutional order would dovetail with the
definition of retail order such that all customers' orders would be
covered by order routing disclosure rules. Moreover, because there
would be no overlap in the definitions of retail and institutional
orders--that is, an order would be classified as either retail or
institutional--there should be no double reporting for any order.\361\
---------------------------------------------------------------------------

    \360\ Commission staff calculated this estimate using a sample
of institutional orders purchased from Abel Noser Solutions, Ltd., a
provider of TCA. The Commission recognizes that this data may not
include all institutional orders, but cannot predict how incomplete
the data are. The more incomplete this data set is, the more this
statistic underestimates the prevalence of institutional orders.
    \361\ Current Rule 600(b)(18) defines a customer order and the
definition is identical to the definition of a retail order in
proposed Rule 600(b)(19). Throughout this proposal, we use the term
``retail order'' rather than ``customer order,'' even if we describe
current rules and practices, because ``retail order'' is the amended
terminology proposed and the definitions are identical.
---------------------------------------------------------------------------

ii. Costs
    As noted above, the same threshold would be applied to all NMS
stocks independent of a stock's liquidity. This uniform standard may,
however, result in orders submitted by institutions that are quite
large when considering a stock's activity level not meeting the
definition of institutional order. For example, an order for $200,000
in a small-cap stock that is illiquid is very different from an order
for $200,000 in a large-cap stock that is very liquid.\362\ The
Commission recognizes that orders meeting the $200,000 threshold may
not be as common for illiquid stocks, and institutional customers may
use orders smaller than $200,000, as supported by staff analysis
described below. As a result, the proposed definition may result in
institutional customers who submit such smaller orders in illiquid
stock not obtaining the benefits from the disclosures required in the
proposed amendments to Rule 606, although the existing requirements of
Rule 606 for retail orders would still apply.
---------------------------------------------------------------------------

    \362\ For example, a $200,000 order in a liquid stock could be
very small relative to the total activity level of that stock
whereas a $150,000 order in an illiquid stock could be half the
typical trading volume of that stock. The execution quality of the
order in the illiquid stock could be much more dependent on the
routing practices of the broker-dealer than the execution quality of
the order in the liquid stock.
---------------------------------------------------------------------------

    To determine the extent of institutional orders that would not meet
this threshold, the Commission staff examined a set of orders from
institutions and found that 83.2% of the total number of orders are
smaller than $200,000.\363\ However, 92% of total dollar volume from
orders of institutions in the data meets the proposed definition of an
institutional order, i.e., an order to buy or sell a quantity of an NMS
stock having a market value of at least $200,000. The percentage of
orders from institutions that would meet the definition varies by
activity level of the stock, with a higher proportion meeting the
definition in more active stocks. While approximately 20% of orders
from institutions in the group of most active stocks would meet the
proposed definition, less than 3% of orders from institutions in the
group of least active stocks would meet the proposed definition.\364\
Therefore, the proposed definition of institutional order covers a
lower proportion of orders submitted by institutions in less active
stocks than it does in more active stocks.
---------------------------------------------------------------------------

    \363\ Information on institutional equity trading for the sample
period of 2013-2014 is obtained from Abel Noser Solutions, Ltd.
According to an academic study by Puckett and Yan (2011), the
dataset contains detailed equity trading information for each Abel
Noser client and includes a representative set of institutional
investors including pension plan sponsors (e.g., CalPERS, the
Commonwealth of Virginia, and YMCA retirement fund) and money
managers (e.g., Massachusetts Financial Services (MFS), Putnam
Investments, and Lazard Asset Management). These clients accounted
for at least 10% of the total trading volume from 1999-2005,
according to Puckett and Yan (2011). The Commission assumes for
purposes of this analysis that clients have continued to account for
at least this volume during its sample period. See, e.g., Andy
Puckett and Xuemin (Sterling) Yan, The Interim Trading Skills of
Institutional Investors, 66 Journal of Finance 601 (April 2011).
    \364\ A stock is sorted into a decile according to average
monthly dollar volume. The most active stocks are defined as being
those in the 10th decile of the distribution of stocks as measured
by the average monthly dollar volume, and the least active stocks
are defined as being those in the 1st decile of the distribution of
stocks as measured by the average monthly dollar volume.
---------------------------------------------------------------------------

    The Commission notes that using any fixed threshold may have
another drawback. For example, market participants may change their
behavior or stock prices may change over time. Fixed thresholds
generally provide an incentive for those affected by the threshold to
alter their actions to control whether the action is above or below the
threshold. With respect to the threshold in the definition of
institutional order, customers may have an incentive to increase their
order sizes to exceed the threshold if they can get better information
about routing and execution quality for orders exceeding the
threshold.\365\ If such changes result in

an increase in the size of orders submitted by institutional customers,
such that more orders from institutional customers are meeting the
$200,000 threshold to qualify as an ``institutional order,'' the
proposed amendments to Rule 606 would apply to a bigger proportion of
all orders submitted by institutional customers. This would increase
the benefits of the proposed amendments to Rule 606 because
institutional customers and the public would receive order handling
information for a larger proportion of all orders submitted by
institutional customers. However, it would also increase the costs of
the proposed amendments to Rule 606 because the information required by
proposed Rules 606(b)(3) and (c) would have to be disclosed for a
larger proportion of all orders submitted by institutional customers.
The Commission preliminarily believes that the increase in costs would
be negligible because the broker-dealers' systems to generate the
reports would already be in place and the marginal costs of adding one
order in a report is likely to be low as it would use only little
additional computing time. Nonetheless, the Commission preliminarily
believes that these incentives may not significantly alter customer
order sizes. In particular, if a customer is able to obtain the same
level of detail on the routing of all of their orders from broker-
dealers, regardless of whether the orders exceed the threshold to be
institutional orders, that customer may have little benefit in
submitting their orders in larger pieces. Further, an institution that
splits its orders to avoid the risk of leaking information to its
broker-dealer, would incur information leakage costs with larger order
sizes.
---------------------------------------------------------------------------

    \365\ The Commission understands that customers currently split
large orders across multiple broker-dealers for reasons such as
limiting the information that broker-dealers have about the full
order. On the margin, the proposed threshold could provide the
incentive to avoid splitting orders to pieces of less than $200,000.
---------------------------------------------------------------------------

    Conversely, if changes in market participants' behavior or stock
prices resulted in a decrease in the size of orders submitted by
institutional customers, such that fewer orders meet the $200,000
threshold for ``institutional orders,'' then the proposed disclosure
amendments to Rule 606 pertaining to institutional order handling would
apply to a smaller proportion of all orders by institutional customers.
This would lead to the public receiving order handling information for
a smaller proportion of all orders submitted by institutional customers
and therefore would reduce the benefits of the proposed amendments to
Rule 606. Still, a decrease in the size of orders submitted by
institutional customers could also decrease the costs associated with
the institutional order handling disclosure required by the proposed
amendments to Rule 606 (since fewer orders would qualify as
``institutional orders''). The Commission preliminarily believes,
however, that this potential decrease in costs would be negligible
since the marginal cost of providing additional information on
institutional orders once systems were in place to produce such reports
would be negligible. Moreover, under this scenario, the Commission
notes that while there may be a decrease in costs associated with
institutional order handling disclosures, broker-dealers may experience
an increase in the number of orders covered in retail order routing
disclosure reports (because the orders that do not qualify as
``institutional orders'' would nonetheless qualify as ``retail orders''
based on size). However, the Commission preliminarily believes that any
increase in the number of orders in retail order routing reports would
result in minimal costs as retail reports do not require extensive
order routing information, the system to generate the reports would
already be in place, and the marginal costs of adding additional orders
would require little computing time.
iii. Request for Comment
    The Commission seeks comment on the definition of institutional
order as proposed in Rule 600(b)(31) and its analysis of the costs and
benefits. In particular, the Commission solicits comment on the
following:
    136. Do commenters believe that the Commission's proposed
definition of institutional order is appropriate from a costs and
benefits perspective? If not, please provide alternative definitions
with a detailed discussion of what the advantages and costs of those
alternatives would be. For example, should the threshold be different
for different stocks? If yes, how? Should the threshold be a fixed
dollar amount or should it be variable over time or defined
differently, e.g., relative to the average daily volume of a stock?
Please provide data and analysis to support your view.
b. Customer Requests for Information on Institutional Order Handling
Under Proposed Rule 606(b)(3)
i. Benefits
    The proposed amendments to Rule 606 would provide transparency
about order routing and execution quality for institutional orders.
Proposed Rule 606(b)(3) would require standardized reports on
institutional order handling, which would be made available to
customers upon request.
    Competition in the market for brokerage services could be further
promoted by more transparent order routing practices and execution
quality. The disclosures proposed in Rule 606(b)(3) would provide
customers who submit institutional 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 proposed Rule 606(b)(3) increase the transparency
of institutional order routing and execution quality, broker-dealers
would 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 that they currently compete on.
The Commission preliminarily believes that broker-dealers would have an
additional incentive to improve their order routing decisions as
customers submitting institutional orders could use the reports
required by the proposed amendments to Rule 606 to compare broker-
dealers, which in turn could lead to better execution quality for
institutional orders.
    There could also be an effect on the competition between trading
centers. If broker-dealers improve their order routing decisions for
institutional orders, thereby routing orders to the trading centers
that are more beneficial for their customers, this could further
promote competition between trading centers and spur innovation on
execution quality. To illustrate, if broker-dealers change their
institutional order routing decisions to focus more on execution
quality and route fewer orders to a given trading center, that trading
center would have an incentive to take measures to attract and gain
back order flow by innovating on execution quality.
    In addition to comparing broker-dealers based on the reports,
customers may also initiate a dialogue with their broker-dealers, or
broker-dealers they are considering to use, about their institutional
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 discussed in Section II.C., some customers currently request and
receive reports about order routing and execution quality of their
institutional

orders from their broker-dealers. However, these reports are not
standardized and as a result, it may be difficult to compare broker-
dealers based on 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
institutional orders have easier access to such reports compared to
customers with a smaller volume of institutional orders. Moreover, the
information provided by a broker-dealer may vary over time without any
standardized or required content for the reports. Proposed Rule
606(b)(3) addresses both of these concerns as the reports would be
standardized for all broker-dealers and all institutional customers,
making comparisons easier and analysis more useful. Furthermore, every
institutional customer would be able to receive reports upon request
from their broker-dealer.
    However, for customers who already receive reports from their
broker-dealers on the handling of their institutional orders, the
benefits of the reports required by proposed Rule 606(b)(3) may be
modest or even non-existent, depending on the information the customers
currently receive. For example, the reports that customers already
receive may be more detailed and tailored to the particular customer.
The reports also may provide different and potentially more information
than what proposed Rule 606(b)(3) requires. Therefore, the proposed
disclosure's benefits to customers who may continue to receive detailed
tailored reports is preliminarily estimated to be minimal.
Nevertheless, these customers would be able to more readily compare
broker-dealers due to the proposed requirement that the disclosures be
standardized.
    Additionally, proposed Rule 606(b)(3) requires that a broker-dealer
assign its order routing strategies to one of three categories and that
the reports contain information grouped by those order routing
strategies: Passive, neutral, and aggressive. Proposed Rule
606(b)(3)(v) defines ``passive order routing strategy'' as ``one that
emphasizes minimization of price impact over the speed of execution'';
``neutral order routing strategy'' as one ``that is relatively neutral
between minimization of price impact and the speed of execution of the
entire institutional order''; and ``aggressive order routing strategy''
as ``one that emphasizes the speed of execution of the entire
institutional order over minimization of price impact.'' The Commission
preliminarily believes that the requirement to group information by
specified order routing strategy categories should make comparisons
among broker-dealers by customers placing institutional orders as well
as by the public possible because it would allow customers to control
for the fact that broker-dealers may get different types of order flow.
For example, to satisfy customer order instructions one broker-dealer
may tend to use an aggressive order routing strategy and another
broker-dealer may tend to use a passive order routing strategy, and
simply comparing these two broker-dealers without considering the order
routing strategy category may lead to incorrect or misleading
conclusions.
    Customers preferring passive order routing strategies may be
willing to wait longer for an execution but may want to limit price
impact. Customers preferring aggressive order routing strategies,
however, may endure some price impact to trade quickly. Therefore, a
broker-dealer implementing a passive order routing strategy may,
compared to an aggressive order routing strategy, tend to route to a
dark pool where execution may be less certain, but likely at a better
price.\366\ Similarly, a broker-dealer implementing passive order
routing strategies may be able to place orders providing liquidity more
often, thereby capturing more rebates.\367\ As a result, the routing
statistics of a broker-dealer that implements predominantly passive
order routing strategies should differ from those of a broker-dealer
that implements predominantly aggressive order routing strategies.
Therefore, including the categories of order routing strategies in the
order handling report can facilitate an assessment of how well a
broker-dealer manages its conflicts of interest and provides execution
quality that matches customer preferences because it provides
information on the preferences communicated by that broker-dealers'
customers. It can also assist in comparing broker-dealers that may not
receive the same mix of order instructions from customers.
---------------------------------------------------------------------------

    \366\ See, e.g., Albert J. Menkveld, Bart Zhou Yueshen, and
Haoxiang Zhu, Shades of Darkness: A Pecking Order of Trading Venues,
Working Paper (2015). The authors find that there exists a pecking
order of trading venues that puts low-cost-low-immediacy venues on
top and high-cost-high-immediacy venues at the bottom. This suggests
that if an order is a passive order and executed with passive order
routing strategy, the broker-dealer would prefer low-cost-low-
immediacy venues, which the paper identifies as dark pools that
execute at the midpoint.
    \367\ Compared to an aggressive order routing strategy, a
passive order routing strategy may reduce transaction costs and
allow the capture of rebates, but immediate execution is not
certain. See Lawrence Harris and Joel Hasbrouck, Market vs. Limit
Orders: The SuperDOT Evidence on Order Submission Strategy, 31
Journal of Financial and Quantitative Analysis 213, 230 (June 1996)
(concluding that passive order routing strategies achieve better
average performance than aggressive order routing strategies in
certain markets). See also Maker-Taker Memo, supra note 55, at 18
(discussing maker-taker fees in U.S. equity markets). A broker-
dealer can be more patient in implementing a passive order routing
strategy and does not have to seek immediate execution.
---------------------------------------------------------------------------

    The requirement to differentiate the proposed disclosures into the
three order routing strategy categories should help mitigate the
possibility that the reports could be interpreted incorrectly. However,
there could still be differences among broker-dealers in how they
classify orders into the three strategy categories, which could make
straight comparisons between broker-dealers difficult. Proposed Rule
606(b)(3)(v) requires broker-dealers to ``assign each order routing
strategy that it uses for institutional orders to one of [the] three
categories in a consistent manner for each report it prepares,'' to
``promptly update the assignments any time an existing strategy is
amended or a new strategy is created that would change such
assignments,'' and to ``document the specific methodologies it relies
upon for making such assignments.'' The proposed Rule defines the
general characteristics of the three order routing strategies in terms
of the trade-off between the minimization of price impact and the speed
of execution of the entire institutional order. However, the proposed
Rule does not prescribe how this trade-off should be taken into
consideration. Broker-dealers would have discretion to determine how to
do this when establishing their methodologies to assign categories in a
consistent manner and when applying the methodologies to assign into
categories the routing strategies and, as a result, broker-dealers
might not have the exact same definitions for the three order routing
strategy categories.
    Under proposed 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.\368\ Under proposed Rule 606(b)(3),
a customer would 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 would be able to examine the
payment for order flow to determine if its order flow is sold to a
third-party. In addition, customers may be interested in how maker-
taker fees affect where broker-dealers route their

institutional orders. If a customer pays a flat-rate commission to its
broker-dealer, and any fraction of the rebate is retained by the
broker-dealer, then the broker-dealer has a financial incentive to
route the order to the trading center offering the highest rebate or
lowest fee.\369\ At present, the brokerage commission, which is known
to the customer, may be lowest when a broker-dealer concentrates order
flow in a high rebate and/or low fee trading center.\370\ 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 affecting price impact.
---------------------------------------------------------------------------

    \368\ See Hitesh Mittal, Are You Playing in a Toxic Dark Pool? A
Guide to Preventing Information Leakage, 3 Journal of Trading 20
(Summer 2008).
    \369\ 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.
    \370\ See Shawn O'Donoghue, The Effect of Maker-Taker Fees on
Investor Order Choice and Execution Quality in U.S. Stock Markets
(January 23, 2015), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2607302.
---------------------------------------------------------------------------

    Proposed Rule 606(b)(3) requires the inclusion of actionable IOIs
in institutional order handling disclosures. Proposed 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 inclusion of actionable IOIs in the proposed reporting
requirements of broker-dealers should provide customers a more complete
picture of how their institutional orders are handled. Since actionable
IOIs can convey similar information as 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 preliminarily believes
that actionable IOIs should be included in the required disclosure of
how institutional orders are handled. In addition, because an
actionable IOI can convey similar information as an order, the use of
actionable IOIs may contribute to information leakage in a similar way
as the use of orders.\371\ Excluding actionable IOIs therefore would
not provide a complete picture of institutional order routing and
executions and could provide broker-dealers with an incentive to use
actionable IOIs instead of orders to circumvent the proposed disclosure
requirements in Rule 606.
---------------------------------------------------------------------------

    \371\ See supra Section II.C.4.
---------------------------------------------------------------------------

    The proposed definition of actionable IOI in Rule 600(b)(1),
however, may limit the benefits achieved. Specifically, the proposed
definition is substantively similar to the description of actionable
IOI in the Regulation of Non-Public Trading Interest Release. Comments
received on the Regulation of Non-Public Trading Interest Release
indicated that some commenters are concerned that the discussion of
actionable IOIs in that release was too stringent.\372\ If the proposed
definition of actionable IOIs is, in fact, too stringent, then some
IOIs would not be included in the definition of actionable IOI and
would not be captured by the proposed reports on institutional order
handling. Consequently, it is possible that institutional customers
might find the reports to be less informative on institutional 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 proposed amendments.
---------------------------------------------------------------------------

    \372\ Comments on the proposed rule for Regulation of Non-Public
Trading Interest 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/s72709-8.pdf.
---------------------------------------------------------------------------

    An additional benefit of having the institutional order handling
information available upon request is that institutional customers
could combine the order handling information with existing TCA or
enhance their TCA. As noted above, institutional customers often work
with independent third-party vendors to perform TCA as a means of
evaluating the cost and quality of brokerage services. Institutional
customers 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 institutional order routing strategy, nor cost, routing, and
execution quality for individual child orders. The disclosures required
by proposed Rule 606(b)(3) would close this informational gap, so that
customers would have more information on how broker-dealers handle and
execute parent and child institutional orders.
    With this additional information, institutional customers 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 proposed Rule 606(b)(3)
may be a factor that can explain transaction cost variations and thus,
the reports from the proposed 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
proposed Rule 606(b)(3) would not.\373\ With TCA alone, a customer may
observe different implementation shortfall across broker-dealers. The
proposed 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 preliminarily believes that proposed Rule
606(b)(3) may complement and enhance all customers' evaluations of
institutional order handling quality, including those of customers who
use TCA.
---------------------------------------------------------------------------

    \373\ For example, proposed Rule 606(b)(3) would not require
reports to contain any information on implementation shortfall costs
of parent orders, which are a key focus for investors placing
institutional orders. In general, the proposed amendments 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 proposed 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.
---------------------------------------------------------------------------

    Finally, proposed Rule 606(b)(3) would require reports to be made
available using an XML schema and associated PDF renderer to be
published on the Commission's Web site.\374\ The benefits, as well as
the costs, associated with this requirement are discussed in Section
V.C.4.
---------------------------------------------------------------------------

    \374\ See supra Section III.A.3.
---------------------------------------------------------------------------

ii. Costs
    As discussed above, some customers currently request reports about
the handling of their institutional 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 proposed Rule
606(b)(3) would require. If the reports broker-dealers currently
provide to a customer more or different information, proposed Rule
606(b)(3)

could impose a cost on such a customer to the extent broker-dealers
stop providing the more detailed or additional information and instead
provide only the data required for institutional order handling by
proposed Rule 606(b)(3). The Commission preliminarily believes that
this scenario is not very likely because, even if Rule 606(b)(3) is
adopted, 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 how
detailed such a report is might depend on the business relationship
between the broker-dealer and the customer. Customers who send or may
send a large number of orders to a broker-dealer might be able to get
customized reports more easily compared to customers who send fewer
orders, and those reports might be more detailed compared to reports
that customers who send fewer orders receive. While proposed Rule
606(b)(3) mitigates this issue in that every customer would be able to
request the standardized reports required by proposed Rule 606(b)(3),
the Commission recognizes that to the extent large institutional
customers are able to receive customized reports that provide
information not contained in the required reports, those large
institutional customers would continue to have an advantage over
smaller institutional customers who are not able to receive the same
reports.
    In addition, the greater transparency provided as a result of the
new reports required under proposed Rule 606(b)(3) might lead broker-
dealers to change how they handle institutional orders. Given that
broker-dealers would be aware of the metrics to be used a priori, they
might route institutional orders in a manner that promotes a positive
reflection on their respective services but which may be suboptimal for
their customers. Any changes to broker-dealers' order routing decisions
due to proposed Rule 606(b)(3) may be intended to benefit customers
placing institutional orders, but if broker-dealers and customers focus
exclusively on the metrics in the reports required by proposed Rule
606(b)(3), the order routing decisions could also be viewed as
suboptimal for some customers.
    For example, suppose a broker-dealer routes institutional 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. However, it could be the case that, in order to achieve
these objectives, the broker-dealer routes the majority of non-
marketable limit order shares to the trading center offering the
highest rebate. An institutional customer that reviews the proposed
routing reports 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 based on
other variables, which might not be completely reflected in the
proposed reports. Under the proposed 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.
    In addition, as noted above, proposed Rule 606(b)(3) requires the
inclusion of actionable IOIs in the reports on institutional order
handling broker-dealers would 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 additional data and run additional calculations. The estimated
cost of including actionable IOIs in the proposed reports is included
in the aggregate costs described in the discussion below and in greater
detail in Section IV.D.1.
    The disclosure requirements of proposed Rule 606(b)(3) would also
impose a monetary cost, as the required disclosures could entail some
reprogramming by broker-dealers that execute or route institutional
orders. These costs may be low for a given broker-dealer if the broker-
dealer already supplies similar reports on institutional order handling
upon requests by their customers. In addition to reprogramming,
receiving and processing customer requests as well as preparing and
transmitting the data to customers on request would impose costs.
    As discussed in Section IV.D.1., the Commission preliminarily
estimates that the one-time, initial burden for a broker-dealer that
routes institutional orders that does not currently retain the proposed
order handling information to program systems in-house to implement the
requirements imposed by the proposed amendments to Rule 606 would be
200 hours resulting in a monetized cost burden of $60,420 per broker-
dealer.\375\ The Commission preliminarily estimates the one-time,
initial burden for a broker-dealer that routes institutional orders
that does not currently create the proposed order handling information
to engage a third-party to program their systems to implement the
requirements of the proposed amendments to Rule 606(b)(3) to be 50
hours resulting in a monetized cost burden of $15,125 per broker-
dealer.\376\ In these cases, the Commission further preliminarily
estimates a fee of $35,000 per broker-dealer to engage the third-party
service provider.\377\ The Commission preliminarily believes that most
broker-dealers either have systems that currently retain the
information required by the proposed rule, or use third-party vendors
who have systems that retain such information. The Commission therefore
preliminarily estimates that 25 broker-dealers that route institutional
orders do not currently have systems that retain the information
required by the proposed amendments or use a third-party vendor to
retain such information.\378\ The Commission preliminarily estimates
that of the 25 broker-dealers that route institutional orders who do
not currently have systems in place to retain the information required
by the proposed rule, 10 such broker-dealers will perform the necessary
programming upgrades in-house, and 15 will engage a third-party to
perform the programming upgrades. Additionally, of the 25 broker-
dealers that route institutional orders who do not currently have
systems in place to retain the information required by the rule, the
Commission preliminarily estimates that 10 such broker-dealers will
need to purchase hardware and software upgrades to fulfill the
requirements of the proposed rule at an average cost of $15,000 per
broker-dealer, and that the remaining 15 broker-dealers have adequate
hardware and software to retain the information proposed by the rule.
Therefore, the total initial burden for all broker-dealers that route
institutional orders who do not currently retain order handling

information required by the proposed rule to program systems to comply
with the proposed rule change is 2,750 hours resulting in a monetized
cost burden of $831,075, plus an additional fee of $675,000 to engage
the third-party service providers.\379\
---------------------------------------------------------------------------

    \375\ See supra note 237.
    \376\ See supra note 238.
    \377\ See supra note 239.
    \378\ See supra note 236.
    \379\ See supra note 240.
---------------------------------------------------------------------------

    As discussed in Section IV.D.1., the Commission preliminarily
estimates the average cost for a broker-dealer who routes institutional
orders who already retains information required by the proposed rule to
format its systems to produce a report to comply with the proposed rule
to be 40 hours resulting in a monetized cost burden of $12,084.\380\
The Commission preliminarily estimates the average burden for a broker-
dealer who routes institutional orders who uses a third-party service
provider to work with such service provider to ensure proper reports
are produced to be 20 hours resulting in a monetized cost burden of
$5,726.\381\ In these cases, the Commission further preliminarily
estimates a fee of $5,000 per-broker to engage the third-party service
provider.\382\ The Commission preliminarily estimates that, of the 175
broker-dealers who route institutional orders who currently retain the
information required pursuant to the rule and need only format their
systems to produce a report required by the rule, 50 such broker-
dealers will use a third-party vendor to ensure proper reports are
produced and the remaining 125 broker-dealers will perform the
necessary work in-house. Thus, the total cost for all broker-dealers
who route institutional orders who only need to format their systems to
prepare a report to comply with the proposed rule is preliminarily
estimated to be 6,000 hours resulting in a monetized cost burden of
$1,796,800, plus an additional fee of $250,000 to engage the third-
party service providers.\383\ Therefore, the total initial burden for
all broker-dealers to comply with proposed Rule 606(b)(3) is
preliminarily estimated to be 8,750 hours resulting in an estimated
cost of $2,627,875, plus an additional fee of $925,000 to engage the
third-party service providers.\384\
---------------------------------------------------------------------------

    \380\ See supra note 242.
    \381\ See supra note 243.
    \382\ See supra note 244.
    \383\ See supra note 245.
    \384\ See supra note 247.
---------------------------------------------------------------------------

    As discussed in Section IV.D.1, the Commission preliminarily
estimates that an average response to a Rule 606(b)(3) request for a
broker-dealer who handles its own responses will take approximately 2
hours per response resulting in a monetized cost burden of $380.\385\
For a broker-dealer that routes institutional orders who will use a
third-party service provider to respond to requests pursuant to Rule
606(b)(3), the Commission preliminarily estimates the burden to be 1
hour per response resulting in a monetized cost burden of $283.\386\ In
these cases, the Commission preliminarily estimates an additional
third-party service provider fee of $100 per response.\387\ The
Commission preliminarily estimates that an average broker-dealer will
receive approximately 200 requests annually.\388\ Therefore, the total
annual burden for all 200 broker-dealers that route institutional
orders to comply with the customer response requirement in proposed
Rule 606(b)(3) is preliminarily estimated to be 67,000 hours, resulting
in a monetized cost burden of $13,939,000, plus an additional fee of
$1,300,000 to compensate third-party service providers for producing
the reports.\389\
---------------------------------------------------------------------------

    \385\ See supra note 250.
    \386\ See supra note 254.
    \387\ See supra note 255.
    \388\ See supra note 251.
    \389\ See supra notes 259 and 260.
---------------------------------------------------------------------------

    Further, as a result of proposed Rule 606(b)(3), broker-dealers
that route institutional orders would likely re-evaluate 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 proposed statistics into their best execution
methodologies. In addition, they may only choose to do so if the
benefits justify the costs.
    Another potential cost of proposed 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 aggregate the time series of
the reports. For example, suppose that a customer chooses to no longer
purchase TCA once reports from proposed Rule 606(b)(3) become
available, because the customer decides that the information contained
in proposed Rule 606(b)(3) reports is sufficient. If fewer customers
purchase TCA, it would have a negative impact on third-party providers
of TCA as well as third-party data vendors, e.g., in terms of less
demand for their services, and 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 may also lead to less data the
third-party providers can base their models on.\390\ However, as
discussed in Section V.C.1.b.i, the reports required by proposed Rule
606(b)(3) would provide information that could be complementary to TCA.
As discussed above, in fact, proposed Rule 606(b)(3) could make TCA
more useful and provide incentives to customers to use TCA. As a
result, the Commission preliminarily believes that proposed Rule
606(b)(3) will not replace TCA.
---------------------------------------------------------------------------

    \390\ Based on staff experience, 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.
---------------------------------------------------------------------------

    As discussed in Section V.C.1.b.i, proposed Rule 606(b)(3) would
require differentiating order routing strategies for institutional
orders into three types: Passive, neutral, and aggressive order routing
strategies. The Commission preliminarily believes that broker-dealers
would incur costs associated with creating their methodologies,
assigning each order routing strategy for institutional orders into one
of these three categories according to the methodologies, promptly
updating the assignments any time an existing strategy is amended or a
new strategy is created that would change such assignments, and
documenting the specific methodologies it relies upon for making such
assignments. The Commission preliminarily estimates the one-time,
initial burden for a broker-dealer that routes institutional orders to
establish and document in-house its specific methodologies for
assigning order routing strategies as required by proposed Rule
606(b)(3)(v) to be 40 hours resulting in a monetized cost burden of
$12,620.\391\ The Commission preliminarily estimates the one-time,
initial burden for a broker-dealer that routes institutional orders who
will work with a third-party service provider to assign into categories
its current order routing strategies and establish and document its
specific methodologies as required by Rule 606(b)(3)(v) to be 10 hours
resulting in a monetized cost burden of $2,896 plus an additional fee
of $5,000 to the third-party service provider.\392\ These figures are
based on the estimated number of hours to establish and review such
methodologies. As noted above, the

Commission preliminarily estimates that 135 broker-dealers who route
institutional orders will create the required reports themselves while
65 such broker-dealers will use a third-party service provider to
create the required reports. Therefore, the total initial burden for
all broker-dealers that route institutional orders to assign its
routing strategies into passive, neutral, and aggressive strategies is
preliminarily estimated to be 6,050 hours resulting in a monetized cost
burden of $1,891,940 plus an additional fee of $325,000 to the third-
party service providers.\393\
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    \391\ See supra note 277.
    \392\ See supra notes 279 and 280.
    \393\ See supra notes 283 and 284.
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    Once the methodologies are established and documented, broker-
dealers that route institutional orders would be required to assign
each order routing strategy for institutional orders into one of these
three categories according to the methodologies in a consistent manner
and promptly update the assignments any time an existing strategy is
amended or a new strategy is created that would change such
assignments.\394\ The Commission preliminarily estimates that the
annual cost for a broker-dealer who will assign its order routing
strategies to one of the three categories and update such assignments
in-house to comply with Rule 606(b)(3)(v) will be 15 hours resulting in
a monetized cost burden of $3,500.\395\ The Commission preliminarily
estimates that the annual burden for a broker-dealer who routes
institutional orders who engages a third-party service provider to
assign the order routing strategies into categories to comply with Rule
606(b)(3)(v) will be 5 hours resulting in a monetized cost burden of
$1,609 plus an additional third-party service provider fee of
$1,000.\396\ As noted above, the Commission preliminarily estimates
that 135 broker-dealers who route institutional orders will create the
required reports themselves while 65 such broker-dealers will use a
third-party service provider to create the required reports. Therefore,
the total annual burden for broker-dealers that route institutional
orders to assign the routing strategies of their institutional orders
into passive, neutral, and aggressive strategies is preliminarily
estimated to be 2,350 hours resulting in a monetized cost burden of
$577,085 plus an additional third-party service provider fee of
$65,000.\397\
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    \394\ For example, a broker-dealer may develop new order routing
strategies, change existing order routing strategies, or change the
descriptions of existing order routing strategies.
    \395\ See supra note 285.
    \396\ See supra notes 287 and 288.
    \397\ See supra notes 291 and 292.
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iii. Request for Comment
    The Commission requests comment on the Commission's analysis of the
costs and benefits of the proposed amendments in Rule 606(b)(3). In
particular, the Commission solicits comment on the following:
    137. Are the assumptions underlying the Commission's estimates for
the costs of implementation and ongoing costs to comply with the
proposal appropriate? Please provide data and analysis to support your
view.
    138. Do commenters believe that broker-dealers currently have
systems that contain the data that would be used in the reports? What
data would be incremental to that already maintained by broker-dealers?
What incremental costs would be necessary to modify and maintain
information systems architecture?
    139. Do commenters believe there are additional costs or benefits
that could be quantified or otherwise monetized? If so, please identify
these costs and benefits. Please explain and provide specific data and
estimates.
    140. Do commenters believe there are any additional costs or
benefits that may arise from the proposal? Are there costs and benefits
described that would likely not result from the proposed amendments?
Are there any unintended consequences that have not been discussed that
may result from the proposal?
    141. Do commenters believe that there are methods by which the
Commission could reduce the costs imposed by the proposal, while still
achieving its stated goals? Please explain in detail.
    The Commission also seeks comment on the analysis of the costs and
benefits for the definition of an actionable IOI in proposed Rule
600(b)(1). In particular, the Commission solicits comment on the
following:
    142. Do commenters believe that the Commission's proposed
definition of actionable IOI is appropriate in light of the estimated
costs and benefits? If not, please provide alternative definitions with
a detailed discussion of what the benefits and costs of those
alternatives would be. Please provide data and analysis to support your
view.
c. Public Reports for Institutional Orders Under Proposed Rule 606(c)
i. Benefits
    Proposed Rule 606(c) would require public quarterly reports broken
down by calendar month on the order routing and execution quality of
institutional orders by each broker-dealer. As a result, proposed Rule
606(c) would provide the public with standardized information regarding
all broker-dealers' institutional order routing practices and execution
quality aggregated across each broker-dealer's customers.
    While these reports would be aggregated across all customers a
broker-dealer serves, the reports would allow current and prospective
customers to compare broker-dealers' institutional order routing
practices and execution quality and ultimately, to inform their choice
of broker-dealers. For example, customers may use the quarterly public
reports broken down by calendar month to decide whether they should
enter into a business relationship with broker-dealers to whom they do
not currently send orders. Additionally, the reports may allow
customers to compare the execution services of their current broker-
dealers with other competitors, who might offer the same execution
quality at lower costs, improved execution quality at the same costs,
or lower cost services and better execution quality.
    As discussed in Section V.C.1.b.i, greater transparency about order
routing practices and execution quality may promote competition in the
market for brokerage services and between trading centers. The
Commission preliminarily believes that public aggregated institutional
order handling reports required by proposed Rule 606(c) would increase
the transparency of institutional order routing and execution quality
and provide additional information to customers beyond that provided by
customer-specific reports required by proposed Rule 606(b)(3).
Customers would be able to compare their broker-dealers not just based
on the orders they send to the broker-dealers, but also based on all
institutional orders handled by the broker-dealers. In addition,
customers would be able to evaluate the order routing and execution
quality of broker-dealers they do not send orders to and could
determine whether to send orders to a given broker-dealer based on such
evaluation.
    Broker-dealers, in turn, might be able to adjust their business
practices to compete better, specifically along the dimensions of order
routing and execution quality and, through the public aggregated
institutional order handling reports, try to attract orders from
customers with whom they do not yet have a business relationship. The
Commission preliminarily believes that the broker-dealers would have
greater incentive to route institutional orders in a manner beneficial
to a customer in order to attract additional order flow from those
customers who may use the public aggregated institutional order

handling reports required by proposed Rule 606(c) to compare relative
broker-dealer execution quality. Ultimately, greater transparency may
increase competition in the brokerage services market, thereby
potentially reducing costs to customers in terms of cost of services
and execution quality for institutional orders, of which transaction
costs is one measure.
    As discussed in Section V.C.1.b.i, if broker-dealers change their
institutional order routing decisions, it might promote competition
among trading centers. The public aggregated institutional order
handling reports required by proposed Rule 606(c) would allow trading
centers to compare the execution quality of orders on different trading
centers as well as the routing behavior of broker-dealers. The trading
centers would have a further incentive to improve execution quality to
attract order flow and the public aggregated institutional order
handling reports that are broken down by month would allow them to see
the effects of any changes they implement. In addition, this may lead
to innovation by existing trading centers and it may attract new
entrants and the formation of new trading centers.
    As discussed for the customer-specific reports required by proposed
Rule 606(b)(3) in Section V.C.1.b.i, customers may also initiate a
dialogue with their broker-dealers, or broker-dealers they are
considering to use, based on the public aggregated institutional order
handling reports required by proposed Rule 606(c). This dialogue may
include discussions about conflicts of interest \398\ and how to match
the needs of customers with the order routing practices of the broker-
dealers to whom they send orders.
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    \398\ As noted above, institutional customers may be able to
utilize the customer-specific reports as required by proposed Rule
606(b)(3) to examine the venues their broker-dealers are routing
orders to and the rebates received and fees paid. The Commission
notes that similar information would be reflected in the public
aggregated institutional order handling reports and could be useful
for institutional customers to discuss order routing practices and
management of conflicts of interest with broker-dealers or
prospective broker-dealers.
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    Further, third-party vendors offering analytical services may use
the information in the public aggregated institutional order handling
reports in an attempt to sell customized reporting tools and services.
These types of consulting services may allow customers and the public
to better identify the potential conflicts of interest that broker-
dealers face with directing order flow to trading centers offering
liquidity rebates and fees.
    Greater transparency of institutional order routing and execution
could help shed light on the effect of today's dispersed and complex
market structure on order routing decisions and related execution
quality. The Commission preliminarily believes that the requirement in
proposed Rule 606(c) for quarterly disclosure on order routing, order
execution, and orders that provide and remove liquidity for each venue
broken down by order routing strategy should provide the public with a
better understanding of the operating procedures of broker-dealers and
how their decisions are affected by the current market structure. In
addition, the information on rebates and fees broker-dealers receive or
incur would allow the public to assess how broker-dealers manage
potential conflicts of interest they face when routing institutional
orders.
    As discussed for the customer-specific reports required by proposed
Rule 606(b)(3) in Section V.C.1.b.i., the public aggregated
institutional order handling reports broken down by calendar month
required by proposed Rule 606(c) would also give customers information
about broker-dealer internalization rates and the rebates received and
fees paid by broker-dealers. As described above, the public aggregated
institutional order handling reports would require the disclosure of
information by all broker-dealers that receive institutional orders.
Customers would be able to compare internalization rates of their
broker-dealers and rebates received and fees paid by their broker-
dealers to those of broker-dealers they do not send orders to. As such,
the information about broker-dealer internalization rates, rebates, and
fees in the public aggregated institutional order handling reports
required by proposed Rule 606(c) would be complementary to the
customer-specific reports required by proposed Rule 606(b)(3), which
would provide customers only information about their orders rather than
all orders a given broker-dealer receives.
    In addition, proposed Rule 606(c) would require the public
aggregated institutional order handling reports to be posted on an
Internet Web site that is free and readily accessible to the public for
a period of three years from the initial date of posting on the
Internet Web site. This requirement would allow customers and the
public to readily access historical data for at least three years
without the need to download the reports frequently, e.g., quarterly,
or purchasing the data from a third-party vendor. Customers and the
public could analyze the historical data and evaluate the order routing
decisions and execution quality provided by broker-dealers based on the
historical data.
    Further, the public aggregated institutional order handling reports
required by proposed Rule 606(c) could improve the extent and quality
of information available to the Commission and other regulatory
agencies, thereby assisting in the regulatory oversight of broker-
dealers' operations.
    Finally, proposed Rule 606(c) would require the public aggregated
institutional order handling reports be made available using an XML
schema and associated PDF renderer to be published on the Commission's
Web site.\399\ The benefits and costs associated with this requirement
are discussed in Section V.C.4.
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    \399\ See supra Section III.A.3.
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ii. Costs
    The Commission considered whether the public aggregated
institutional order handling reports that would be required pursuant to
proposed Rule 606(c) may disclose information about specific
institutional orders that currently is not publicly available, and
preliminarily believes that the possibility of such disclosure and
associated costs are small. First, the reports required by proposed
Rule 606(c) would be quarterly reports broken down by calendar month
made public within one month after the end of the quarter. As a result,
it is very unlikely that the reports would contain any information
about orders that are being worked by broker-dealers at the time of
publication. Second, the reports would be aggregated across all
customers a broker-dealer serves. To the extent that a broker-dealer
serves multiple customers placing institutional orders, it would be
difficult to identify the orders of a particular customer in the
proposed reports. However, it is possible that, for example, a smaller
broker-dealer may have one customer placing institutional orders that
represents the majority of its business and this may be known to other
market participants. In this case, it may be possible to learn from the
reports some information about the order flow of that customer,
particularly the order flow given to the specific broker-dealer. This
information would not be about active orders but could provide
historical information about the general characteristics of the
customer's order flow, e.g., how much of its order flow has been
handled using aggressive or passive order routing strategies. To the
extent that these characteristics apply to future orders, this
information

may be useful to other market participants. Such a potential outcome
could put smaller broker-dealers (that is, those with a small set of