allow them to determine independently whether an order received best
execution from a broker-dealer. Further, obtaining and analyzing such
information could be costly for retail customers.
---------------------------------------------------------------------------

    \257\ For instance, a broker-dealer may decide to act in a
principal capacity in a situation where there is a liquidity
externality in that the investor's order lacks a counterparty,
though the presence of such an externality is not necessary to the
broker-dealer's decision.
    \258\ ``Trading is a zero-sum game in an important accounting
sense. In a zero-sum game, the total gains of the winners are
exactly equal to the total losses of the losers. Trading is a zero-
sum game, because the combined gains and losses of buyers and
sellers always sum to zero.'' Larry Harris, Trading and Exchanges:
Market Microstructure for Practitioners (2002).
---------------------------------------------------------------------------

    The Commission has long taken the position that the ``scope of
[the] duty of best execution must evolve as changes occur in the market
that give rise to improved executions for customer orders . . . [and
that] broker-dealers' procedures for seeking to obtain best execution
for customer orders also must be modified to consider price
[improvement] opportunities that become `reasonably available.' ''
\259\ Current SRO rules that specifically address broker-dealer best
execution policies and procedures requirements focus on a retrospective
``regular and rigorous'' review of execution quality. With limited
exceptions, such as those for orders involving foreign securities, and
securities for which there is limited pricing information or quotations
available, existing SRO rules do not establish specific standards
concerning a broker-dealer's policies and procedures for complying with
the best execution obligations in FINRA Rule 5310(a) and MSRB Rule G-
18(a).\260\
---------------------------------------------------------------------------

    \259\ See, e.g., Marc N. Geman, Securities Exchange Act Release
No. 43963 (Feb. 14, 2001) (Commission opinion) (citing Order
Execution Obligations Adopting Release, supra note 10, 61 FR 48322-
48323).
    \260\ As discussed supra in note 129 and the accompanying text,
FINRA Rule 3110(b)(1) requires broker-dealers to have policies and
procedures for compliance with FINRA rules and Federal securities
laws and regulations. MSRB Rule G-18.08 requires broker-dealers to
have policies and procedures for determining the best available
market for the executions of their customers' transactions. MSRB
Rule G-28 requires broker-dealers to have procedures for compliance
with MSRB rules and the Exchange Act and rules thereunder. Unlike
these FINRA and MSRB rules, proposed Regulation Best Execution would
establish specific standards concerning the policies and procedures
for complying with the proposed best execution standard, as
discussed in sections IV.B.1 and 2 supra.
---------------------------------------------------------------------------

    The proposal would build on the existing regulatory framework,
codify in a Commission rule a best execution standard that is
consistent with how the Commission and the courts have described the
duty of best execution, enhance the Commission's ability to enforce
best execution, and impose detailed policies and procedures obligations
on broker-dealers' handling and execution of customer orders, including
documented incremental efforts required for a broker-dealer to obtain
the most favorable price in conflicted transactions for or with retail
customers.\261\ These requirements could further help enhance broker-
dealers' ability to maintain robust best execution practices, including
in situations where broker-dealers have order handling conflicts of
interest with retail customers.
---------------------------------------------------------------------------

    \261\ See supra section IV.
---------------------------------------------------------------------------

    The Commission estimates aggregate compliance costs of $165.4
million in one-time costs and $128.9 million in annual costs on broker-
dealers as they update, or establish, their policies and procedures for
the handling, execution, and review of customer orders. To the extent
that broker-dealers already have policies and procedures that are
consistent with the proposed rules, aggregate implementation costs
would be less than this estimate, and based on the Commission's
experience, the Commission preliminarily believes these estimates
overstate costs broker-dealers would bear in implementing the
proposal.\262\ Broker-dealers may also

incur indirect costs.\263\ Some of these costs could be passed through
to customers in the form of higher commissions or reduced services.
---------------------------------------------------------------------------

    \262\ See infra section V.C.2.
    \263\ See infra section V.C.2.b).
---------------------------------------------------------------------------

    The Commission has considered the economic effects of proposed
Regulation Best Execution and, wherever possible, the Commission has
quantified the likely economic effects of proposed Regulation Best
Execution. The Commission is providing both a qualitative assessment
and quantified estimates of the potential economic effects of the
proposal where feasible. The Commission has incorporated data and other
information to assist it in the analysis of the economic effects of
proposed Regulation Best Execution. However, as explained in more
detail below, because the Commission does not have, and in certain
cases does not believe it can reasonably obtain, data that may inform
the Commission on certain economic effects, the Commission is unable to
quantify certain economic effects. Further, even in cases where the
Commission has some data, quantification is not practicable due to the
number and type of assumptions necessary to quantify certain economic
effects, which render any such quantification unreliable. Our inability
to quantify certain costs, benefits, and effects does not imply that
the Commission believes such costs, benefits, or effects are less
significant. The Commission requests that commenters provide relevant
data and information to assist the Commission in quantifying the
economic consequences of proposed Regulation Best Execution.

B. Baseline

    Commission statements and SRO rules, including FINRA Rule 5310 and
MSRB Rule G-18, and related SRO interpretive notices and guidance
address broker-dealer best execution duties primarily through a broad,
principles-based approach. Differences in security characteristics and
market structure can cause broker-dealer order handling and execution
practices to vary significantly across different asset classes,
including the role that conflicts of interests play in the handling and
execution of a broker-dealer's retail customer orders. In addition,
policies related to the handling of customer orders can impact
competition among broker-dealers, trading venues, and broker-dealers
that offer order routing and execution services. The baseline against
which the costs, benefits, and the effects on efficiency, competition,
and capital formation of proposed Regulation Best Execution is measured
consists of the current regulatory requirements and SRO guidance for
broker-dealers concerning customer best execution, current broker-
dealer best execution review processes, the current market structure
and broker-dealer practices concerning handling and executing customer
orders that may be impacted by proposed Regulation Best Execution,\264\
and the structure of the market for broker-dealer services.
---------------------------------------------------------------------------

    \264\ While proposed Regulation Best Execution would apply to
all securities, the Commission preliminarily believes that the
proposal would not have economic effects on the market structure or
order handling practices in the markets for securities based swaps,
asset-backed securities, and repurchase and reverse repurchase
agreements because these markets are mostly dominated by
institutional investors that do their own order handling. Therefore,
the market structure and order handling practices in these markets
are not discussed in the economic baseline of this release.
---------------------------------------------------------------------------

1. Current Legal and Regulatory Framework
    Although FINRA and the MSRB have established rules and issued
guidance directly addressing the duty of best execution that are
applicable to their respective members, the Commission has never
established its own rule governing a broker-dealer's legal duty of best
execution. As described above in section II.A, the duty of best
execution that a broker-dealer has today was originally derived from an
implied representation that a broker-dealer makes to its customers when
it agrees to engage in certain transactions on their behalf. The common
law agency obligations of ``undivided loyalty and reasonable care''
that an agent owes to its principal require that a ``broker-dealer seek
to obtain for its customer orders the most favorable terms reasonably
available under the circumstances.'' \265\ Expressed in economic terms,
because a ``client-principal seeks his own economic gain and the
purpose of the agency is to help the client-principal achieve that
objective, the broker-dealer['s best execution obligation], absent
instructions to the contrary, [means that a broker-dealer] is expected
to use reasonable efforts to maximize the economic benefit to the
client in each transaction.'' \266\
---------------------------------------------------------------------------

    \265\ Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc.,
135 F.3d at 270.
    \266\ See id.
---------------------------------------------------------------------------

    In addition to the duty itself, the current framework consists of
examination and monitoring programs conducted by the Commission and
FINRA \267\ of Commission registrants and FINRA and MSRB members. Best
execution is and has been a priority item in these examinations.\268\
In addition, FINRA produces monthly status reports for members, known
as the best execution Outside-of-the-Inside report card, ``detailing
the number of transactions reported to a FINRA [trade reporting]
Facility, in which [a] firm participated that were executed Outside-of-
the-Inside market in apparent violation of the Best Execution Rule.''
\269\
---------------------------------------------------------------------------

    \267\ The MSRB does not conduct its own enforcement or
compliance examinations. MSRB, The Role and Jurisdiction of the
MSRB, at 2 (2021) (``the SEC and federal bank regulators [ ] share
responsibility for enforcement and compliance examinations''),
available at https://www.msrb.org/sites/default/files/2022-09/Role-and-Jurisdiction-of-MSRB.pdf.
    \268\ The Division of Exams 2022 priorities note that best
execution in fixed-income securities, best execution obligations in
a zero commission environment, and possible effects of conflicts of
interest on best execution are focus points of its broker-dealer
exam program. Division of Examinations, 2022 Examination Priorities,
at 19 and 20, available at https://www.sec.gov/files/2022-exam-priorities.pdf. According to FINRA, ``[a]ssessing firms' compliance
with their best execution obligations under FINRA Rule 5310 (Best
Execution and Interpositioning) is one of the cornerstones of
FINRA's oversight activities.'' FINRA, 2022 Report on FINRA's
Examination and Risk Monitoring Program, at 2 (Feb. 2022), available
at https://www.finra.org/sites/default/files/2022-02/2022-report-finras-examination-risk-monitoring-program.pdf.
    \269\ FINRA, Best Execution Outside-of-the-Inside Report Card,
available at https://www.finra.org/compliance-tools/report-center/equity/best-execution-outside-inside-report-card. Member firms are
told that they should ``make no inference . . . that FINRA staff has
or has not determined that the information contained on the Best
Execution Outside-of-the-Inside report cards does or does not
constitute rule violations.'' Id.
---------------------------------------------------------------------------

(a) Commission and Court Statements, Agency Guidance, and Enforcement
Activities
    In the context of agency rulemaking, adjudication, and Federal
court litigation, the Commission and various Federal courts of appeal
have articulated what the duty of best execution means and interpreted
how the duty applies in various circumstances. For example, the duty of
best execution requires a broker-dealer to ``execute customers' trades
at the most favorable terms reasonably available under the
circumstances, i.e., at the best reasonably available price.'' \270\
When considering what the

best reasonably available price means in the context of a broker-
dealers' best execution analysis, the Commission has articulated a non-
exhaustive list of factors that may be relevant to broker-dealers' best
execution analysis. These factors include the size of the order, speed
of execution, clearing costs, the trading characteristics of the
security involved, the availability of accurate information affecting
choices as to the most favorable market center for execution and the
availability of technological aids to process such information, and the
cost and difficulty associated with achieving an execution in a
particular market center.\271\
---------------------------------------------------------------------------

    \270\ Regulation NMS Adopting Release, supra note 21, at 37538.
See also Order Execution and Routing Practice Release, supra note
22, at 75418 (price is a critical concern for investors); Geman v.
SEC, 334 F.3d 1183, 1186 (10th Cir. 2003) (``[T]he duty of best
execution requires that a broker-dealer seek to obtain for its
customer orders the most favorable terms reasonably available under
the circumstances.'') (quoting Newton v. Merrill, Lynch, Pierce,
Fenner & Smith, Inc., 135 F.3d 266, 270 (3d Cir. 1998)); Kurz v.
Fidelity Management & Research Co., 556 F.3d 639, 640 (7th Cir.
2009) (describing the ``duty of best execution'' as ``getting the
optimal combination of price, speed, and liquidity for a securities
trade'').
    \271\ See Order Execution and Routing Practice Release, supra
note 22, at 75422; Regulation NMS Adopting Release, supra note 21,
at 37538.
---------------------------------------------------------------------------

    Other Commission statements address what best execution means in
the context of various market practices and circumstances.
Interpositioning, which occurs when a broker-dealer places a third
party between itself and the best market for executing a customer trade
in a manner that results in a customer not receiving the best available
market price or paying unnecessary expenses, violates the broker-
dealer's duty of best execution.\272\ When a broker-dealer receives a
limit order, the duty of best execution requires the broker-dealer to
account for potential material differences in execution quality, such
as the likelihood of execution among the various securities markets or
market centers to which limit orders may be routed.\273\ The Commission
has also recognized that it may be impractical for a broker-dealer that
handles a heavy volume of orders to make individual determinations
regarding where to route each order \274\ and that the duty of best
execution requires a broker-dealer to assess periodically the quality
of competing markets to ensure that its customers' order flow is
directed to the markets providing the most beneficial terms.\275\
---------------------------------------------------------------------------

    \272\ See supra notes 29-30 listing Commission opinions. See
also SEC v. Ridenour, 913 F.2d 515 (8th Cir. 1990) (bond salesman's
interpositioning of personal trading between his customers'
securities transactions and the market violated the antifraud
provisions).
    \273\ See Order Execution Obligations Adopting Release, supra
note 10, at 48323.
    \274\ See Payment for Order Flow Release, supra note 33, at
55009.
    \275\ See Regulation NMS Adopting Release, supra note 21, at
37516; Payment for Order Flow Release, supra note 33, at 55009.
---------------------------------------------------------------------------

    Although the Commission has not established a set of specific
minimum data elements that a broker-dealer would need to acquire to
achieve best execution \276\ and has acknowledged that it cannot
specify the data elements that may be relevant to every specific
situation,\277\ it has identified the various types of data needed by
broker-dealers to fulfill their duty of best execution. For example,
information contained in the public quotation system must be considered
in seeking best execution of customer orders.\278\ In adopting Rules
605 and 606,\279\ the Commission recognized that the reports required
of market centers would provide statistical disclosures regarding
certain factors, such as execution price and speed of execution,
relevant to a broker-dealer's order routing decisions and that these
public disclosures of execution quality should help broker-dealers
fulfill their duty of best execution.\280\ More recently, the
Commission emphasized that broker-dealers should consider the
availability of consolidated market data, including the various
elements of data content and the timeliness, accuracy, and reliability
of the data in developing and maintaining best execution policies and
procedures.\281\
---------------------------------------------------------------------------

    \276\ See MDI Adopting Release, supra note 38, at 18606.
    \277\ Id.
    \278\ See Order Execution and Routing Practice Release, supra
note 22, at 75418.
    \279\ 17 CFR 242.605, 242.606.
    \280\ See Order Execution and Routing Practice Release, supra
note 22, at 75418. See also, id. at 75420 (information provided by
these reports is not, by itself, sufficient to support conclusions
regarding the provision of best execution, and any such conclusions
would require a more in-depth analysis of the broker-dealer's order
routing practices than will be available from the disclosures
required by the rules).
    \281\ See MDI Adopting Release, supra note 38, at 18605-06.
---------------------------------------------------------------------------

    The Commission has also emphasized the importance of price
improvement in considering whether a customer order received best
execution stating that ``notwithstanding any ambiguity that may have
once existed [ ], it should now be clear that a firm must consider the
potential for price improvement in carrying out its best execution
obligations.'' \282\ Relatedly, the Commission has taken the position
that simply routing customer order flow for automated executions or
internalizing customer orders on an automated basis at the best bid or
offer does not necessarily satisfy a broker-dealer's duty of best
execution for small orders in non-NMS stock equity securities (and NMS
stocks).\283\ Rather, broker-dealers handling small orders should look
for price improvement opportunities when executing these orders.\284\
And the expectation of price improvement for customer orders is
particularly important when broker-dealers receive payment for order
flow.\285\ According to the Commission, a broker-dealer's receipt of
payment for order flow is not a violation of its duty of best execution
as long as it periodically assesses the quality of the markets to which
it routes packaged order flow.\286\
---------------------------------------------------------------------------

    \282\ Marc N. Geman, Exchange Act Release No. 43963 (Feb. 14,
2001) (C'n opinion) (record did not support a finding that firm
fraudulently violated its duty of best execution), affirmed on other
grounds, 334 F.3d 1183, 1186 (10th Cir. 2003). See Order Execution
Obligations Adopting Release, supra note 10, at 48323. See also, id.
at 48323 n. 357
    \283\ See id. at 48323.
    \284\ See id.
    \285\ See Payment for Order Flow Release, supra note 33, at
55008. See Exchange Act Rule 10b-10, 17 CFR 240.10b-10. See also
supra note 43 (reviewing the definition of payment for order flow).
    \286\ See Payment for Order Flow Release, supra note 33, at
55009.
---------------------------------------------------------------------------

    An additional component of the best execution baseline for the
Commission is enforcement mechanisms. The Commission has broad
statutory authority under the Exchange Act to bring an injunctive
action in Federal district court under Exchange Act Section 21(d)(1)
whenever any person is engaged or is about to engage in acts or
practices constituting a violation of the Federal securities laws and
rules and regulations thereunder and, among other things, FINRA and
MSRB rules, including best execution rules. Exchange Act Section 21(f)
directs the Commission not to bring an injunctive action against any
person for a SRO rule violation ``unless . . . such self-regulatory
organization . . . is unable or unwilling to take appropriate action .
. ., or (2) such action is otherwise necessary or appropriate in the
public interest or for the protection of investors.'' \287\ The
Commission's authority to obtain monetary sanctions in Federal district
court actions for FINRA and MSRB rule violations is also not co-
extensive with its authority to obtain injunctive relief for violations
of the Federal securities laws. For example, while the Commission can
seek disgorgement and any equitable relief for Federal securities law
violations and SRO rule violations, the Commission's authority to
obtain civil penalties in a Federal district court action under Section
21(d) extends to violations of ``any provision of th[e

Exchange Act], the rules or regulations thereunder, or a cease-and-
desist order entered by the Commission . . . other than [ ] a violation
subject to a penalty pursuant to [the Exchange Act provision penalizing
insider trading violations].'' \288\ Section 21(d)(3) does not include
the language in Section 21(d)(1) regarding the ``rules of a registered
securities association'' or the ``rules of the Municipal Securities
Rulemaking Board.''
---------------------------------------------------------------------------

    \287\ Under Exchange Act Section 21(f), the Commission ``shall
not bring any action pursuant to subsection (d) or (e) of this
section against any person for violation of, or to command
compliance with, the rules of a self-regulatory organization . . .
unless it appears to the Commission that (1) such self-regulatory
organization . . . is unable or unwilling to take appropriate action
against such person in the public interest and for the protection of
investors, or (2) such action is otherwise necessary or appropriate
in the public interest or for the protection of investors.''
    \288\ Exchange Act Section 21(d)(3)(A).
---------------------------------------------------------------------------

    The Commission's authority to obtain relief in administrative and
cease-and-desist proceedings is more limited. The Commission can
institute administrative proceedings pursuant to Exchange Act Sections
15(b)(4) and 15(b)(6), against broker dealers and their associated
persons respectively, and pursuant to Exchange Act Sections 15B(c)(2)
and 15B(c)(4) against municipal securities dealers and their associated
persons respectively, for willful violations, and willful aiding and
abetting violations of, among other things, the Federal securities
statutes, the rules and regulations thereunder, ``or the rules of the
Municipal Securities Rulemaking Board.'' \289\ There is no parallel
provision for the rules of an SRO or a registered securities
association such as FINRA. A cease-and-desist proceeding can be brought
only if ``any person is violating, has violated, or is about to violate
any provision of [the Exchange Act], or any rule or regulation
thereunder.'' \290\ There is no parallel provision for the rules of the
MSRB \291\ or the rules of a Federal securities association.\292\
---------------------------------------------------------------------------

    \289\ Exchange Act Section 15(b)(4)(D) and (E) and
15(b)(6)(A)(i). Where broker-dealer's best execution-related
misconduct has also involved fraud, the Commission may exercise its
discretion to bring best execution-based fraud charges pursuant to
the Exchange Act's and the Securities Act's antifraud provisions.
See, e.g., Linkbrokers Derivatives LLC, Exchange Act Rel. No. 72,846
(Aug. 14, 2014) (settled Section 15(b) and cease-and-desist
proceeding alleging antifraud violations of Exchange Act Section
15(c)(1)), available at https://www.sec.gov/litigation/admin/2014/34-72846.pdf.
    \290\ Exchange Act Section 21C(a).
    \291\ Where the Commission can institute an administrative
proceeding under both Sections 15B(c) and 21C, the Commission can
order remedies, including a cease-and-desist order, and other
sanctions against a municipal securities dealer. See, e.g., RBC
Capital Markets, LLC, Exchange Act Rel. No. 93,042 (Sept. 17, 2021)
(settled action) available at https://www.sec.gov/litigation/admin/2021/34-93042.pdf.
    \292\ In situations where broker-dealer best execution-related
misconduct has involved fraud, the Commission can exercise its
discretion to bring best execution-based fraud charges pursuant to
the Exchange Act's or the Securities Act's antifraud provisions.
See, e.g., Robinhood SEC, supra note 69 (settled cease-and-desist
proceeding alleging antifraud violations of Securities Act Sections
17(a)(2) and 17(a)(3)) https://www.sec.gov/litigation/admin/2020/33-10906.pdf; Patrick R. Burke, Exchange Act Rel. No. 76,285 (Oct. 28,
2015) (settled cease-and-desist and Section 15(b) proceeding
alleging antifraud violations of Exchange Act Section 10(b) and Rule
10b-5 and Securities Act Section 17(a)), available at https://www.sec.gov/litigation/admin/2015/33-9968.pdf.
---------------------------------------------------------------------------

(b) FINRA Rule 5310 Best Execution Rule and Related Information
    As discussed in greater detail in Sections II.C and IV., FINRA has
a rule for its members that details their best execution
obligations.\293\ Specifically, Rule 5310(a)(1) states that ``[i]n any
transaction for or with a customer or customer of another broker-
dealer, a member and persons associated with a member shall use
reasonable diligence to ascertain the best market for the subject
security and buy or sell in such market so that the resultant price to
the customer is as favorable as possible under prevailing market
conditions.'' \294\ FINRA's rule applies ``not only where the member
acts as agent for the account of its customer but also where
transactions are executed as principal'' \295\ and cannot be
transferred to others.\296\ Interpositioning is expressly
prohibited.\297\ Like the position taken by the Commission,\298\
FINRA's rule lists a set of non-exclusive ``factors that will be
considered in determining whether a member has used `reasonable
diligence.'' The five factors listed are:
---------------------------------------------------------------------------

    \293\ Rule 5310, which first became effective in May 2012,
consolidated FINRA members' best execution requirements that were
based largely on NASD Rule 2320 and NASD Interpretive Guidance with
Respect to Best Execution Requirements, NASD IM-2320, as well as new
provisions. FINRA, Regulatory Notice 12-13, SEC Approves
Consolidated FINRA Best Execution Rule, available at https://www.finra.org/rules-guidance/notices/12-13. As previously noted
supra in note 129, in addition to FINRA's best execution rule, FINRA
Rule 3110(b)(1) requires broker-dealers to have procedures for
compliance with FINRA rules (including its best execution rule) and
Federal securities laws and regulations. Separately, FINRA Rules
3130(b) and (c) require the chief executive officer (or equivalent
officer) of a FINRA member to certify annually that the member has
in place processes to establish, maintain, review, test and modify
written compliance policies and written supervisory procedures
reasonably designed to achieve compliance with applicable FINRA
rules, MSRB rules, and Federal securities laws and regulations. See
also, FINRA Regulatory Notice 21-12, supra note 174, at 9 (``FINRA
has also advised Member firms should have effective procedures in
place to ensure they are fulfilling their best execution obligations
during extreme market conditions'').
    \294\ FINRA Rule 5310(a)(1), available at https://www.finra.org/rules-guidance/rulebooks/finra-rules/5310. FINRA rule 5310
recodified FINRA's predecessor, the NASD, rule and interpretative
material (IM) governing best execution and interpositioning, NASD
Rule 2320 and IM-2320. FINRA's most recent regulatory guidance on
Rule 5310 is contained in Regulatory Notice 15-46, Best Execution:
Guidance on Best Execution Obligations in Equity, Options and Fixed
Income Markets (Nov. 2015) (``FINRA Regulatory Notice 15-46''),
available at https://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_15-46.pdf; and Regulatory
Notice 21-23, Best Execution and Payment for Order Flow (June 23,
2021) (``FINRA Regulatory Notice 21-23'') available at https://www.finra.org/sites/default/files/2021-06/Regulatory-Notice-21-23.pdf.
    \295\ FINRA Rule 5310(e). This paragraph also states that a
broker-dealer's duty of best execution is ``distinct from the
reasonableness of commission rates, markups, or markdowns, which are
governed by Rule 2121 and its Supplementary Material.'' Id.
    \296\ FINRA Rule 5310.09(a).
    \297\ FINRA Rule 5310(a)(2). This subparagraph is one of a
number of the rule's specific provisions addressing
interpositioning. For a discussion of the related burdens and
prohibitions imposed by FINRA in connection with interpositioning,
see the discussion of FINRA Rules 5310(b), (c), and (d) in Section
IV.A., including the text accompanying supra notes 149 and 150.
    \298\ See Order Execution and Routing Practice Release, supra
note 22, at 75422, and the accompanying discussion.

    i. the character of the market for the security (e.g., price,
volatility, relative liquidity, and pressure on available
communications);
    ii. the size and type of transaction;
    iii. the number of markets checked;
    iv. accessibility of the quotation; and
    v. the terms and conditions of the order which result in the
transaction, as communicated to the member and persons associated
with the member.\299\
---------------------------------------------------------------------------

    \299\ FINRA Rule 5310(a)(1).

    FINRA's best execution rule and related guidance \300\ addresses
how its members' obligations and these factors are accounted for and
considered. For example, for debt securities, FINRA Rule 5310.03
explains that the term ``quotation'' in its ``accessibility of the
quotation'' factor ``refers to either dollar (or other currency)
pricing or yield pricing'' and that ``[i]n the absence of
accessibility, members are not relieved from taking reasonable steps
and employing their market expertise in achieving the best execution of
customer orders.'' \301\ FINRA Rule 5310.06 also states that FINRA
members ``must have written policies and procedures in place that
address how the member will determine the best inter-dealer market for
such a security in the absence of pricing information or multiple
quotations and must document its compliance with those policies and
procedures.''
---------------------------------------------------------------------------

    \300\ FINRA Rule 5310 includes supplementary material which
addresses: (i) the execution of marketable customer orders; (ii) the
definition of ``market;'' (iii) debt securities; (iv) executing
brokers; (v) the use of another broker, a broker's broker, to
execute a customer's orders; (vi) orders involving securities with
limited quotation or pricing information; (vii) orders involving
foreign securities; (viii) customer instructions for order handling;
and (ix) the regular and rigorous review of execution quality. The
text of FINRA Rule 5310 is available at https://www.finra.org/rules-guidance/rulebooks/finra-rules/5310. Regulatory Notices 15-46 and
21-23 are FINRA guidance documents for its best execution rule.
    \301\ FINRA Rule 5310.03.
---------------------------------------------------------------------------

    FINRA Rule 5310.07 also addresses orders involving foreign
securities.

``Even though a security does not trade in the U.S., members still have
an obligation to seek best execution for customer orders involving any
foreign security.'' \302\ ``[A] member that handles customer orders
involving foreign securities that do not trade in the U.S. must have
specific written policies and procedures in place regarding its
handling of customer orders for these securities that are reasonably
designed to obtain the most favorable terms available for the customer,
taking into account differences that may exist between U.S. markets and
foreign markets.'' \303\ Referencing two of its factors to be
considered, FINRA Rule 5310.07 states that ``the character of the
particular foreign market and the accessibility of quotations in
certain foreign markets may vary significantly'' and that ``the
determination as to whether a member has satisfied its best execution
obligations necessarily involves a `facts and circumstances'
analysis.'' \304\ Further, for customer orders involving a foreign
security FINRA requires its members to ``have specific written policies
and procedures in place regarding its handling of customer orders for
these securities that are reasonably designed to obtain the most
favorable terms available for the customer.'' \305\
---------------------------------------------------------------------------

    \302\ FINRA Rule 5310.07.
    \303\ Id.
    \304\ Id. The rule also states that ``best execution obligations
also must evolve as changes occur in the market that may give rise
to improved executions [and] members also must regularly review
these policies and procedures to assess the quality of executions
received and update or revise the policies and procedures as
necessary.''
    \305\ Id.
---------------------------------------------------------------------------

    FINRA rules address two situations where a member's best execution
obligation is modified or no longer applicable. If a broker-dealer
``receives an unsolicited instruction from a customer to route that
customer's order to a particular market for execution, the member is
not required to make a best execution determination beyond the
customer's specific instruction.'' \306\ FINRA Rule 5310.04 addresses a
specific situation where its best execution rule does not apply. The
rule ``does not apply in instances when another broker-dealer is simply
executing a customer order against the member's quote.'' The rule
explains that ``[t]he duty to provide best execution to customer orders
received from other broker-dealers arises only when an order is routed
from the broker-dealer to the member for the purpose of order handling
and execution.'' \307\
---------------------------------------------------------------------------

    \306\ FINRA Rule 5310.08. FINRA does require, however, that the
broker-dealer process the ``order promptly in accordance with [its]
terms . . . [and] where a customer has directed that an order be
routed to another specific broker-dealer,'' that broker-dealer
receiving the directed order would be subject to the duty of best
execution with respect to the customer's order. Id.
    \307\ FINRA Rule 5310.04 (emphasis added).
---------------------------------------------------------------------------

    FINRA Rule 5310 addresses a broker-dealer's best execution-related
obligations to determine order execution quality. FINRA Rule 5310.09(a)
requires that ``[a] member that routes customer orders to other broker-
dealers for execution on an automated, non-discretionary basis, as well
as a member that internalizes customer order flow, must have procedures
in place to ensure the member periodically conducts regular and
rigorous reviews of the quality of the executions of its customers'
orders if it does not conduct an order-by-order review.'' \308\ This
``regular and rigorous'' review must be conducted at a minimum no less
frequently than quarterly unless, based on a member's business, ``more
frequent reviews are needed.'' Reviews are required to be done on a
security-by-security and type-of-order basis.\309\ Execution quality
reviews must compare customer execution quality to the execution
quality of other markets that are not used for customer order
execution.\310\ However, FINRA Rule 5310.09(c) allows a broker-dealer
to rely on another broker-dealer's regular and rigorous review if the
broker-dealer seeking to rely ``routes its order flow to another member
that has agreed to handle that order flow as agent for the customer
(e.g., a clearing firm or other executing broker-dealer)'' and ``as
long as the statistical results and rationale of the review are fully
disclosed to the member and the member periodically reviews how the
review is conducted, as well as the results of the review.'' \311\
Issues associated with payment for order flow are also addressed in
FINRA's best execution rule and guidance. FINRA recently issued best
execution guidance that stated that ``firms that provide payment for
order flow for the opportunity to internalize customer orders cannot
allow such payments to interfere with their best execution
obligations.'' \312\ For example, ``inducements such as payment for
order flow and internalization may not be taken into account in
analyzing market quality.'' \313\
---------------------------------------------------------------------------

    \308\ FINRA Rule 5310.09(a). FINRA has stated that there are two
situations where an order-by-order review would satisfy best
execution requirements when a ``regular and rigorous review alone .
. . may not'' do so. One involves certain larger-sized security
orders. See FINRA Regulatory Notice 15-46, supra note 294, at 3
(``when routing or internally executing larger-sized orders in any
security, regular and rigorous review alone (as opposed to an order-
by-order review) may not satisfy best execution requirements, given
that the execution of larger-size orders ``often requires more
judgment in terms of market timing and capital commitment'' (quoting
NASD Notice to Members 01-22 at n. 13)). The other circumstance
involves ``any orders that a member firm determines to execute
internally'' which, according to FINRA Regulatory Notice 21-23,
``are subject to an order-by-order best execution analysis.'' Id.,
supra note 294, at 3. FINRA guidance includes commentary that
advances in technology make ``order-by-order review of execution
quality [ ] increasingly possible for a range of orders in equity
securities and standardized options. Id. Although the text of FINRA
Rule 5310 and its interpretive guidance refer to an ``order-by-order
review'' in contrast to the ``regular and rigorous review'' detailed
in Rule 5310.09, it is our understanding that FINRA has not directly
addressed what an ``order-by-order review'' entails.
    \309\ FINRA Rule 5310.09(a).
    \310\ ``[A] member must determine whether any material
differences in execution quality exist among the markets trading the
security and, if so, modify the member's routing arrangements or
justify why it is not modifying its routing arrangements.'' FINRA
Rule 5310.09(b). FINRA has identified eight factors for members to
consider in order to assure that order flow is directed to markets
providing the most beneficial terms for a member's customers'
orders. These factors are discussed in the text accompanying supra
note 299.
    \311\ FINRA Rule 5310.09(c).
    \312\ FINRA Regulatory Notice 21-23, supra note 294, at 4.
    \313\ Id. FINRA's guidance stated that ``the possibility of
obtaining price improvement is a heightened consideration when a
broker-dealer receives payment for order flow.'' Id. (citation
omitted).
---------------------------------------------------------------------------

    ``In other words, . . . firms may not negotiate the terms of order
routing arrangements for those customer orders in a manner that reduces
the price improvement opportunities that otherwise would be available
to those customer orders absent payment for order flow.'' \314\
---------------------------------------------------------------------------

    \314\ Id. (citing FINRA Regulatory Notice 15-46, supra note 294,
at n.25 (``For example, if a firm obtains price improvement at one
venue of $0.0005 per share, and it could obtain mid-point price
improvement at another venue of $0.025 per share, the firm should
consider the opportunity of such midpoint price improvement on that
other venue as part of its best execution analysis.'')).
---------------------------------------------------------------------------

    FINRA publishes reports that include the results of its examination
program's annual review of member best execution compliance. These
reports, covering examinations from 2017 through 2021, include a series
of findings and observations on various aspects of Rule 5310.\315\ In
each year, FINRA observed some noncompliance with Rule 5310. Among the
points made in each report, FINRA reported observing some firms that
did not: (1) assess execution in competing markets; (2) conduct an
adequate review on a type-of-order basis; (3) evaluate certain required
factors when conducting regular and rigorous review; and, in more
recent

years, (4) consider and address potential conflicts of interest in
conflicts of interest relating to routing of orders to affiliated
broker-dealers, ATSs, or market centers that provide payment for order
flow or other routing inducements.\316\
---------------------------------------------------------------------------

    \315\ Each of these reports is available at https://www.finra.org/media-center/reports-studies. For 2017 through 2019,
the reports are titled ``FINRA Report on Examination Findings.''
More recent reports are titled ``Report on FINRA's Examination and
Risk Monitoring Program.''
    \316\ Id.
---------------------------------------------------------------------------

(c) MSRB Rule G-18 Best Execution Rule and Guidance
    The MSRB's adopted its best execution rule, Rule G-18, in 2015
which became effective on March 21, 2016.\317\ It is generally modeled
after and similar to FINRA Rule 5310.\318\ It extends the outline of
``reasonable diligence'' to include ``the information reviewed to
determine the current market for the subject security or similar
securities,'' provides more granular detail regarding transactions in
which the broker-dealer acts in a principal capacity, and directs at
least annual reviews of best execution (versus at least quarterly
reviews required by FINRA). Unlike FINRA Rule 5310, MSRB Rule G-48(e)
provides an exception from the requirements of Rule G-18 for all
transactions with sophisticated municipal market professionals, defined
in MSRB Rule D-15.\319\ According to FINRA and the MSRB, there are two
instances where ``material differences'' exist between the MSRB's best
execution guidance and FINRA's.\320\ They involve the regular and
rigorous review of execution quality required by members,\321\ and the
timeliness of executions consistent with reasonable diligence.\322\
MSRB Rule G-18.08(a) requires a broker-dealer to, at a minimum, conduct
annual reviews of its policies and procedures for determining the best
available market for the execution of its customers' transactions. MSRB
Rule G-18.08(b) provides that where a broker-dealer routes its
customers' transactions to another broker-dealer, and that broker-
dealer has agreed to handle those transactions as agent or riskless
principal for the customer, the routing broker-dealer may rely on the
other broker-dealer's periodic reviews as long as the results and
rationale of the reviews are fully disclosed to the broker-dealer and
the broker-dealer periodically reviews how the other broker-dealer's
reviews are conducted and the results of such reviews.\323\
---------------------------------------------------------------------------

    \317\ The full text of the MSRB rule is available at https://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G-18.aspx. The rule applies to brokers, dealers, and municipal
securities dealers. In addition, MSRB Rule G-28 requires broker-
dealers to have procedures for compliance with MSRB rules and the
Exchange Act and rules thereunder. As previously noted in supra note
48, for ease of discussion and consistency, when discussing the MSRB
rule, the release refers to these entities collectively as ``broker-
dealers.'' The MSRB issued ``Implementation Guidance on MSRB Rule G-
18, on Best Execution'' on November 20, 2015 (``MSRB 2015
Guidance''), available at https://www.msrb.org/~/media/Files/MISC/
Best-Ex-Implementation-Guidance.ashx. An updated version of portions
of that guidance from February 7, 2019 (``MSRB Notice 2019-05'') is
available at https://www.msrb.org/-/media/Files/Regulatory-Notices/Announcements/2019-05.ashx??n=1. The MSRB and FINRA coordinated
their issuance of independent guidance in 2015 with each notice
including a statement that the guidance being issued was
``consistent in all material respects with guidance on best
execution obligations [being published by the other SRO] . . .
except where the rule or context otherwise specifically requires.''
MSRB 2015 Guidance, at n. 1; FINRA Regulatory Notice 15-46, supra
note 294, at n. 1. The MSRB has also issued information for
investors available at https://www.msrb.org/msrb1/pdfs/Best-Execution-Investors-Perspective.pdf.
    \318\ See sections II.C and IV for detailed discussions of Rule
G-18. The discussion in this section of the economic analysis is
largely limited to identifying the differences between Rule G-18 and
FINRA Rule 5310.
    \319\ MSRB Rule G-48 and paragraph (e) provide that ``a broker,
dealer, or municipal securities dealer's obligations to a customer
that it reasonably concludes is a Sophisticated Municipal Market
Professional, or SMMP, as defined in Rule D-15, shall be modified''
such that ``[t]he broker, dealer, or municipal securities dealer
shall not have any obligation under Rule G-18 to use reasonable
diligence to ascertain the best market for the subject security and
buy or sell in that market so that the resultant price to the SMMP
is as favorable as possible under prevailing market conditions.''
See supra note 120.
    \320\ FINRA Regulatory Notice 15-46, supra note 294, at 12 n. 1;
MSRB Notice 2019-05, supra note 317, at 4 n.1. In addition to these
``material differences,'' the MSRB guidance also expressly states
that the provisions of Rule G-18 do not apply to transactions in
municipal fund securities.'' MSRB Rule G-18.09. The FINRA guidance
has no comparable position.
    \321\ The MSRB, ``[i]n adopting Rule G-18, and paragraph .08 of
the Supplementary Material specifically, [ ] did not include
provisions that are contained in FINRA Rule 5310 pertaining to
``regular and rigorous review of execution quality,'' to tailor the
rule to the characteristics of the municipal securities market.''
MSRB Notice 2019-05, supra note 317, at 7 n.12.
    \322\ FINRA Regulatory Notice 15-46, supra note 294, at 12 n. 1.
    \323\ For a discussion of how the MSRB has interpreted the
obligations of introducing brokers, see supra note 229.
---------------------------------------------------------------------------

    The other material difference between FINRA and MSRB best execution
rules can be found in MSRB Rule G-18.03. According to this rule, ``[a]
dealer must make every effort to execute a customer transaction
promptly, taking into account prevailing market conditions. In certain
market conditions a dealer may need more time to use reasonable
diligence to ascertain the best market for the subject security.''
\324\ FINRA Rule 5310 has no similar provision noting the potential
need for more time.
---------------------------------------------------------------------------

    \324\ MSRB Rule G-18.03.
---------------------------------------------------------------------------

    MSRB does not have authority to bring enforcement actions itself.
Rather, FINRA and the Commission may enforce MSRB rules.
2. Best Execution Review Processes
    Policies and procedures for reviewing the execution quality of
customer orders vary across broker-dealers. Under the existing SRO
rules and guidance, broker-dealers \325\ that route to clearing or
executing brokers on an agency basis may rely on the best execution
review of their clearing firm or executing brokers. Other broker-
dealers may use third-party transactions costs analysis (TCA) services
and internal review systems, including best execution committees.
Currently, broker-dealers review best execution to standards set by
FINRA Rule 5310 or MSRB Rule G-18, as applicable.\326\ FINRA Rule 5310
requires at least a quarterly review of execution quality. MSRB Rule G-
18 requires an annual review of best execution policies and procedures
that takes into account execution quality obtained under those policies
and procedures, among other things. In performing reviews of customers'
order execution quality, broker-dealers compare the execution actually
achieved to the execution quality in other markets that were not used.
Overall, these processes help broker-dealers to evaluate whether or not
access to a specific market will improve customer execution quality
given cost of access. FINRA Rule 5310.02 provides a ``market''
definition and states that broker-dealers must not mandate that
``certain trading venues have less relevance than others in the course
of determining a firm's best execution obligations.'' What constitutes
a relevant/material market to access varies based on the needs of the
individual customer order and estimated changes in their transaction
costs. A best execution policy including a documented process of venue
selection aids this decision.
---------------------------------------------------------------------------

    \325\ These broker-dealers can include introducing brokers as
proposed to be defined by this rule, but FINRA's rule applies more
generally.
    \326\ See supra Section II.C for a detailed discussion of FINRA
and MSRB best execution review requirements.
---------------------------------------------------------------------------

    Introducing brokers perform best execution reviews by evaluating
the execution quality achieved by brokers to which they route their
customers' orders. As discussed above in this section, introducing
brokers \327\ may rely on the best execution review processes of their
routing or executing brokers and use these to evaluate the execution

quality of orders by comparing execution statistics of executing
brokers, with which the introducing broker has a relationship. The
Commission believes this is currently done by comparing execution
statistics in aggregate, rather than on an order-by-order basis, except
where an introducing broker is following FINRA's statements in its
regulatory notice regarding order-by-order best execution reviews.\328\
Introducing brokers typically have pre-arranged agreements with a small
number of executing brokers, which vary by introducing broker.\329\
This may lead to introducing brokers principally relying on execution
statistics from these executing brokers to determine whether customers'
orders are receiving best execution. While the FINRA rule requires
introducing brokers to review the methodology and results of its
executing broker's regular and rigorous review of its execution quality
on a quarterly basis, it does not specifically require the introducing
broker to compare the execution quality of its executing broker(s) to
what it would have received from other executing brokers.\330\
---------------------------------------------------------------------------

    \327\ All broker-dealers who route to executing or clearing
brokers on an agency basis may use this reliance, per FINRA Rule
5310, for the purposes of best execution.
    \328\ See supra note 308 for further discussion on FINRA's rules
and guidance related to broker-dealers reviewing the execution
quality of customer orders.
    \329\ See Henry F. Minnerop, The Role and Regulation of Clearing
Brokers-Revisited, 75 Bus. Lawyer 2201 (Summer 2020), available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3663233
(retrieved from Elsevier database).
    \330\ See FINRA Rule 5310.09(c), Regular and Rigorous Review of
Execution Quality.
---------------------------------------------------------------------------

    Executing brokers are able to conduct a more thorough review of
execution quality of the orders they receive. Executing brokers review
execution quality by comparing execution statistics of executions
received given particular execution methods, e.g., routing to a
particular market center or internalization. The Commission
preliminarily believes this review is highly heterogeneous among
executing brokers (i.e., some use third party transaction cost analysis
(``TCA'') services exclusively while others supplement and verify their
own analysis with third party TCA statistics), with some brokers
performing very rigorous comparisons of executions using various
methods, and other brokers performing a more cursory review.
    Some brokers may utilize third-party analysis in their execution
quality reviews. In order to evaluate their execution quality, some
brokers may send information on their orders to third parties TCA
services to produce independent order execution quality statistics. TCA
components may include, but are not necessarily limited to, fees,
taxes, rebates, spreads, delay costs, price appreciation, market
impact, timing risk, and opportunity costs. For example, TCA service
providers in the NMS stock and options markets may produce execution
quality reports for their clients which contain, in addition to other
metrics, information on the percentage of trades receiving price
improvement, percentage of trades at or within the NBBO, average
savings per share from price improvement, liquidity multiple (i.e.,
average size of order execution at or better than the NBBO at the time
of order routing, divided by average quoted size), execution speed, and
effective to quoted spread ratios. In NMS Stocks, broker-dealers may
also utilize Rule 605 reports to help evaluate execution quality at
different market centers, including market to which they may not route
orders.\331\
---------------------------------------------------------------------------

    \331\ See supra note 223 and accompanying discussion for more
information on Rule 605 reports.
---------------------------------------------------------------------------

    Some broker-dealers use best execution committees (BECs) to
evaluate their execution quality and establish their best execution
policies and procedures. Order-by-order reviews are typically reserved
for large orders, which likely leaves the execution quality review of
retail orders as a task to be done in aggregate. BECs meet
periodically, as often as monthly, to review execution quality of all
applicable order types, compare order routing practices, policies, and
procedures to industry standards, and maintain written documentation
for order execution and evaluation. BEC members may consist of senior
trading representatives along with members of the broker-dealer's
compliance, legal, and operational risk departments.
3. Description of Markets and Broker-Dealer Order Handling and
Execution Practices
    Broker-dealers execute orders from their customers in a variety of
ways, which may depend on the nature of the market, broker-dealer, or
customer, or characteristics of the order such as size. Some broker-
dealers may act on a purely agency basis by routing orders to the best
available quotes set by other broker-dealers or third-party market
makers on exchanges and ATSs or at other OTC market centers, some
broker-dealers may choose to execute the orders on a principal basis,
and some may do both.
    Certain conflicts of interest may arise in the handling and
execution of customer orders that exacerbate the principal-agent
problem between the customer and broker-dealer. Common types of
conflicts of interest that may exacerbate the principal-agent problem
can involve: (1) a broker-dealer routing a customer order in exchange
for a payment or a lower fee; or (2) a broker-dealer seeking to
transact in a principal capacity with a customer order, which involves
trading off the spread the broker-dealer can earn on the transaction vs
the price the customer must pay; or (3) a broker-dealer routing a
customer order to a trading venue or broker-dealer with which it may
have a relationship, such as a broker-dealer routing a customer order
to an affiliated ATS.\332\ However, SRO rules address the extent to
which certain specific situations presenting conflicts of interest are
prohibited from influencing a broker-dealer's duty of best execution.
For example FINRA rules and guidance (e.g., FINRA Regulatory Notice 21-
23) require that ``member firms may not let payment for order flow
interfere with their duty of best execution.'' \333\
---------------------------------------------------------------------------

    \332\ See supra Section III.A.
    \333\ See supra Section III.A.2.
---------------------------------------------------------------------------

    The below sections discuss in more detail the trading environment
and broker-dealer order handling and execution practices in different
asset classes. They also discuss the role that certain conflicts of
interest such as PFOF and principal trading play in the handling and
execution of retail orders in different asset classes.
(a) NMS Securities
i. NMS Stocks
a. NMS Stocks Trading Services Overview
    Market centers compete to attract order flow in NMS stocks. At the
same time, market participants compete to provide liquidity in NMS
stocks within market centers. As shown in Table 1, in Q1 of 2022, NMS
stocks were traded on 16 registered securities exchanges \334\

and off-exchange at 32 NMS Stock ATSs and at over 230 other FINRA
members, including OTC market makers.\335\ OTC market markers include 6
wholesalers that internalize the majority of individual investor
marketable orders.\336\ These numerous market centers match traders
with counterparties, provide a framework for price negotiation and/or
provide liquidity to those seeking to trade.
---------------------------------------------------------------------------

    \334\ Most of these 16 registered securities exchanges are owned
by three exchange families. Currently, CBOE Global Markets owns:
Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc. (``Cboe BZX''),
Cboe EDGA Exchange, Inc., and Cboe EDGX Exchange, Inc. (``Cboe
EDGX''); the Nasdaq Inc. owns: Nasdaq BX, Inc. (``Nasdaq BX''),
Nasdaq PHLX LLC (``Nasdaq Phlx''), and The Nasdaq Stock Market LLC
(``Nasdaq''); and the Intercontinental Exchange Inc. owns: NYSE,
NYSE American LLC (``NYSE American''), NYSE Arca, Inc. (``NYSE
Arca''), NYSE Chicago, Inc., and NYSE National, Inc. Other
registered securities exchanges that trade NMS stocks and do not
belong to one of these exchange groups include: Investors Exchange
LLC (``IEX''), Long-Term Stock Exchange, Inc., MEMX LLC, and MIAX
Pearl, LLC (``MIAX PEARL''). Among these exchanges, eight trade only
equities and eight trade both equities and options. The Commission
has approved BOX Exchange LLC (``BOX'') to trade certain equity
securities that would be NMS stocks on a facility, BSTX LLC
(``BSTX''), but BSTX is not yet operational. See Securities Exchange
Act Release Nos. 94092 (Jan. 27, 2022), 87 FR 5881 (Feb. 2, 2022)
(SR-BOX-2021-06) (approving the trading of equity securities on the
exchange through a facility of the exchange known as BSTX); 94278
(Feb. 17, 2022), 87 FR 10401 (Feb. 24, 2022) (SR-BOX-2021-14)
(approving the establishment of BSTX as a facility of BOX). BSTX
cannot commence operations as a facility of BOX until, among other
things, the BSTX Third Amended and Restated Limited Liability
Company Agreement approved by the Commission as rules of BOX is
adopted. Id. at 10407.
    \335\ See Concept Release on Equity Market Structure, Exchange
Act Release No. 61358 (Jan. 14, 2010), 75 FR 3593 (Jan. 21, 2010) at
3598-3560 (for a discussion of the types of trading centers); see
also Form ATS-N Filings and Information, available at https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm. Some
academic studies attribute the fragmented nature of this market, in
part, to certain provisions of Regulation NMS. See, e.g., Maureen
O'Hara & Mao Ye, Is Market Fragmentation Harming Market Quality?,
100 J. Fin. 459 (2011); Amy Kwan, et. al., Is Market Fragmentation
Harming Market Quality?, 115 J. Fin. 330 (2015).
    \336\ The six OTC market makers that are classified as
wholesalers for purposes of this release are the OTC market makers
to which the majority of marketable orders originating from retail
brokers were routed as identified from information from retail
broker Rule 606(a)(1) reports from Q1 2022. Rule 606(a)(1) requires
broker-dealers to produce quarterly public reports containing
information about the venues to which the broker-dealer regularly
routed non-directed orders for execution, including any payment
relationship between the broker-dealer and the venue, such as any
PFOF arrangements. See 17 CFR 242.606(a)(1).
---------------------------------------------------------------------------

    Market centers' primary customers are broker-dealers that route
their own orders or their customers' orders for execution. Market
centers may compete with each other for these broker-dealers' order
flow on a number of dimensions, including execution quality. They also
may innovate to differentiate themselves from other trading centers to
attract more order flow. While registered exchanges cater to a broader
spectrum of investors, ATSs and OTC market makers, including
wholesalers, tend to focus more on providing trading services to either
institutional or individual investor orders.

                    Table 1--Q1 2022 NMS Stock Share Volume Percentage by Market Center Type
----------------------------------------------------------------------------------------------------------------
                                                                                Percentage  of  Percentage  of
                       Market center type                           Venue count    total  share    off- exchange
                                                                                volume       share volume
----------------------------------------------------------------------------------------------------------------
Exchanges.......................................................              16            59.7  ..............
NMS Stock ATSs..................................................              32            10.2            25.2
Wholesalers \a\.................................................               6            23.9            59.4
Other FINRA Members.............................................             232             6.3            15.6
----------------------------------------------------------------------------------------------------------------
This table reports for Q1 2022 the percentage of NMS stock share volume executed by market center type and the
  percentage of off-exchange share volume by market centers type. Venue Count lists the number of venues in each
  market center category. Percentage of Total Share Volume is the percentage of all NMS stock share volume (on-
  exchange plus off-exchange) executed by the type of market center. Percentage of off-Exchange Share Volume is
  the percentage of off-exchange share volume executed by the type of market center. Exchange share volume and
  total market volume are based on CBOE Market Volume Data on monthly share volume executed on each exchange and
  share volume reported in FINRA Trade Reporting Facilities (TRFs).\b\ NMS Stock ATSs, wholesalers and Other
  FINRA members share volume are based on monthly FINRA OTC Transparency data on aggregated NMS stock trading
  volume executed on individual ATSs and over-the-counter at Non-ATS FINRA members.\c\ The Percentage of Off-
  Exchange Share Volume is calculated by dividing the NMS Stock ATS, wholesaler and FINRA member share volume
  from the FINRA Transparency Data by the total TRF share volume reported in CBOE Market Volume Data.
  Percentages do not add up to 100 percent due to rounding.
\a\ See supra note 336 for details regarding how FINRA member OTC market makers are classified as wholesalers
  for purposes of this release.
\b\ Cboe, U.S. Historical Market Volume Data, available at https://cboe.com/us/equities/market_statistics/historical_market_volume/. Trade Reporting Facilities (TRFs) are facilities through which FINRA members report
  off-exchange transactions in NMS stocks, as defined in SEC Rule 600(b)(47) of Regulation NMS. See generally
  FINRA, Trade Reporting Facility, available at https://www.finra.org/filing-reporting/trade-reporting-facility-trf trf.
\c\ FINRA OTC (Non-ATS) Transparency Data, Monthly Statistics, available at https://otctransparency.finra.org/otctransparency/OtcData otctransparency/OtcData; FINRA OTC (ATS Block)Transparency Data, Monthly Statistics, available at https://otctransparency.finra.org/otctransparency/AtsBlocksDownload. The FINRA OTC (Non-ATS) Transparency Data may not
  contain all share volume transacted by a wholesaler or FINRA member because FINRA aggregates ``[s]ecurity-
  specific information for firms with `de minimis' volume outside of an ATS'' and ``publishe[s it] on a non-
  attributed basis.'' FINRA, OTC (ATS & Non-ATS) Transparency, Overview, available athttps://www.finra.org/
  filing-reporting/otc-transparency.

    Table 1 displays NMS stock share volume percentage by market center
type for Q1 2022. Exchanges execute approximately 60% of total share
volume in NMS stocks, while off-exchange market centers execute
approximately 40%. The majority of off-exchange share volume is
executed by wholesalers, who execute almost one quarter of total share
volume (23.9%) \337\ and about 60% of off-exchange share volume.\338\
NMS Stock ATSs execute approximately 10% of total NMS stock share
volume and 25% of off-exchange share volume. Other FINRA members,
besides wholesalers and ATSs, execute approximately 15% of off-exchange
share volume. Wholesalers and other OTC market makers also operate
single dealer platforms (``SDPs'') where they operate as dealers to
internalize marketable institutional orders.\339\ One study found that
SDPs accounted for approximately 10% of off-exchange

trading volume in Q1 2022.\340\ Exchanges (via their rules) and ATSs
determine how orders compete with each other, wherein liquidity
suppliers set prices and wait for execution at their prices by
liquidity demanders. This interaction between liquidity providers and
demanders encompasses order-by-order competition. Unlike exchanges, for
which each exchange's rules determine competition in a non-
discretionary fashion, wholesalers execute or route orders in a
discretionary fashion.\341\ While some orders may be routed to a
central limit order book against which institutional investors may
execute (on the discretion of the wholesaler), institutional investors
generally consider order flow routed to a wholesaler to be
``inaccessible.'' \342\
---------------------------------------------------------------------------

    \337\ Of the six wholesalers identified in Q1 2022, two
accounted for approximately 66% of wholesalers' total executed share
volume of NMS stocks. This result suggests that just two wholesalers
account for a very large percentage of order flow coming from
individual investors. One study finds that the concentration of
wholesaler internalization, as measured by the Herfindahl-Hirschman
Index (HHI) of share volume executed across wholesalers, has
increased from 2018 to 2021. See Edwin Hu & Dermot Murphy,
Competition for Retail Order Flow and Market Quality (Working paper,
June 2022), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4070056 (retrieved from Elsevier database).
    \338\ The share volume reported for wholesalers in FINRA OTC
Transparency Data includes both individual investor orders executed
by wholesalers in a principal capacity, as well as other orders
executed by wholesalers in a principal capacity, such as
institutional orders executed on their single dealer platforms. It
does not include share volume that they executed in a riskless
principal capacity or share volume that was routed and executed at
another market center.
    \339\ Wholesalers and OTC market makers can execute orders
itself or instead further route the order to other venues. An SDP
always acts as the counterparty to any trade that occurs on the SDP.
See, e.g., FINRA, Investor Insights, Where Do Stocks Trade? (Dec. 3,
2021), available at https://www.finra.org/investors/insights/where-do-stocks-trade .
    \340\ See Rosenblatt Securities, US Equity Trading Venue Guide
(May 24, 2022), available at https://www.rblt.com/market-reports/rosenblatts-2021-us-equity-trading-venue-guide-2. SDP trading volume
would be included in the share volume percentage estimates for
wholesalers and other FINRA members in Table 1.
    \341\ A study estimates that the volume of individual investor
orders executed by wholesalers accounted for approximately 16% to
17% of consolidated share volume during Q1 2022. See Rosenblatt
Securities, An Update on Retail Market Share in US Equities (June
24, 2022), available at https://www.rblt.com/market-reports/trading-talk-an-update-on-retail-market-share-in-us-equities. However,
wholesalers are not completely focused on individual investor order
flow and some do offer services to institutional order flow.
    \342\ See, e.g., Jennifer Hadiaris, Cowen Market Structure:
Retail Trading -- What's going on, what may change, and what can you
do about it?, Insights (Mar. 23, 2021), available at https://www.cowen.com/insights/retail-trading-whats-going-on-what-may-change-and-what-can-institutional-traders-do-about-it/ (``Market
makers print most of these shares internally at their firm, so they
trade off-exchange. One way we have for isolating retail volume is
to look at the share of volume that trades off-exchange, but not in
a dark pool. We refer to this as `inaccessible liquidity.' This is
because most institutional orders--whether they are executed via
algos directly or by high touch desks--primarily go to exchanges and
dark pools.'').
---------------------------------------------------------------------------

    As a proxy for expected execution quality, quoted prices are a
dimension on which exchanges compete to attract order flow.
Specifically, exchanges are required to post the best bid and ask
prices available on the exchange at that time \343\ and broker-dealers
can observe those prices and choose to route orders to the exchange
posting the best prices at a given point in time. However, others who
provide trading services, such as ATSs and OTC market makers, do not
compete on this dimension.\344\ In other words, wholesalers generally
do not compete for order flow by posting competitive prices the way
exchanges do. They do not display or otherwise advertise the prices at
which they are willing to internalize individual investor orders at a
given point in time. This suggests that wholesalers attract order flow
by offering retail brokers more than just competitive price
improvement.\345\ In particular, wholesalers bundle their market access
services with execution services, thereby fully vertically integrating
order handling and execution services for their retail broker
customers.
---------------------------------------------------------------------------

    \343\ See Rule 602 of Regulation NMS.
    \344\ ATSs typically compete for institutional order flow by
offering innovative trading features such as distinct trading
protocols and segmentation options. They may also compete on fees.
In addition, they could include their ATS access in the broader set
of bundled services that the broker-dealer operator of the ATS
offers to its institutional investors.
    \345\ Wholesalers do not compete by quoting price at a given
point in time, but instead generally attract order flow by offering
prices that are on average better than displayed prices.
---------------------------------------------------------------------------

b. Rules Addressing Consolidated Market Data
    In 2020, the Commission adopted a new rule and amended existing
rules to establish a new infrastructure for consolidated market data
(``MDI Rules''),\346\ and the regulatory baseline for NMS stocks
includes these changes to the current arrangements for consolidated
market data. However, as discussed in more detail below, the MDI Rules
have not been implemented, and so they have not yet affected market
practice. As a result, the data used to measure the baseline below
reflects the regulatory structure in place for consolidated market data
prior to the implementation of the MDI Rules. Accordingly, this section
first will briefly summarize the regulatory structure for consolidated
market data prior to the implementation of the MDI Rules. It then will
discuss the current status of the implementation of the MDI Rules and
provide an assessment of the potential effects that the implementation
of the MDI Rules could have on the baseline estimations.
---------------------------------------------------------------------------

    \346\ See supra note 38, discussing MDI Adopting Release.
---------------------------------------------------------------------------

Regulatory Structure for Consolidated Market Data Prior to the MDI
Rules
    Consolidated market data are made widely available to investors
through the national market system, a system set forth by Congress in
section 11A of the Exchange Act \347\ and facilitated by the Commission
in Regulation NMS.\348\ Market data are collected by exclusive SIPs,
who consolidate that information and disseminate an NBBO and last sale
information. For quotation information, only the 16 exchanges that
currently trade NMS stocks provide quotation information to the SIPs
for dissemination in consolidated market data.\349\ FINRA has the only
SRO display-only facility (the ADF). No broker-dealer, however,
currently uses it to display quotations in NMS stocks in consolidated
market data. Disseminated quotation information includes each
exchange's current highest bid and lowest offer and the shares
available at those prices, as well as the NBBO.
---------------------------------------------------------------------------

    \347\ See supra note 13.
    \348\ 17 CFR 242.600 through 242.614.
    \349\ See supra note 334.
---------------------------------------------------------------------------

    For transaction information, currently all of the national
securities exchanges that trade NMS stocks and FINRA provide real-time
transaction information to the SIPs for dissemination in consolidated
market data. Such information includes the symbol, price, size, and
exchange of the transaction, including odd-lot transactions.
Unimplemented Market Data Infrastructure Rules
    Among other things, the unimplemented MDI Rules update and expand
the content of consolidated market data to include: (1) certain odd-lot
information; \350\ (2) information about certain orders that are
outside of an exchange's best bid and best offer (i.e., certain depth
of book data); \351\ and (3) information about orders that are
participating in opening, closing, and other auctions.\352\ The MDI
Rules also introduced a four-tiered definition of round lot that is
tied to a stock's average closing price during the previous month.\353\
For stocks with prices greater than $250, a round lot is defined as
consisting of between 1 and 40 shares, depending on the tier.\354\ The
MDI Rules also introduce a decentralized consolidation model under
which competing consolidators, rather than the existing exclusive SIPs,
will collect, consolidate, and disseminate certain NMS
information.\355\
---------------------------------------------------------------------------

    \350\ See 17 CFR 242.600(b)(59); MDI Adopting Release, supra
note 38, 86 FR at 18613. The Commission outlined a phased transition
plan for the implementation of the MDI Rules, including the
implementation of odd-lot order information. See MDI Adopting
Release, 86 FR at 18698-701.
    \351\ See MDI Adopting Release, supra note 38, 86 FR 18596.
    \352\ See id. at 18630.
    \353\ See id. at 18617.
    \354\ See id. The Commission adopted a four-tiered definition of
round lot: 100 shares for stocks priced $250.00 or less per share,
40 shares for stocks priced $250.01 to $1,000.00 per share, 10
shares for stocks priced $1,000.01 to $10,000.00 per share, and 1
share for stocks priced $10,000.01 or more per share.
    \355\ See id. at 18637.
---------------------------------------------------------------------------

    In the MDI Adopting Release, the Commission established a
transition period for implementation of the MDI Rules.\356\ The ``first
key milestone'' for

the transition period was to be an amendment of the effective national
market system plan(s), which ``must include the fees proposed by the
plan(s) for data underlying'' consolidated market data (``Proposed Fee
Amendment'').\357\ The compliance date for the MDI Rules was set with
reference to the date that the Commission approved the Proposed Fee
Amendment.\358\ The end of the transition period was to be at least two
years after the date the Commission approved the Proposed Fee
Amendment.\359\
---------------------------------------------------------------------------

    \356\ Id. at 18698-18701.
    \357\ Id. at 18699.
    \358\ See, e.g., id. at 18700 n. 355 (compliance date for
amendment to Rule 603(b) to be 180 calendar days from the date of
the Commission's approval of the amendments to the effective
national market system plan(s)).
    \359\ Id. at 18700-18701 (specifying consecutive periods of 90
days, 90 days, 90 days, 180 days, 90 days, a period for filing and
approval of another national market system plan amendment to
effectuate the cessation of the operations of the SIPs (with a 300-
day maximum time for Commission action after filing to approve or
disapprove the filing).
---------------------------------------------------------------------------

    The MDI Adopting Release did not specify a process for continuing
the transition period if the Commission disapproved the Proposed Fee
Amendment. On September 21, 2022, the Commission disapproved the
Proposed Fee Amendment, because the Participants had not demonstrated
that the proposed fees were fair, reasonable and not unreasonably
discriminatory.\360\ Accordingly, there currently is no date to begin
the at-least-two-year period for implementation of the MDI Rules, and
there is no date that can be reasonably estimated for the
implementation of the MDI Rules to be completed.
---------------------------------------------------------------------------

    \360\ Securities Exchange Act Release No. 95851 (Sept. 21, 2022)
(Order Disapproving the Twenty-Fifth Charges Amendment to the Second
Restatement of the CTA Plan and Sixteenth Charges Amendment to the
Restated CQ Plan).
---------------------------------------------------------------------------

    Given that the MDI Rules have not yet been implemented, they have
not affected market practice and therefore data that would be required
for a comprehensive quantitative analysis of a baseline that includes
the effects of the MDI Rules is not available. It is possible that the
baseline (and therefore the economic effects relative to the baseline)
could be different once the MDI Rules are implemented. The following
discussion reflects the Commission's assessment of the anticipated
economic effects of the MDI Rules as described in the MDI Adopting
Release.\361\
---------------------------------------------------------------------------

    \361\ See MDI Adopting Release, supra note 38, 86 FR 18741-
18799.
---------------------------------------------------------------------------

    The Commission anticipated that the new round lot definition will
result in narrower NBBO spreads for most stocks with prices greater
than $250 because, for these stocks, fewer odd-lot shares will need to
be aggregated together (possibly across multiple price levels) \362\ to
form a round lot and qualify for the NBBO.\363\ The reduction in
spreads will be greater in higher-priced stocks because the definition
of a round lot for these stocks will include fewer shares, such that
even fewer odd-lot shares will need to be aggregated together.\364\
This could cause statistics that are measured against the NBBO to
change because they will be measured against the new, narrower NBBO.
For example, execution quality statistics on price improvement for
higher-priced stocks may show a reduction in the number of shares of
marketable orders that received price improvement because price
improvement will be measured against a narrower NBBO. In addition, the
Commission anticipated that the NBBO midpoint in stocks priced higher
than $250 could be different under the MDI Rules than it otherwise
would be, resulting in changes in the estimates for statistics
calculated using the NBBO midpoint, such as effective spreads. In
particular, at times when bid odd-lot quotations exist within the
current NBBO but no odd-lot offer quotations exist (and vice versa),
the midpoint of the NBBO resulting from the rule will be higher than
the current NBBO midpoint.\365\ More broadly, the Commission
anticipated that the adopted rules will have these effects whenever the
new round lot bids do not exactly balance the new round lot offers.
However the Commission stated that it does not know to what extent or
direction such odd-lot imbalances in higher priced stocks currently
exist, so it is uncertain of the extent or direction of the
change.\366\
---------------------------------------------------------------------------

    \362\ The calculation of the NBBO includes odd-lots that, when
aggregated, are equal to or greater than a round lot. As stated in
CFR 242.600(b)(21)(ii), ``such aggregation shall occur across
multiple prices and shall be disseminated at the least aggressive
price of all such aggregated odd-lots.'' For example, if there is
one 50-share bid at $25.10, one 50-share bid at $25.09, and two 50-
share bids at $25.08, the odd-lot aggregation method would show a
protected 100-share bid at $25.09.
    \363\ For example, if there is one 20-share bid at $250.10, one
20-share bid at $250.09, and two 50-share bids at $250.08, prior to
MDI the NBB would be $250.08, as even aggregated together the odd
lot volume would not add up to at least a round lot. After MDI, the
NBB would be $25.09, as the odd-lot aggregation method would show a
protected 40-share round lot bid at $25.09.
    \364\ See supra note 354. An analysis in the MDI Adopting
Release showed that the new round lot definition caused a quote to
be displayed that improved on the current round lot quote 26.6% of
the time for stocks with prices between $250.01 and $1,000, and
47.7% of the time for stocks with prices between $1,000.01 and
$10,000. See MDI Adopting Release, supra note 38, 86 FR 18743.
    \365\ For example, if the NBB is $260 and the NBO is $260.10,
the NBBO midpoint is $260.05. Under the adopted rules a 40 share buy
quotation at $260.02 will increase the NBBO midpoint to $260.06.
Using this new midpoint, calculations of effective spread will be
lower for buy orders, but will be higher for sell orders.
    \366\ See MDI Adopting Release, 86 FR 18750.
---------------------------------------------------------------------------

    The Commission also anticipated that the MDI Rules could result in
a smaller number of shares at the NBBO for most stocks in higher-priced
round lot tiers.\367\ To the extent that this occurs, there could be an
increase in the frequency with which marketable orders must walk the
book to execute. This would affect statistics that are calculated using
consolidated depth information, such as measures meant to capture
information about whether orders received an execution of more than the
displayed size at the quote, i.e., ``size improvement.''
---------------------------------------------------------------------------

    \367\ However, this effect will depend on how market
participants adjust their order submissions. See id. at 18746, for
further discussion.
---------------------------------------------------------------------------

    The MDI Rules may also result in a higher number of odd-lot trades,
as the inclusion of odd-lot quotes that may be priced better than the
current NBBO in consolidated market data may attract more trading
interest from market participants that previously did not have access
to this information.\368\ However, the magnitude of this effect depends
on the extent to which market participants who rely solely on SIP data
and lack information on odd-lot quotes choose to receive the odd-lot
information and trade on it. The Commission states in the MDI Adopting
Release that it believes it is not possible to observe this willingness
to trade with existing market data.\369\
---------------------------------------------------------------------------

    \368\ See id. at 18754.
    \369\ See id.
---------------------------------------------------------------------------

    The MDI Rules may have implications for broker-dealers' order
routing practices. For those market participants that rely solely on
SIP data for their routing decisions and that choose to receive the
expanded set of consolidated market data, the Commission anticipated
that the additional information contained in consolidated market data
will allow them to make more informed order routing decisions. This in
turn would help facilitate best execution, which would reduce
transaction costs and increase execution quality.\370\
---------------------------------------------------------------------------

    \370\ See id. at 18725.
---------------------------------------------------------------------------

    The MDI Rules may also result in differences in the baseline
competitive standing among different trading venues, for several
reasons. First, for stocks with prices greater than $250, the
Commission anticipated that the new definition of round lots may affect
order flows as market participants who rely on consolidated data will
be aware of

quotes at better prices that are currently in odd-lot sizes, and these
may not be on the same trading venues as the one that has the best 100
share quote.\371\ Similarly, it anticipated that adding information on
odd-lot quotes priced at or better than the NBBO to expanded core data
may cause changes to order flow as market participants take advantage
of newly visible quotes.\372\ However, the Commission stated that it
was uncertain about the magnitude of both of these effects.\373\ To the
extent that it occurs, a change in the flow of orders across trading
venues may result in differences in the competitive baseline in the
market for trading services.
---------------------------------------------------------------------------

    \371\ See id. at 18744.
    \372\ See id. at 18754.
    \373\ See id. at 18745, 18754.
---------------------------------------------------------------------------

    Second, national securities exchanges and ATSs have a number of
order types that are based on the NBBO, and so the Commission
anticipated that the changes in the NBBO caused by the new round lot
definitions may affect how these order types perform and could also
affect other orders with which they interact.\374\ The Commission
stated that these interactions may affect relative order execution
quality among different trading platforms, which may in turn affect the
competitive standing among different trading venues, with trading
venues that experience an improvement/decline in execution quality
attracting/losing order flow.\375\ However, the Commission stated that
it was uncertain of the magnitude of these effects.\376\
---------------------------------------------------------------------------

    \374\ See id. at 18748.
    \375\ See id.
    \376\ See id.
---------------------------------------------------------------------------

    Third, the Commission anticipated that, as the NBBO narrows for
securities in the smaller round lot tiers, it may become more difficult
for the retail execution business of wholesalers to provide price
improvement and other execution quality metrics at levels similar to
those provided under a 100 share round lot definition.\377\ To the
extent that wholesalers are held to the same price improvement
standards by retail brokers in a narrower spread environment, the
wholesalers' profits from executing individual investor orders might
decline,\378\ and to make up for lower revenue per order filled in a
narrower spread environment, wholesalers may respond by changing how
they conduct their business in a way that may affect retail brokers.
However, the Commission stated that it was uncertain as to how
wholesalers may respond to the change in the round lot definition, and,
in turn, how retail brokers may respond to those changes, and so was
uncertain as to the extent of these effects.\379\ If wholesalers do
change how they conduct business, it may impact wholesalers'
competitive standing in terms of the execution quality offered,
particularly to individual investor orders.
---------------------------------------------------------------------------

    \377\ See id. at 18747.
    \378\ Individual investor orders typically feature lower adverse
selection than other types of orders, such as institutional orders.
It is generally more profitable for any liquidity provider,
including wholesalers, to execute against orders with lower adverse
selection risk. See, e.g., David Easley, Nicholas M. Kiefer &
Maureen O'Hara, Cream-skimming or profit-sharing? The curious role
of purchased order flow, 51 J. Fin. 811 (1996).
    \379\ See id. at 18748.
---------------------------------------------------------------------------

    Where implementation of the above-described MDI Rules may affect
certain numbers in the baseline, the description of the baseline below
notes those effects.
c. Market Access
    Some broker-dealers that connect directly to one or more exchanges
and other trading centers offer order routing to smaller broker-dealers
that may not directly connect to exchanges. This is, in part, driven by
the requirement that in order to directly route orders to an exchange,
broker-dealers need to be a member of that exchange.\380\ It is also
driven by economies of scale in being able to distribute high fixed
costs related to exchange connectivity and proprietary market data
feeds.\381\ Most large broker-dealers connect to multiple
exchanges.\382\ These broker-dealers may use their connections to
provide order-routing and execution services, such as access to smart
order routers (SORs), to smaller broker dealers who may find direct
connections to exchanges prohibitively expensive.\383\ To this end,
such smaller broker-dealers access exchanges through intermediaries,
i.e., larger broker-dealers, allowing these intermediaries to compete
with exchanges in the trade execution and order-routing markets.\384\
These intermediaries often compete on both the quality of their order
execution and the fees they charge.\385\
---------------------------------------------------------------------------

    \380\ Membership on an exchange also gives the broker-dealer
access to exchange-provided order routers that re-route orders to
other exchanges at a per-order fee.
    \381\ Broker-dealers may choose to incur these costs in order to
gain faster access through direct exchange connectivity as well as
proprietary exchange data feeds, both of which may improve order
handling and execution capabilities, and thus their competitive
position. See Section V.B.3.(e) of Market Data Infrastructure
Adopting Release (for discussions on broker-dealer competitive
trading strategies).
    \382\ See MDI Adopting Release, supra note 38, at 86 FR 18740
(for analysis indicating that 50 firms connected to all but one of
the exchanges in a sample of FINRA audit trail data from December
2016), available at https://www.govinfo.gov/content/pkg/FR-2021-04-09/pdf/2020-28370.pdf.
    \383\ The number of broker-dealers providing access is thus
limited due to the expenses of being an exchange member and ATS
subscriber. In addition, membership on an exchange also gives the
broker-dealer access to exchange-provided order routers that re-
route orders to other exchanges at a per-order fee. Thus, membership
on one exchange can effectively provide access, though not directly,
to all exchanges.
    \384\ Providing market access can mean rerouting customer orders
and it can also involve sponsoring access for the broker to send
customer orders directly to a market center.
    \385\ The types of fees charged by routing brokers can vary,
some charge a per-order/share fee or a fee that is part of other
bundled services they may offer.
---------------------------------------------------------------------------

d. Retail Order Handling in NMS Stocks
    The Commission estimates that in 2021 approximately 1,037 retail
brokers originated orders from retail investors in NMS stocks.\386\
Retail brokers route most of their customers' marketable order flow to
wholesalers.\387\ Wholesalers do not typically directly charge retail
brokers for their order routing and execution services. In fact, they
may pay some retail brokers for the opportunity to handle their order
flow with PFOF. Wholesalers' vertical integration of routing and
execution services for the orders of individual investors provides them
flexibility with regard to their handling of order flow. They utilize
sophisticated algorithmic trading technology to deliver their
services.\388\ In particular, wholesalers determine which orders to
internalize (i.e., execute in a principal capacity) and which to
execute in a riskless principal or agency capacity. Commission analysis
indicates that wholesalers

internalize over 90% of the executed dollar volume from individual
investor marketable orders that are routed to them and executed.\389\
---------------------------------------------------------------------------

    \386\ This number is estimated using CAT data for broker-dealers
that originated an order from an ``Individual Customer'' CAT account
type in 2021. See infra note 422 for more info CAT account types.
    \387\ Commission analysis of broker-dealer Rule 606 report order
routing data in infra Table 3 indicates that retail brokers route
over 90% of their marketable orders to wholesalers.
    \388\ Wholesalers, similar to other market makers, must
establish connections with the numerous venues in which they wish to
operate and provide liquidity. They also must design smart order
routers that can locate and provide liquidity in real time, as well
as maintain fast data processing capabilities that enable them to
respond to market conditions while abiding by the relevant trade
execution regulations. Wholesalers also face the costs associated
with price risk. As wholesalers trade against market participants,
they take positions at the opposite side, accumulating inventory.
Holding inventory exposes wholesaler profits to inventory (price)
risk, where the value of inventory, and hence, that of the
wholesaler's holdings, may fluctuate as security prices vary.
Scaling up the size of the business to ensure steady incoming flow
from opposite sides of the markets is a common strategy pursued by
wholesalers. This strategy enables them to execute buy and sell
transactions, offsetting order flow from opposite sides, reducing
the possibility of accumulating prolonged, unwanted inventory.
However, among other costs, scaling up requires more comprehensive,
efficient connectivity networks, and adds to the costs of
establishing and maintaining such networks.
    \389\ See analysis in infra Table 7.
---------------------------------------------------------------------------

    One aspect of the wholesaler business model is the segmentation of
the order flow of individual investors, which typically have lower
adverse selection risk than the orders of other types of market
participants.\390\ Wholesalers are market makers that can identify
orders with low adverse selection risk.\391\ Through segmentation,
wholesalers typically internalize marketable orders with lower adverse
selection risk and generally execute them at prices better than the
current NBBO, i.e., because of segmentation, wholesalers are typically
able to execute the marketable orders of individual investors at better
prices than they would receive if they were routed to an exchange. An
analysis of marketable NMS stock orders presented below indicates that
the orders that wholesalers internalize present lower adverse selection
risk and receive higher execution quality relative to marketable orders
wholesalers receive and execute in a riskless principal or agency
capacity.\392\ Additional results \393\ show that, relative to orders
executed on exchanges, orders internalized by wholesalers are
associated with lower price impacts (i.e., lower adverse selection
risk),\394\ lower effective half-spreads (i.e., higher price
improvement),\395\ and higher realized half-spreads (i.e., higher
potential profitability).\396\ Academic studies have also found that
retail orders in NMS stocks benefit from being segmented and
internalized by wholesalers, because wholesalers can offer the
segmented retail orders more price improvement due to their lower
adverse selection risk.\397\
---------------------------------------------------------------------------

    \390\ Wholesalers and other liquidity providers face adverse
selection risk when they accumulate inventory, for example, by
providing liquidity to more informed traders, because of the risk of
market prices moving away from market makers before they are able to
unwind their positions. Wholesalers and other market makers are
usually not privy to the motives or information of the investors
they are trading with. As such, should the liquidity provider trade
with an investor possessing short-lived price information about the
security price, it is exposing its inventory to adverse selection
risk. Hence, liquidity providers normally choose their trading
strategies to minimize their interaction with order flow with
increased adverse selection risk. Wholesalers do this by attracting
marketable orders of individual investors, known to be the order
flow with the lowest adverse selection risk. Pursuing this strategy
also requires scaling up the part of the business that interacts
with retail order flow.
    \391\ See infra Table 7 and corresponding discussion. Adverse
selection is based on various characteristics of the order,
including the identity of the originating broker.
    \392\ See analysis in infra Table 7.
    \393\ See infra Table 5 and Table 6 for a comparison of exchange
and wholesaler execution quality.
    \394\ ``Price impact'' is the extent to which the NBBO midpoint
moves against the liquidity provider for a marketable order in a
short time period after the order execution. For Rule 605 reporting,
the time period is five minutes after the time of order execution.
For the analyses of CAT data provided later in this section, the
time period is one minute after the time of order execution, which
was chosen to reflect the increase in trading speed in the years
since Rule 605 was adopted. By measuring the difference between the
transaction price and the prevailing market price for some fixed
period of time after the transaction (e.g., one minute), price
impact measures the extent of adverse selection costs faced by a
liquidity provider. For example, if a liquidity provider provides
liquidity by buying shares from a trader who wants to sell, thereby
accumulating a positive inventory position, if the liquidity
provider wants to unwind this inventory position by selling shares
in the market, it will incur a loss if the price has fallen in the
meantime. In this case, the price impact measure will be positive,
reflecting the liquidity provider's exposure to adverse selection
costs.
    \395\ The effective half-spread is calculated by comparing the
trade execution price to an estimate of the stock's value (i.e., the
midpoint of the prevailing NBBO at the time of order receipt) and
thus captures how much more than the stock's estimated value a
trader has to pay for the immediate execution of their order. The
effective spread will be smaller (or less positive) when it is
closer to the NBBO midpoint, reflecting the order receiving a
greater amount of price improvement. See, e.g., Bjorn
Hagstr[ouml]mer, Bias in the Effective Bid-Ask Spread, 142 J. Fin.
Econ. 314 (2021). For the remainder of this analysis, we will use
the term ``effective spread'' to refer to the ``effective half-
spread.'' See also results in Thomas Ernst & Chester S. Spatt, supra
note 77. Rule 600(b)(8) of Regulation NMS defines ``average
effective spread'' as the share-weighted average of effective
spreads for order executions calculated, for buy orders, as double
the amount of difference between the execution price and the
midpoint of the NBB and NBO at the time of order receipt and, for
sell orders, as double the amount of difference between the midpoint
of the NBB and NBO at the time of order receipt and the execution
price.
    \396\ The realized half-spread is calculated similarly to the
effective half-spread, but, instead of using the NBBO midpoint at
the time of order receipt, the realized spread calculation uses the
NBBO midpoint a short time period after the execution of a
marketable order. For Rule 605 reporting, the time period is five
minutes after the time of order execution. For the analyses of CAT
data provided later in this section, the time period is one minute
after the time of order execution. The realized half-spread proxies
for the potential profitability of trading for liquidity providers
after accounting for the adverse selection risk (i.e., price impact)
of the trade. See, e.g., Securities Exchange Act Release No. 43590
(Nov. 17, 2000), 65 FR 75423-75424 (Dec. 1, 2000) (Disclosure of
Order Execution and Routing Practices) (``The smaller the average
realized spread, the more market prices have moved adversely to the
market center's liquidity providers after the order was executed,
which shrinks the spread `realized' by the liquidity providers. In
other words, a low average realized spread indicates that the market
center was providing liquidity even though prices were moving
against it for reasons such as news or market volatility.''); See
also Larry Harris, Trading and Exchanges: Market Microstructure for
Practitioners at 286 (Oxford University Press 2003) (``Informed
traders buy when they think that prices will rise and sell
otherwise. If they are correct, they profit, and whoever is on the
other side of their trade loses. When dealers trade with informed
traders, prices tend to fall after the dealer buys and rise after
the dealer sells. These price changes make it difficult for dealers
to complete profitable round-trip trades. When dealers trade with
informed traders, their realized spreads are often small or
negative. Dealers therefore must be very careful when trading with
traders they suspect are well informed.''). See also Joel Hasbrouck,
Empirical Market Microstructure: The Institutions, Economics, and
Econometrics of Securities Trading at 147 (Oxford University Press
2007) (``The execution cost based on the pretrade bid-ask midpoint
(BAM) is also known as the effective cost. Since 2001, the U.S. SEC
has required U.S. equity markets to compute effective costs and make
summary statistics available on the Web . . . The rule . . . also
requires computation of the realized cost . . . . The difference
between effective and realized costs is sometimes used as an
estimate of the price impact of the trade. The realized cost can
also be interpreted as the revenue of the dealer who sold to the
customer . . . and then covered his position at the subsequent
BAM.''). For the remainder of this analysis, we will use the term
``realized spread'' to refer to the realized half-spread. Rule
600(b)(9) of Regulation NMS generally defines ``average realized
spread'' as the share-weighted average of realized spreads for order
executions calculated, for buy orders, as double the amount of
difference between the execution price and the midpoint of the NBB
and NBO five minutes after the time of order execution and, for sell
orders, as double the amount of difference between the midpoint of
the NBB and NBO five minutes after the time of order execution and
the execution price.
    \397\ See Ernst & Spatt, supra note 77 and Kothari, S.P., So,
E., & Johnson, T. Commission Savings and Execution Quality for
Retail Trades (Working paper, 2021). See also Adams, Kasten, &
Kelley, Do investors save when market makers pay? Retail Execution
costs under PFOF models (Working paper, 2021), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3975667 (retrieved from
Elsevier database).

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

Segmentation and Routing of Individual Investor Orders in NMS Stocks
    Most individual investor orders are non-directed, so individual
investor order routing choices are largely made by retail brokers.
Specifically, retail brokers choose how to access the market in order
to fill their individual investor customers' orders. Wholesalers are
the dominant providers of market access for retail brokers and bundle
their market access services with execution services.
    Retail brokers may route to wholesalers because the cost of sending
orders to wholesalers is lower than the various alternatives available
to their customers for market access. While some broker-dealers have
SORs,\398\ exchange memberships, and ATS subscriptions, and are thus
able to provide market access to retail brokers, other broker-dealers
incur costs in handling order flow for retail brokers in the form of
exchange access fees, ATS access fees, and administrative and
regulatory costs such as recordkeeping and the risk management controls
of Rule 15c3-5. While wholesalers could incur some of these marginal
costs as well, they benefit on the margin from individual investor
order flow because it gives them the option to internalize the most
profitable of that order flow, i.e., the individual investor orders
with the lowest adverse selection risk.\399\ This ability to capture,
identify, and internalize profitable orders from individual investors
allows wholesalers to provide market access to retail brokers at low
explicit cost, either by providing PFOF or by not charging retail
brokers explicitly for market access. This service of obtaining market
access on behalf of retail brokers assists retail brokers by allowing
them to avoid routing expenses (even in cases where the wholesaler
further routes the order instead of internalizing) or costly liquidity
searches, and may increase retail brokers' reliance on wholesalers
beyond any payment they receive for routing their order flow to
wholesalers.
---------------------------------------------------------------------------

    \398\ Individual investors and professional traders relying on
displayed screens to access financial markets generally do not have
access to these low-latency (algorithmic, high speed) technologies.
    \399\ See infra Table 7 and corresponding discussion.
---------------------------------------------------------------------------

    Indeed, Table 2 shows that retail brokers who accept PFOF (``PFOF
brokers'') pay less to route their orders to wholesalers than to route
them elsewhere.\400\ In fact, they are paid to route their order flow
to wholesalers for every order type reported in the table. On average,
rates paid by wholesalers for both market and marketable limit orders
are higher than those paid by alternative venues, with wholesalers
paying an average of 13 cents per 100 shares for market orders and 12.6
cents for marketable limit orders across S&P 500 and non-S&P 500 stocks
during Q1 2022. In contrast, exchanges, on average, charged PFOF
brokers when they routed their marketable order flow to exchanges. This
likely indicates that most of the volume that PFOF brokers sent to
exchanges was routed to maker-taker exchanges (where fees are assessed
on marketable orders).\401\ Furthermore, since retail brokers that do
not accept PFOF (``non-PFOF brokers'') also incur fees when they route
marketable orders to exchanges, they are incentivized to route their
marketable order flow to wholesalers, who do not charge them explicit
costs to route and execute their orders.
---------------------------------------------------------------------------

    \400\ In Table 2, average payment rates reported in Rule 606
reports for PFOF brokers in S&P 500 stocks and non-S&P 500 stocks in
Q1 2022 are broken down by trading venue and order type, with rates
given in cents per 100 shares.
    \401\ Furthermore, wholesaler rates for non-marketable orders
are more than double the rates for marketable orders, averaging 27.1
cents per hundred shares compared to 13 cents for market orders and
12.6 cents for marketable limit orders. Additionally, Table 2 shows
that the average payment rates PFOF brokers receive from routing
non-marketable limit orders to wholesalers is greater than the
average rates they receive from routing them to exchanges. This may
be driven by wholesalers passing through exchange rebates for these
orders, for which they may receive higher volume-based tiering rates
compared to retail brokers, back to broker-dealers.

            Table 2--Average Rule 606 Payment Rates for Q1 2022 to PFOF Brokers by Trading Venue Type
----------------------------------------------------------------------------------------------------------------
                                                                                Non-
                                                   Market orders    Marketable      marketable     Other orders
                                                                   limit orders    limit orders
----------------------------------------------------------------------------------------------------------------
S&P 500.......................  Exchange........            -5.9           -23.9            30.9            20.8
                                OMM--Wholesaler.            15.2            21.8            41.1            24.1
                                Other...........             4.5            -0.6            -0.6             7.5
Non-S&P 500...................  Exchange........           -14.9           -15.3            17.9            16.5
                                OMM--Wholesaler.            12.5            11.8            24.6            10.1
                                Other...........             1.5            -3.7            -4.6             1.5
Combined......................  Exchange........           -12.4           -15.7            19.3            17.1
                                OMM--Wholesaler.            13.0            12.6            27.1            11.9
                                Other...........             1.7            -3.7            -4.5             2.0
----------------------------------------------------------------------------------------------------------------
This table shows the average payment rates (in cents per 100 shares) made from different types of trading venues
  in Q1 2022 to 14 retail PFOF brokers from wholesalers based on their Rule 606 reports. The table breaks out
  average rates from exchanges, wholesalers, and other trading venues for market orders, marketable limit
  orders, non-marketable limit orders, and other orders in S&P 500 stocks and non-S&P 500 stocks. Other venues
  include any other venue to which a retail broker routes an order other than a wholesaler or an exchange. The
  43 broker-dealers were identified from the 54 retail brokers used in the CAT retail analysis (see infra note
  422). This analysis uses the retail broker's Rule 606 report if it publishes one or the Rule 606 report of its
  clearing broker if it did not publish a Rule 606 report itself (the sample of 43 broker-dealer Rule 606
  reports include some broker-dealers that were not included in the CAT analysis because some clearing broker
  Rule 606 reports are included). Some broker-dealers reported handling orders only on a not held basis and did
  not have any Rule 606.

    Table 3 confirms that wholesalers dominate the business of
providing market access for retail brokers and that PFOF is a factor in
retail broker routing decisions.\402\ Data from Table 3 indicates that
orders of individual investors for NMS stocks are primarily routed to
wholesalers, although, a small fraction of individual investor orders
are routed to exchanges and other broker-dealers providing market
access or other market centers (i.e., ATSs), some of which may be
affiliated with the broker that received the original order.
---------------------------------------------------------------------------

    \402\ Table 3 summarizes order routing decisions of 43 of the
most active retail brokers about non-directed orders. Table 4
repeats the analysis but separately summarizes routing choices for
14 retail brokers who accept PFOF in equity markets and 29 who do
not. Note that some brokers do not accept PFOF for orders in
equities but do accept PFOF for orders in options. Consistent with
Rule 606, routing statistics are aggregated together in Rule 606
reports based on whether the stock is listed in the S&P500 index.
Rule 606 reports collect routing and PFOF statistics based on four
different order types for NMS stocks: (1) market orders, resulting
in immediate execution at the best available price; (2) marketable
limit orders, resulting in immediate execution at the best price
that is not worse that the order's quoted limit price; (3) non-
marketable limit orders whose quoted limit price less aggressive
than the NBBO, often preventing immediate execution; and (4) all
other orders. See supra note 336 for a summary of the requirements
of Rule 606(a)(1) of Regulation NMS.

       Table 3--Retail Broker Order Routing in NMS Stocks for Q1 2022, Combining PFOF and Non-PFOF Brokers
----------------------------------------------------------------------------------------------------------------
                                                                       Non-
                                      Market        Marketable      marketable         Other           Total
           Venue type                (percent)         limit           limit         (percent)       (percent)
                                                     (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
                                           Panel A: Non S&P 500 Stocks
----------------------------------------------------------------------------------------------------------------
Other...........................             6.0             4.7             3.1             1.5             3.6
Exchange........................             0.2             5.5            22.5             0.8             8.5
Wholesaler......................            93.9            89.8            74.4            97.6            87.9
                                 -------------------------------------------------------------------------------
    Total.......................            26.5            12.6            33.6            27.3           100.0
----------------------------------------------------------------------------------------------------------------
                                             Panel B: S&P 500 Stocks
----------------------------------------------------------------------------------------------------------------
Other...........................             6.6             5.9             1.8             1.7             3.6
Exchange........................             0.2             4.6            25.1             0.8             9.1
Wholesaler......................            93.3            89.6            73.1            97.5            87.3
                                 -------------------------------------------------------------------------------
    Total.......................            30.6             9.6            33.5            26.4           100.0
----------------------------------------------------------------------------------------------------------------
This table aggregates Rule 606 reports from retail brokers and shows the percentage of market orders, marketable
  limit orders, non-marketable limit orders, and other orders that retail brokers route to different types of
  venues in Q1 2022. Other venues include any other venue to which a retail broker routes an order other than a
  wholesaler or an exchange. Order type classifications are based on the order types broker-dealers are required
  to include in their Rule 606 reports.
This table aggregates routing information from 43 broker-dealer Rule 606 reports from Q1 2022. The 43 broker-
  dealers were identified from the 54 retail brokers used in the CAT retail analysis (see infra note 422). This
  analysis uses the retail broker's Rule 606 report if it publishes one or the Rule 606 report of its clearing
  broker if it did not publish a Rule 606 report itself (the sample of 43 broker-dealer Rule 606 reports include
  some broker-dealers that were not included in the CAT analysis because some clearing broker Rule 606 reports
  are included). Some broker-dealers reported handling orders only on a not held basis and did not have any Rule
  606 reports. Because Rule 606 only include percentages of where there order flow is routed and not statistics
  on the number of orders, the reports are aggregated together using a weighting factor based on an estimate of
  the number of non-directed orders each broker-dealer routes each month. The number of orders is estimated by
  dividing the number of non-directed market orders originating from a retail broker in a given month (based on
  estimates from CAT data) by the percentage of market orders as a percent of non-directed orders in the retail
  broker's Rule 606 report (the weight for a clearing broker consists of the aggregated orders from the
  introducing brokers in the CAT retail analysis that utilize that clearing broker).

                         Table 4--Retail Broker Order Routing in NMS Stocks for Q1 2022
----------------------------------------------------------------------------------------------------------------
                                                                       Non-
                                      Market        Marketable      marketable         Other           Total
           Venue type                (percent)         limit           limit         (percent)       (percent)
                                                     (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
                                           Panel A: Non-S&P 500 Stocks
                                                Non-PFOF Brokers
----------------------------------------------------------------------------------------------------------------
Other...........................            24.1            22.3             4.2            41.6            16.0
Exchange........................            <0.1            25.3            80.8            19.7            39.8
Wholesaler......................            76.0            52.4            15.0            38.8            44.2
                                 -------------------------------------------------------------------------------
    Total.......................            38.4            12.4            44.2             5.0           100.0
----------------------------------------------------------------------------------------------------------------
                                                  PFOF Brokers
----------------------------------------------------------------------------------------------------------------
Other...........................            <0.1             1.2             2.8             0.3             1.1
Exchange........................             0.2             1.5             5.8             0.2             2.1
Wholesaler......................            99.7            97.3            91.4            99.5            96.8
                                 -------------------------------------------------------------------------------
    Total.......................            24.1            12.7            31.5            31.8           100.0
----------------------------------------------------------------------------------------------------------------

                                             Panel B: S&P 500 Stocks
                                                Non-PFOF Brokers
----------------------------------------------------------------------------------------------------------------
Other...........................            24.8            27.0             3.2            23.4            15.4
Exchange........................            <0.1            19.6            83.2             8.2            39.0
Wholesaler......................            75.2            53.4            13.6            68.3            45.6
                                 -------------------------------------------------------------------------------
    Total.......................            39.0             9.2            43.8             8.0           100.0
----------------------------------------------------------------------------------------------------------------
                                                  PFOF Brokers
----------------------------------------------------------------------------------------------------------------
Other...........................            <0.1             0.5             1.3             0.3             0.6
Exchange........................             0.2             0.9             3.4             0.3             1.3
Wholesaler......................            99.8            98.6            95.3            99.5            98.2
                                 -------------------------------------------------------------------------------
    Total.......................            28.4             9.7            30.7            31.2           100.0
----------------------------------------------------------------------------------------------------------------
This table aggregates Rule 606 reports from PFOF and non-PFOF retail brokers and separately shows the percentage
  of market orders, marketable limit orders, non-marketable limit orders, and other orders PFOF brokers and non-
  PFOF brokers route to different types of venues in Q1 2022. PFOF brokers are retail brokers that receive
  payments for routing marketable orders to wholesalers. Other venues include any other venue to which a retail
  broker routes an order other than a wholesaler or an exchange. Order type classifications are based on the
  order types broker-dealers are required to include in their Rule 606 reports.
This table aggregates routing information from PFOF and non-PFOF broker-dealer Rule 606 reports from Q1 2022.
  Fourteen retail brokers are identified as PFOF brokers that receive payments for routing orders in NMS stocks
  to wholesalers. Twenty-nine non-PFOF brokers are identified as retail brokers that do not receive monetary
  compensation when they route orders in NMS stocks to wholesalers. The 43 broker-dealers were identified from
  the 54 retail brokers used in the CAT retail analysis (see infra note 422). This analysis uses the retail
  broker's Rule 606 report if it publishes one or the Rule 606 report of its clearing broker if it did not
  publish a Rule 606 report itself (the sample of 43 broker-dealer Rule 606 reports include some broker-dealers
  that were not included in the CAT analysis because some clearing broker Rule 606 reports are included). Some
  broker-dealers reported handling orders only on a not held basis and did not have any Rule 606 reports.
  Because Rule 606 only include percentages of where there order flow is routed and not statistics on the number
  of orders, the reports are aggregated together using a weighting factor based on an estimate of the number of
  non-directed orders each broker-dealer routes each month. The number of orders is estimated by dividing the
  number of non-directed market orders originating from a retail broker in a given month (based on estimates
  from CAT data) by the percentage of market orders as a percent of non-directed orders in the retail broker's
  Rule 606 report (the weight for a clearing broker consists of the aggregated orders from the introducing