dealers, the financial press, and market centers likely will continue
to respond to the needs of investors by analyzing the disclosures and
producing more digestible information using the data to the extent that
they currently do so.\796\ Furthermore, requiring all market centers
and larger broker-dealers to prepare summary reports with aggregated
execution quality information \797\ as well as Rule 605 reports would
strike a balance between ensuring that market participants have access
to detailed execution quality information, and providing an overview of
execution quality information that may be more accessible for some
market participants.\798\
---------------------------------------------------------------------------

    \795\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75419
(stating that most individual investors likely would not obtain and
digest the reports themselves). See also supra note 112 and
accompanying text (EMSAC committee member stating that retail
investors will not look at the Rule 605 reports); Angel Letter at 3
(commenter stating that Rule 605 data is too raw for most investors
to interpret); and See Consumer Federation II at 10 (commenter
stating that most retail investors may not use the disclosures
directly).
    \796\ See, e.g., supra notes 545-547, describing the use of Rule
605 data in academic literature, in comment letters related to
Commission and SRO rulemaking, and the financial press.
    \797\ See proposed Rule 605(a)(2).
    \798\ Several EMSAC committee members argued in favor of
requiring broker-dealers to file Rule 605 reports rather than only
summary reports. See supra notes 112-114 and accompanying text.
---------------------------------------------------------------------------

(b) Specifying and Expanding Requirements for Market Centers
    In addition to the proposed amendment expanding the scope of Rule
605 reporting entities to include larger broker-dealers, the Commission
believes that additional proposed modifications to the scope of
reporting entities would also promote increased transparency.
    A proposed amendment specifies that broker-dealers that operate
ATSs must prepare Rule 605 reports for their ATSs that are separate
from the reports for their other trading activities.\799\ Another
proposed amendment requires that market centers operating SDPs post
separate reports for each entity.\800\ These amendments would address
directly what Rule 605 requires with respect to reporting by firms that
operate multiple market centers, thus increasing the transparency of
each reporting entity's execution quality and limiting the co-mingling
of information about multiple types of reporting entities into a single
report, which, to the extent that it occurs, may currently add noise to
or skew Rule 605 reports. For example, requiring market centers that
operate SDPs to report statistics separately for each line of business
would increase the transparency of the operating market centers' fill
rates by eliminating the downwards skew from including ``pinging''
orders submitted to the SDP into their Rule 605 reports.\801\ Market
participants would be better informed about the execution quality of
each reporting entity, which would facilitate comparisons across
reporting entities.
---------------------------------------------------------------------------

    \799\ See proposed Rule 605(a)(1). See also supra note 214 and
accompanying text. See supra note 212 and accompanying text for
discussion of suggestions from the EMSAC and commenters related to
reporting requirements for ATSs.
    \800\ See proposed Rule 605(a)(1). See also supra note 219 and
accompanying text.
    \801\ See supra section VII.C.2.(a)(2) for a discussion of why
the co-mingling of wholesaler and SDP orders for the purposes of
Rule 605 reporting will effect a downwards skew on the fill rates
derived from the wholesalers' Rule 605 reports.
---------------------------------------------------------------------------

    If the Order Competition Rule Proposal is adopted,\802\ the
proposed amendment requiring separate Rule 605 reports for qualified
auctions \803\ would also promote increased transparency. First, it
would allow for easier comparisons of how execution quality varies
across qualified auctions. Second, it would limit the extent to which
co-mingling qualified auction statistics with other orders executed on
a market center add noise to or skew that market center's Rule 605
report. For example, orders submitted to a qualified auction may be
more likely to receive price improvement, and may have systematically
different fill rates and time-to-executions, as compared to similar
orders executed in other trading mechanisms.\804\
---------------------------------------------------------------------------

    \802\ See Order Competition Rule Proposal.
    \803\ See proposed Rule 605(a)(1). See also supra note 203 and
accompanying text.
    \804\ See supra section III.B for further discussion.
---------------------------------------------------------------------------

    The proposed amendment expanding the order size categories required
by Rule 605 to include information about fractional shares \805\ would
also expand the scope of reporting entities to include an estimated 20
additional market centers \806\ that currently exclusively execute
fractional shares and that were previously not required to file Rule
605 reports due to fractional shares falling below the smallest order
size category in the current Rule 605. This would increase transparency
about the execution quality achieved by these market centers.
---------------------------------------------------------------------------

    \805\ See proposed Rule 600(b)(19).
    \806\ See supra note 486 for further discussion of this
estimate.
---------------------------------------------------------------------------

(2) Modifications to Rule 605 Disclosure Requirements
    The Commission believes that, as a result of the proposed
amendments expanding and modernizing Rule 605 disclosure requirements,
the metrics contained in Rule 605 would be more informative about
execution quality, which would increase transparency into the
differences in execution quality achieved by reporting entities. These
improvements in transparency would stem from modifications aimed at
clarifying and expanding the scope of Rule 605 reporting entities,
modernizing the information required to be reported under Rule 605, and
improving the accessibility of the information contained in Rule 605
reports.
(a) Expanding the Definition of Covered Orders
    The proposed amendments expanding the definition of covered orders
to include additional order types would increase transparency about the
execution quality that reporting entities achieve for these additional
order types, including orders submitted outside of regular trading
hours, orders submitted with stop prices, and non-exempt short sale
orders.\807\
---------------------------------------------------------------------------

    \807\ Commenters have suggested various ways to expand or modify
the definition of covered order, including broadening its scope to
capture additional order types. See supra notes 122-125 and
accompanying text.

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

    First, the proposed amendment expanding the definition of ``covered
orders'' to include NMLOs submitted outside of regular trading hours
that become executable during regular trading hours \808\ would lead to
a more complete picture of reporting entities' execution
characteristics.\809\ While an analysis using CAT data shows that pre-
open/post-close orders that are executable during regular hours are
likely only a small portion of total order flow, these orders have a
higher concentration of individual investor shares (29.5%) than the
sample time window during regular trading hours (1.9%).\810\ Therefore,
including information about the execution quality of these orders would
be very relevant for individual investors, who would be able to make
more informed decisions when choosing a broker-dealer if these orders
are included in broker-dealers' execution quality disclosures.
Likewise, broker-dealers would be able to make more informed decisions
about where to route NMLOs submitted outside of regular trading hours,
knowing that these orders are being factored into a market center's
overall statistics.
---------------------------------------------------------------------------

    \808\ See proposed Rule 600(b)(30). See also supra note 230 and
accompanying text.
    \809\ One commenter to the 2018 Rule 2016 Amendments and
petitioner for rulemaking recommending inclusion of orders submitted
prior to market open in Rule 605 reporting requirements. See supra
notes 123-125.
    \810\ See analysis described in supra Section VII.C.2.(b)(4).
---------------------------------------------------------------------------

    Second, the proposed amendment removing the exclusion of orders
with stop prices from the definition of ``covered orders'' \811\ would
increase transparency about the execution quality of this type of
order.\812\ This would be particularly beneficial for this order type,
as the handling of stop orders can vary significantly across broker-
dealers and across the market centers to which they route.\813\
Furthermore, the execution prices of stop orders are highly sensitive
to handling and execution practices, as these orders are more likely to
execute when the stock price is in decline and any delay in execution
will result in a larger loss (or smaller gain) for the investor. This
risk is particularly acute for stop orders that use market orders, as
the execution price an investor receives for this market order can
deviate significantly from the stop price in a fast-moving market where
prices change rapidly.\814\ As shown in Table 4, stop orders that
trigger the submission of market orders are the most common type of
stop orders used by individual investors (representing 87.7% of their
stop orders), who are more likely than institutional investors to
submit stop orders (i.e., 6.44% of individual investors' market orders
are submitted with stop prices vs. 0.23% of those of institutional
investors). Therefore, information about the execution quality of stop
orders would be particularly useful for individual investors, who could
use this information to identify and direct stop orders to those
broker-dealers with the practices and abilities that allow them to
achieve higher execution quality for these orders. As broker-dealers
would be incentivized to improve their handling of stop orders,\815\
they would be able to use information about the execution quality of
stop orders achieved by market centers to route stop orders to those
market centers with the practices and abilities that allow them to
achieve higher execution quality for these orders.\816\ Furthermore,
the proposed amendment to include stop orders as a separate order type
category rather than grouping them together with other order types
\817\ also would prevent them from skewing the execution quality of
other orders downwards, given that stop orders are more likely to
execute in adverse market conditions.
---------------------------------------------------------------------------

    \811\ See proposed Rule 600(b)(30) (eliminating the express
carve out of orders submitted with stop prices from the definition
of ``covered order''). See also supra note 243 and accompanying
text.
    \812\ A petitioner stated that including stop orders within the
Rule's scope would provide a more complete view of the orders
certain broker-dealers may use when assessing the execution quality
market centers provide. See supra note 123 and accompanying text.
    \813\ See supra note 652 and accompanying text for a discussion
of differential treatment of stop orders.
    \814\ See, e.g., SEC Investor Bulletin: Stop, Stop-Limit, and
Trailing Stop Orders, (July 13, 2017), available at https://www.sec.gov/oiea/investor-alerts-bulletins/ib_stoporders.html. This
risk can be attenuated with the use of stop limit orders, which sets
a minimum price at which the stop order can be executed. However,
the limit price may prevent the stop limit order from executing if
the stock price falls below the limit price before the stop limit
order can execute.
    \815\ See infra section VII.D.1.(b)(1)(a) for a discussion of
the proposed amendments' impact on competition between broker-
dealers on the basis of execution quality for stop orders.
    \816\ As discussed in supra section VII.C.2.(b)(2), the
Commission understands that the handling of stop orders can vary
significantly across market centers.
    \817\ See proposed Rule 600(b)(20) (defining ``categorized by
order type'' to include a category for ``executable orders submitted
with stop prices'') (emphasis added). See also discussion in supra
section IV.B.2.(a).
---------------------------------------------------------------------------

    Lastly, the proposal to clarify that non-exempt short sale orders
should be included in Rule 605 statistics \818\ would lead to a more
complete picture of reporting entities' execution characteristics, as
short sales make up a large portion of trades and by implication are
likely also a significant component of order flow.\819\ An analysis of
short volume data found that, between August 2009 and February 2021,
short selling was an average of 47.3% of trading volume for non-
financial common stocks.\820\ To the extent that the proportion of
short selling trade volume is comparable to the proportion of short
selling order volume, these data points show that short selling is
prevalent in equity markets. Therefore, the inclusion of non-exempt
short sale orders would result in reporting entities' execution quality
statistics reflecting more relevant orders for individual and
institutional investors, who both engage in short selling. While the
costs to maintain margin accounts and borrow stocks may prevent some
individual investors from participating in the short sale market, one
academic working paper found that, between January 2010 and December
2016, 6.36% of all off-exchange short selling \821\ could be attributed
to retail traders, and 10.92% of retail trading was made up of short
sales.\822\ Meanwhile, evidence suggests

that short selling by institutional investors is largely the purview of
hedge funds,\823\ which are estimated to make up around 85% of the
short selling market.\824\ One academic paper finds that short sellers'
choice of trading venue is highly dependent on its market design and
that, due to their information advantages, short sellers prefer trading
venues that offer high execution speeds over those that offer low
trading costs.\825\ Therefore, including information about the
execution quality that reporting entities achieve for short sale orders
into Rule 605 disclosures would be relevant for a variety of investors
who engage in short selling.
---------------------------------------------------------------------------

    \818\ See supra note 254 and accompanying text.
    \819\ See also supra note 123 and accompanying text (petitioner
recommending inclusion of short sales in Rule 605).
    \820\ Short volume data is provided by CBOE Group (CBOE BYX
Exchange, CBOE BZX Exchange, CBOE EDGA Exchange, CBOE EDGX
Exchange), FINRA (FNYX,FNSQ, FNQC), NASDAQ Group (Nasdaq BX, Nasdaq
PSX and Nasdaq Stock Market), and NYSE Group (New York Stock
Exchange, NYSE Arca, NYSE American, NYSE Chicago, and NYSE
National). See https://www.cboe.com/us/equities/market_statistics/short_sale/ (CBOE data); https://www.finra.org/finra-data/browse-catalog/short-sale-volume-data (FINRA data); https://nasdaqtrader.com/Trader.aspx?id=shortsale (NASDAQ data); ftp://ftp.nyxdata.com/ (NYSE data). Common stocks include those with a
CRSP share code of 10 or 11. Financial stocks (SIC code 6000-6999)
and stocks that do not have an active trading status in CRSP (trade
status = A) are excluded. Analysis derived based on data from CRSP
1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch.
Bus. (2022). The daily level of short selling is calculated for each
stock as the daily number of shares sold short divided by the daily
trading volume, averaged across stocks, and finally averaged across
all days in the sample (August 3, 2009 to February 5, 2021). Note
that this number matches that of other studies. For example, Figure
F.1 in the Congressional Study on Short Sale Reporting shows that
the level of short selling as a percentage of trading volume grew
from 2007 to close to 50% by 2013. See Short Sale Position and
Transaction Reporting (June 5, 2014), available at https://www.sec.gov/files/short-sale-position-and-transaction-reporting%2C0.pdf.
    \821\ One academic paper found that short selling by individual
investors made up a much smaller percentage of overall shorting
volume on NYSE (1% to 2%). The authors attribute the low number of
on-exchange retail shorting to brokerage routing decisions. See
Ekkehart Boehmer, Charles M. Jones & Xiaoyan Zhang, Which Shorts are
Informed?, 63 J. Fin. 491 (2008).
    \822\ See Ekkehart Boehmer & Wanshan Song, Smart Retail Traders,
Short Sellers, and Stock Returns. Short Sellers, and Stock Returns
(working paper Oct. 23, 2020) available athttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=3723096 (retrieved from SSRN Elsevier
database).
    \823\ See Peter Molk & Frank Partnoy, Institutional Investors as
Short Sellers?, 99 B.U. L. Rev. 837, 839 (2019). Molk and Partnoy's
paper ``identif[ies] the regulatory and other barriers that keep key
categories of institutions[, specifically, mutual funds, insurance
companies, banks, sovereign wealth funds, endowments, and
foundations,] from acquiring significant short positions.'' Id. at
843. In addition, a Division of Economic and Risk Analysis White
Paper survey of all mutual fund Form N-SAR filings in 2014 found
that ``[w]hile 64% of all funds were allowed to engage in short
selling, only 5% of all funds actually did so.'' See Daniel Deli et
al., Use Of Derivatives By Registered Investment Companies, SEC 8
(2015), available at https://www.sec.gov/files/derivatives12-2015.pdf.
    \824\ See Yawen Jiao, Massimo Massa & Hong Zhang, Short Selling
Meets Hedge Fund 13F: An Anatomy of Informed Demand, 122 J. Fin.
Econ. 544 (2016), citing a 2009 report from Goldman Sachs.
    \825\ See Adam V. Reed, Mehrdad Samadi & Jonathan Sokobin,
Shorting in Broad Daylight: Short Sales and Venue Choice, 55 J. Fin.
Quantitative Analysis 2246 (Nov. 2020).
---------------------------------------------------------------------------

(b) Modernizing the Required Information
(i) Categorization by Order Size
    The proposed amendments modernizing the information required by
Rule 605 would promote increased transparency by increasing the
relevance of the information contained in Rule 605 reports, including
information about order size categories.\826\
---------------------------------------------------------------------------

    \826\ The EMSAC and commenters have also suggested bringing
smaller and larger order sizes within scope. See supra notes 126-132
and accompanying text.
---------------------------------------------------------------------------

    The proposed amendments expanding Rule 605's order size categories
to include information about a wider range of order sizes,\827\
including odd-lots, orders less than one share, and larger-sized
orders,\828\ would increase the extent to which Rule 605 captures
information about orders that are relevant to both individual and
institutional investors. Analyses showed that the inclusion of orders
for less than 100 shares into Rule 605 reporting requirements would
include up to an additional 18.2% of NMLOs (2.8% of NMLO share
volume),\829\ and the inclusion of fractional shares would include up
to an additional 10.4% of executions received by individual investors
into Rule 605 reports.\830\ Fractional shares would benefit from
increased transparency. While the Commission lacks information on the
execution quality of fractional shares, the execution quality of orders
for less than one share may vary across broker-dealers. In particular,
many market centers do not offer the functionality to accept or execute
such orders, and so their execution quality will depend on how the
broker-dealer handles these orders, such as internalizing such orders
or aggregating them together for the purpose of rerouting to market
centers.\831\ Lastly, the inclusion of information about larger-sized
orders would include up to an additional 7.8% of NMLO share
volume,\832\ which would likely mostly be relevant for institutional
investors, to the extent that some of these orders may not be split
into smaller child orders.\833\
---------------------------------------------------------------------------

    \827\ Commenters have suggested amending the scope of the Rule
to include odd-lot orders (see supra note 271 and accompanying
text), as well as larger-sized orders (see supra notes 283-285 and
accompanying text).
    \828\ See proposed Rule 600(b)(20). Furthermore, see supra
section IV.B.1.(b)(2) for a discussion of the Commission's proposal
to rescind the exemptive relief for orders of 10,000 or more shares
and include these orders within the scope of Rule 605 reports.
    \829\ See Figure 5 in supra section VII.C.2.(b)(1)(a). As
discussed in this section, odd-lots are submitted by both individual
and institutional investors.
    \830\ See analysis in supra section VII.C.2.(b)(1)(b).
    \831\ See supra note 643 and accompanying text.
    \832\ See analysis in supra section VII.C.2.(b)(1)(c).
    \833\ This effect on competition may be limited if most large
institutional orders are not held orders and would thus be excluded
from Rule 605 reporting requirements, and/or are broken up into
smaller child orders that are likely to be smaller and may already
be included in Rule 605 reporting requirement. See supra note 650
and accompanying text.
---------------------------------------------------------------------------

    In addition, the proposed amendments to define order size
categories in terms of number of round lots \834\ would increase the
transparency regarding distribution of order sizes that a reporting
entity handles, particularly for higher-priced stocks. The new MDI
Rules tie the definition of round lot to a stock's average closing
price during the previous month, with higher-priced stocks associated
with lower-sized rounds lots,\835\ to account for the fact that order
sizes will tend to be smaller in higher-priced stocks. Continuing the
example from section VII.C.2.(c)(1), under the new MDI Rules, a $500
stock would have a round lot size of 40 shares. Therefore, for a $500
stock, instead of all typically-sized orders below $200,000 \836\
(i.e., 400 shares, or 10 round lots) being clustered in a single order
size category, these orders would potentially be spread among four out
of six of the proposed order size categories: (i) less than a share;
(ii) odd-lot; (iii) 1 round lot to less than 5 round lots; (iv) 5 round
lots to less than 20 round lots. This would result in a more meaningful
categorization of orders that would better enable market participants
to compare execution qualities across orders of different sizes. As a
result, market participants would be better able to take into account
potential differences in the distribution of order sizes that reporting
entities typically handle for a given stock when comparing execution
quality metrics across reporting entities, making these metrics more
informative for making apples-to-apples comparisons of execution
quality across reporting entities.
---------------------------------------------------------------------------

    \834\ See proposed Rule 600(b)(19).
    \835\ See supra note 577 and accompanying text describing the
new definition of round lots.
    \836\ This refers to the exclusion of orders greater than
$200,000 from some Regulation NMS rules. See supra note 674.
---------------------------------------------------------------------------

(ii) Categorization by Order Type
    The proposed amendments modifying the order type categories
required by Rule 605, including modifications to the coverage of NMLOs,
and including separate order type categories for beyond-the-midpoint
orders and marketable IOCs, would promote increased transparency by
increasing the relevance of the information contained in Rule 605
reports.
    First, the proposed amendment to modify Rule 605's coverage of
NMLOs so that reporting entities are required to disclosure execution
quality information only for those NMLOs that become executable \837\
(i.e., eventually touch the NBBO) would facilitate comparisons between
market centers, by more accurately excluding NMLOs that do not receive
a meaningful opportunity to execute; for example because the price
moved away from the order and/or the order was cancelled before its
limit price was reached.\838\ On the other

hand, investors could expect a NMLO with a limit price equal to the
prevailing NBBO to have a reasonable chance of executing, even if the
limit price is more than $.10 away from the NBB or NBO at the time of
order receipt. This would facilitate comparisons between market centers
by ensuring that the execution quality statistics for NMLOs more
meaningfully capture a market center's performance in handling NMLOs,
rather than reflecting market conditions potentially outside of the
market center's control, such as movements of the NBBO.
---------------------------------------------------------------------------

    \837\ See proposed Rule 600(b)(42) (defining ``executable'') and
proposed Rule 600(b)(20) (defining ``categorized by order type'' to
include categories for ``executable orders submitted with stop
prices'' and ``executable non-marketable limit orders'') (emphasis
added). See also supra notes 240-241 and 303-304.
    \838\ See supra notes 296-297 and accompanying text for
discussion of commenters' suggestions regarding Rule 605 reporting
requirements for NMLOs.
---------------------------------------------------------------------------

    This is evident from an analysis comparing the fill rates of all
near-the-quote and away-from-the-quote NMLOs to the fill rates of
executable NMLOs, calculated using the sample of MIDAS data.\839\
Results are presented in Figure 15.\840\ While the fill rates of all
near-the-quote and away-from-the-quote NMLOs are very low and similar
to one another (0.2% and 0.6%, respectively), the fill rates of
executable near-the-quote and away-from-the-quote NMLOs are much
higher, and also very different from one another. In fact, at 32.9%,
the average fill rate of executable away-from-the-quote NMLOs is
relatively high, and actually much higher than the average fill rate of
executable near-the-quote orders (5.5%).\841\ This reflects that even
away-from-the-quote orders are likely to execute if prices move such
that they have a meaningful opportunity to execute.
---------------------------------------------------------------------------

    \839\ See supra note 634 for a description of the dataset. Staff
found that, first, only a small percentage of NMLOs eventually touch
the NBBO: only 15.01% of near-the-quote NMLOs and 2.08% of away-
from-the-quote NMLOs were executable during their lifespan.
    \840\ This analysis uses data from prior to the implementation
of the MDI Rules and results may be different following the
implementation of the MDI Rules. However, it is not clear how a
change in the distribution of orders into various NMLO categories
would affect the average fill rates of these NMLO categories. See
supra note 685 and section VII.C.1.(d)(2). Also, note that, by
definition, all at-the-quote and inside-the-quote NMLOs are
executable by definition of having a limit price equal to or better
than the NBBO, and so the fill rates of executable at-the-quote and
inside-the-quote NMLOs would be identical to those for all at-the-
quote and inside-the-quote NMLOs presented in Figure 8.
    \841\ This is likely because many near-the-quote NMLOs are
cancelled before their limit prices are reached. In fact, examining
the distribution of cancellations of these orders reveals that 27.5%
of near-the-quote NMLO shares are cancelled within 100 milliseconds,
vs. only 13.5% of away-from-the-quote NMLOs.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

Figure 15: Fill Rates of Executable Away-From-the-Quote and Near-the-
Quote NMLOs, March 2022
[GRAPHIC] [TIFF OMITTED] TP20JA23.015

BILLING CODE 8011-01-C
    Second, the proposed amendment to include a separate order type
category for beyond-the-midpoint limit orders \842\ would increase
transparency on how reporting entities handle these types of orders
(e.g., whether or not they offer these orders price improvement) and
reduce the extent to which including information about these orders
along with other types of NMLOs may skew the execution quality
statistics of other types of NMLOs. The Commission understands that
different reporting entities may treat beyond-the-midpoint

NMLOs differently from other types of NMLOs, and that as a result
beyond-the-midpoint NMLOs have systematically different execution
quality characteristics than other types of NMLOs, and even other types
of inside-the-quote NMLOs. For example, beyond-the-midpoint limit
orders may be offered price improvement at some market centers, such as
wholesalers, so the execution quality of these orders would be highly
dependent on to which type of market center the broker-dealer routes
such orders.\843\ Requiring reporting entities to report execution
quality statistics separately for beyond-the-midpoint orders would
reveal differences in reporting entities' handling of this type of
order.
---------------------------------------------------------------------------

    \842\ See proposed Rule 600(b)(20) (defining ``categorized by
order type'' to include a category for ``beyond-the-midpoint limit
orders''). See also supra note 312 and accompanying text.
    \843\ See Table 5 in supra section VII.C.5.(c), showing that
beyond-the-midpoint orders handled by wholesalers tend to have
higher fill rates, faster execution time, and higher price
improvement relative to other types of NMLOs.
---------------------------------------------------------------------------

    Lastly, the proposed amendment assigning marketable IOCs to a
separate order type category so that they no longer would be commingled
with other order types \844\ would increase the transparency of
execution quality information, both for IOCs and for other types of
marketable orders.\845\ Assigning marketable IOCs to a separate order
type category would increase transparency about the execution quality
that reporting entities achieve for these types of orders. Supporting
the idea that IOCs tend to have different execution quality profiles
than other types of marketable orders, an analysis showed that IOCs on
average have much lower fill rates (3.22%) than other market and
marketable limit orders (15.94%), and that fill rates vary across
market centers and according to order characteristics such as
size.\846\ Information about the execution quality of IOCs would allow
broker-dealers handling these types of orders to be able to better
assess which market center on average offers better execution quality
to these types of orders. These broker-dealers could thus make more
informed decisions about where to route these orders. Furthermore, due
to their different execution profiles, removing IOCs from other
marketable order categories would cause the execution quality metrics
for other types of marketable orders to more accurately reflect
reporting entities' handling of other types of market orders.\847\ The
effect on the execution quality metrics of other types of marketable
orders would likely be significant, as an analysis of IOCs found that
they make up more than 90% of market and marketable share volume.\848\
---------------------------------------------------------------------------

    \844\ See proposed Rule 600(b)(20) (defining ``categorized by
order type'' to include a category for ``marketable immediate-or-
cancel orders''). See also discussion in supra section IV.B.2.(c).
    \845\ The EMSAC, as well as commenters on the 2010 Equity Market
Structure Concept Release and the 2018 Rule 606 Amendments,
suggested separating IOCs within the categorization by order type.
See supra note 324 and accompanying text.
    \846\ For example, market centers other than wholesalers tend to
have higher fill rates for IOC odd-lots (39.6%) than non-IOC odd-
lots (15.4%), the opposite is true for wholesalers (30.1% vs.
67.1%). See Table 6 in supra section VII.C.5.(g).
    \847\ See supra note 725 and accompanying text for an example of
how co-mingling IOCs with other order types could lower marker
centers' incentives to improve execution quality for other
marketable orders.
    \848\ See Table 6 in supra section VII.C.5.(g) and corresponding
discussion.
---------------------------------------------------------------------------

(iii) Timestamp Conventions
    Several of the proposed amendments would promote increased
transparency by modifying the conventions used to calculate time-to-
execution information for the purposes of Rule 605 reporting, including
increasing the granularity of the timestamp, replacing the current
time-to-execution buckets in Rule 605 with statistics capturing
information about the distribution of time-to-execution, and modifying
the conventions for recording the time-to-execution of NMLOs.\849\
---------------------------------------------------------------------------

    \849\ See supra notes 339-340, 358 and accompanying text
discussing suggestions from commenters related to the current
provisions in Rule 605 for timestamps.
---------------------------------------------------------------------------

    First, the proposed amendment increasing the granularity of the
timestamp conventions used for the time of order receipt and time of
order execution from seconds to milliseconds \850\ would make the
current time-to-execution statistics in Rule 605, including the average
share-weighted time-to-execution of shares executed with positive price
improvement, without price improvement and also with negative price
improvement, more informative about the execution speeds offered by a
market center. Given the data and trading speeds enabled by modern
technology in which execution speeds measured in seconds are likely to
miss much of the variation in time-to-executions across reporting
entities in today's markets, particularly for market and marketable
orders,\851\ adding granularity to the timestamps used to calculate the
time-to-execution speed measures included in Rule 605 reports would
benefit market participants in their efforts to compare time-to-
executions across reporting entities.
---------------------------------------------------------------------------

    \850\ See proposed Rule 600(b)(108) and (109). See also supra
notes 333-334 and accompanying text.
    \851\ See supra section VII.C.2.(c)(4) for a discussion of how
the granularity of the time-to-execution categories currently
defined in Rule 605 has lost relevance over time.
---------------------------------------------------------------------------

    Second, the proposal to eliminate the current time-to-execution
buckets \852\ would eliminate a method for presenting information about
time-to-executions that has lost relevance over time, as, for reasons
described above, these categories are not granular enough with respect
to variations in time-to-executions across reporting entities. Instead,
the Commission proposes requiring, in addition to average time to
execution statistics as currently included in Rule 605,\853\ both
share-weighted median and 99th percentile time-to-execution statistics
in order to provide information about the distribution of execution
speeds achieved by a reporting entity.\854\ Given that outliers could
skew the share-weighted average time to execution, information about
the distribution of execution speeds in addition to the average would
still be useful. However, time-to-execution buckets are of limited
utility, especially since time-to-execution buckets that are
appropriate for some order types, such as NMLOs, may not be granular
enough for other order types, such as market and marketable
orders.\855\ Statistics capturing the distribution of time-to-
executions would represent a more flexible and useful method for
capturing information about the time-to-executions of a variety of
order types.
---------------------------------------------------------------------------

    \852\ See 17 CFR 242.605(a)(1)(i)(F), (G), (H), (I) and (J)
(detailing time-to-execution buckets of 0-9 seconds, 10 to 29
seconds, 30 to 59 seconds, 60 to 299 seconds and 5 to 30 minutes
after the time of order receipt).
    \853\ See 17 CFR 242.605(a)(1)(ii)(D), (F), and (I), requiring
share-weighted average period from the time of order receipt to the
time of order execution for shares executed with price improvement,
at the quote, and outside the quote, respectively.
    \854\ See proposed Rule 605(a)(1)(ii)(D), (E), (H), (I), (M),
and (N), and proposed Rule 605(a)(1)(iii)(D) and (E), requiring
share-weighted median and share-weighted 99th percentile time to
execution information. See also supra note 349 and accompanying
text.
    \855\ See Figure 12 and corresponding discussion in section
VII.C.2.(c)(4), supra, describing an analysis showing that, for at-
the-quote and near-the-quote limit orders, executions are reasonably
well distributed across the different time-to-execution buckets but,
for market and marketable limit orders, time-to-executions are
mostly bunched up at the faster end of their time buckets.
---------------------------------------------------------------------------

    Finally, the proposed amendments would measure time-to-execution
for NMLOs from the time that the order becomes executable, rather than
from the time of order receipt.\856\ This would ensure that this metric
would be more likely to capture the portions of execution speed that
are within a

reporting entity's control, rather than dependent on market
conditions.\857\
---------------------------------------------------------------------------

    \856\ See proposed Rule 605(a)(1)(iii)(C), (D), and (E).
    \857\ See supra note 513 for an example of how market conditions
can influence the time-to-execution of NMLOs.
---------------------------------------------------------------------------

(iv) Modifications to Information Required for All Types of Orders
    The proposed amendments modernizing the information required for
all order types would promote increased transparency by increasing the
relevance of the information contained in Rule 605 reports. This holds
as well for the proposed amendments modifying the calculations of
average realized spreads, expanding existing requirements to report
average effective spreads, adding additional metrics such as percentage
realized and effective spreads, effective over quoted spreads, and size
improvement, and modifying the categorization of riskless principal
trades.
    First, the proposed amendment to modify the time horizon used to
calculate the realized spread from a single horizon of five minutes to
two horizons of 15 seconds and 1 minute \858\ would increase the
relevance of this measure and allow it to more accurately reflect the
speed of modern markets.\859\ This would allow market participants to
better compare execution quality across market centers. Realized
spreads are meant to capture information about the adverse selection
risk associated with providing liquidity,\860\ and in this way are a
useful measure for evaluating reporting entities' order handling
practices during times of market stress or high adverse selection.
However, the current requirement to use a five-minute time horizon to
calculate realized spreads for the purposes of Rule 605 disclosures is
too long of a horizon to reflect the speed of modern markets, and
likely results in noisy measures of the realized spread.\861\ Instead,
the proposed time horizons of 15 seconds and 1 minute are more
appropriate time horizons given current trading speeds. Analysis found
that the proposed time horizons of 15 seconds and 1 minute capture most
of the information about realized spreads, in particular for the
largest stocks.\862\ This supports results from the academic
literature, as one paper similarly posits that the five-minute time
horizon should be replaced with a horizon of no more than 15 seconds
for large stocks and 60 seconds for small stocks.\863\
---------------------------------------------------------------------------

    \858\ See proposed Rule 605(a)(1)(i)(G) and(I). See also supra
note 375 and accompanying text.
    \859\ See supra note 377 discussing commenters' suggestions
regarding to Rule 605's provisions related to the realized spread.
    \860\ See supra note 701 and accompanying text for a discussion
about what the realized spread is intended to measure.
    \861\ See discussion in supra section VII.C.2.(c)(5).
    \862\ See discussion of analyses in supra section IV.B.4.(a).
    \863\ See Conrad and Wahal.
---------------------------------------------------------------------------

    Second, the proposed amendment to require market centers to include
information about average effective spreads for NMLOs and orders
submitted with stop prices,\864\ in addition to market and marketable
limit orders, would increase transparency about the availability of
favorable executions for these types of orders. For NMLOs, the average
effective spread captures how much customers can expect to be
compensated for providing liquidity.\865\ If a market center is
offering lower (or, more precisely, more negative) effective spreads
for NMLOs on average, that means that the market center is able to
execute NMLOs even when the NBBO spread is wide, e.g., because it is
able to attract trading interest even during potentially adverse market
conditions.\866\ This can represent profitable trading opportunities
for providers of limit orders, who would otherwise need to raise (in
case of a buy limit order) or lower (in case of a sell limit order)
their limit prices in order to attract a counterparty. Therefore,
information about effective spreads for NMLOs would allow providers of
limit orders (and their broker-dealers) to make comparisons across
market centers based on the profitability of their limit order
strategies. For orders submitted with stop prices, the average
effective spread would reflect similar information to the extent that
these are NMLOs. For marketable orders submitted with stop prices,\867\
the average effective spread would capture information about how much
more than the stock's estimated value a trader has to pay for the
immediate execution of their order, similarly to how the effective
spread currently included in Rule 605 for market and marketable limit
orders can be interpreted.
---------------------------------------------------------------------------

    \864\ See proposed Rule 600(b)(10). See also supra note 386 and
accompanying text.
    \865\ See supra note 709 and accompanying text for more details
about interpreting effective spreads for NMLOs.
    \866\ Note that the ability of market centers to execute NMLOs
at a wide spread is limited by the prohibited of trade-throughs of
protected quotes under Rule 611 of Regulation NMS.
    \867\ See supra Table 4 for a break-down of orders submitted
with stop prices according to order type.
---------------------------------------------------------------------------

    The proposed amendments would require the average effective spread
of a NMLO or an order submitted with a stop price to be calculated
using the midpoint as of the time of the order's executability, rather
than the time of order execution.\868\ Providing the average effective
spread would allow market participants to measure what liquidity
providers expect to earn, which is more informative about expectations
of the reporting entities' skill at handling and/or executing orders as
compared to a measurement of what liquidity providers actually earn,
which can be impacted by market conditions outside of a reporting
entities' control.\869\
---------------------------------------------------------------------------

    \868\ See proposed Rule 600(b)(10). The time an order becomes
executable would be used for NMLOs, beyond-the-midpoint limit
orders, and orders submitted with stop prices.
    \869\ Market participants can use the realized spread to
estimate what limit order providers actually earn from liquidity
provision. See supra note 709.
---------------------------------------------------------------------------

    Third, the proposed amendment requiring reporting entities to
report average effective spreads and average realized spreads in
percentage terms,\870\ in addition to the current requirement to report
them in dollar terms,\871\ would allow market participants to evaluate
and compare the actual per-share dollar premium paid (or amount earned)
captured by the spread, and use average percentage measures to compare
aggregate spreads across broker-dealers that handle different mixes of
stocks and/or stocks with significant price volatility. Since average
spread measures represent a per-share cost, the real costs to (or
premiums earned by) investors captured by average spread measures can
be very different, depending on the stock price.\872\ Percentage
average spread measures, on the other hand, would better account for
these differences in stock prices.\873\ As different reporting entities
handle and/or transact in different mixes of stocks with varying
prices, including information about average percentage spreads would
make it possible for market participants who may want to compare
reporting entities' overall spread measures or their spread measures
for baskets of stocks to aggregate average spreads for a variety of

stocks with varying prices.\874\ This would facilitate a more apples-
to-apples comparison of both average effective and average realized
spreads across reporting entities.
---------------------------------------------------------------------------

    \870\ See proposed Rule 605(a)(1)(i)(H), (J), and (L).
    \871\ See 17 CFR 242.605(a)(1)(i)(K) and 17 CFR
242.605(a)(1)(ii)(A).
    \872\ See supra note 712 and accompanying text for an example
showing that the total cost of accumulating the same position in
terms of dollar value in two stocks with the same per-share dollar
effective spread can differ significantly in terms of total
transaction costs if one stock is priced much lower than the other.
    \873\ See example in supra note 712. While the $250 stock and
the $2.50 stock would have the same average effective spread, the
average percentage effective spreads of these stocks would be 0.004%
and 0.4%, respectively, which indicates that investors would face
higher costs from accumulating a position in the $2.50 stock than
they would from accumulating an equal-value position in the $250
stock.
    \874\ While the main purpose of Rule 605 is to facilitate
comparisons across reporting entities on the basis of execution
quality within a particular security, the Commission understands
that access to aggregated information is useful for market
participants. The proposed amendment to require reporting entities
to prepare summary reports that aggregate execution quality
information for S&P 500 stocks, along with all NMS stocks, would
give market participants access to aggregate effective spreads for
one commonly used basket of stocks. Meanwhile, per-stock percentage
spread information would enhance market participant's ability to
aggregate effective spread information across baskets of stocks
other than the S&P 500.
---------------------------------------------------------------------------

    Fourth, the proposed amendment requiring reporting entities to
include information on effective over quoted spreads \875\ would
increase market participants' access to information about price
improvement. The Commission understands that the effective over quoted
spread (E/Q) is a measure often used in industry practice.\876\ As
such, it represents a measure of price improvement that is likely to be
easily understood and interpreted by market participants. While E/Q can
already be calculated from data currently available in Rule 605
reports,\877\ extrapolating an average monthly quoted spread and using
that to calculate an average monthly E/Q produces a noisier E/Q measure
than an average E/Q calculated on a per transaction basis.\878\
Therefore, including this measure would improve upon the accessibility
of price improvement information contained in Rule 605 reports by
making more readily available a measure that is already used and well
understood by industry participants.
---------------------------------------------------------------------------

    \875\ See proposed Rule 605(a)(1)(i)(M). See also supra note 401
and accompanying text.
    \876\ See, e.g., About Us: Brokerage Built for You, Vanguard,
available at https://investor.vanguard.com/about-us/brokerage-order-execution-quality.
    \877\ See supra note 399.
    \878\ To see this, consider a market center that, in a given
month, executes two orders of sizes s1 and s2,
with effective spreads E1 and E2 and quoted
spreads Q1 and Q2. The true share-weighted
average E/Q would be [s1/(s1 + s2) x (E1/Q1)] + [s2/(s1 + s2) x (E2/
Q2)]. On the other hand, approximating the average E/Q from share-
weighted average effective and quoted spreads would yield [s1/(s1 Q1
+ s2 Q2) x E1] + [s2/(s1 Q1 + s2 Q2) x E2]. In other words, it
yields the weighted effective spread divided by a share-weighted
average quoted spread, rather than a share-weighted average of the
effective divided by quoted spread.
---------------------------------------------------------------------------

    Fifth, the proposed amendment expanding Rule 605 reporting
requirements to include a measure of size improvement would provide
market participants with more information about an additional dimension
of execution quality that is currently not fully captured by Rule 605
statistics.\879\ The proposed amendment would require reporting
entities to report, for executions of covered shares, a benchmark
metric calculated as the consolidated reference quote size, capped at
the size of the order,\880\ which a market participant could compare to
the market center's reported number of shares executed at or better
than the quote.\881\ This would reflect the market center's ability to
offer size improvement, which would be particularly beneficial for
larger-sized orders, as these orders are the most likely to exceed the
liquidity available at the best quotes and therefore benefit the most
from size improvement.
---------------------------------------------------------------------------

    \879\ Liquidity providers have expressed support for a size
improvement measure (see supra note 405) and have made suggestions
regarding measures (see supra notes 411-413).
    \880\ See proposed Rule 605(a)(1)(i)(F). As discussed in supra
section IV.B.4.(e), this metric is meant to capture whether the
depth available at the best market prices is sufficient to fully
execute against a given order, or whether the order would need to
walk the book in order to fully execute.
    \881\ Continuing the example from section VII.C.2.(c)(6), while
the market center's Rule 605 report would reveal a price improvement
metric of $0 for this order, the market center's benchmark metric
would reveal a consolidated reference quote size of 100 shares,
which a market participant could compare to the market center's
reported number of shares executed at or better than the quote,
which would reveal 200 shares.
---------------------------------------------------------------------------

    If information about size improvement is already captured by
current Rule 605 statistics, the addition of the above-described
benchmark metric capturing size improvement would not necessarily
represent a benefit to transparency. To examine the extent to which a
size improvement measure calculated using this benchmark metric would
contain information that is different from measures currently required
by Rule 605, data from the Tick Size Pilot B.II Market and Marketable
Limit Order dataset \882\ was analyzed to calculate the average
correlation \883\ between price improvement, effective spreads, and the
size improvement share count divided by the benchmark share count
(``size enhancement rate'').\884\ As national securities exchanges and
off-exchange market centers differ in the extent to which they can
offer size and price improvement, staff performed this analysis
separately for these two different types of market centers.
---------------------------------------------------------------------------

    \882\ See supra note 723 for dataset description. The Commission
limited this analysis to a randomly selected sample of 100 stocks
and for the time period of March 2019. This dataset was then merged
with MIDAS data to obtain the consolidated depth available at the
NBBO at the time of the market and marketable limit order
submissions, along with data on odd-lots and consolidated volume at
prices outside of the NBBO. This analysis uses data from prior to
the implementation of the MDI Rules and the specific numbers may be
different following the implementation of the MDI Rules. In
particular, for certain stocks, the NBBO quoted spread is expected
to narrow, the liquidity available at the NBBO may decrease, and the
NBBO midpoint may change, though the Commission is uncertain of the
direction of this effect. This may impact statistics that are based
on these values, including measures of price and size improvement
and effective spreads. See supra section VII.C.1.(d)(2). However, it
is unclear whether or how these effects would impact the
correlations between these measures documented in this analysis.
    \883\ Correlation is calculated using the Pearson correlation
coefficient, which measures the linear correlation between two sets
of data, ranging from -1 to 1, with -1 representing perfect negative
correlation and 1 representing perfect positive correlation. To
construct a measure of average correlation, the Commission first
calculated the Pearson correlation coefficient for each pair of
execution quality metrics, for each market center--stock
combination. Then the Commission took the value-weighted average
correlation coefficient across all stocks for each market center,
using dollar volume as weights. Then the Commission averaged the
resulting correlation coefficients across market centers using an
equal-weighted average.
    \884\ See section IV.B.4.(e) for a definition of the size
improvement share count, which captures the number of shares greater
than the depth available at the NBBO to which the market center was
able to offer the best displayed price. The size improvement share
count is divided by the proposed benchmark share count to obtain the
size enhancement rate to control for differences in market
conditions. For example, if Market Center A has 1,000,000 shares
executed at or better than the best displayed price and a benchmark
share count of 800,000, and Market Center B has 2,000,000 shares
executed at or better than the best displayed price and a benchmark
share count of 1,800,000, both market centers would have a size
improvement share count of 200,000, but Market Center A would be
offering the a higher rate of size improvement since they had fewer
shares available to them at the consolidated depth (i.e., a lower
benchmark share count). To capture this, the size improvement share
count is divided by the benchmark share count, such that Market
Center A would have a size enhancement rate of 200,000/800,000 = 25%
and Exchange B would have size enhancement rate of 200,000/1,800,000
= 11%. This difference recognizes that Exchange A and Exchange B
provided the same number of size improved shares but Exchange A had
lower consolidated depth available when it needed to execute.
---------------------------------------------------------------------------

    Results are presented in Table 8 and show that, for both national
securities exchanges and off-exchange market centers, effective spreads
are modestly (negatively) correlated with price improvement, confirming
that effective spreads contain some of the same information as price
improvement measures. Likewise, at least for national securities
exchanges, effective spreads are modestly (negatively) correlated with
the size enhancement rate, confirming that effective spreads contain
some information about size improvement. However, this correlation is
nearly zero for off-exchange market centers, implying that effective
spreads are a poor measure of size improvement

particularly for these types of market centers.

     Table 8--Average Correlation Between Measures of Price and Size
                               Improvement
------------------------------------------------------------------------
                                             National
                                            securities     Off-exchange
              Correlations                   exchanges    market centers
                                             (percent)       (percent)
------------------------------------------------------------------------
Price Improvement and Effective Spreads.           -25.7           -20.5
Size Enhancement Rate and Effective                -12.0             0.1
 Spreads................................
Price Improvement and Size Enhancement              31.3             5.9
 Rate...................................
------------------------------------------------------------------------
Table 8: Average Correlation between Measures of Price and Size
  Improvement. This table presents correlations between three measures
  of price improvement and size improvement: price improvement,
  calculated as the signed difference between the execution price and
  the NBBO; the effective spread, calculated as twice the signed
  difference between the execution price and the NBBO midpoint; and the
  size enhancement rate, calculated as the size improvement share count
  divided by the benchmark share count (see supra note 884 and
  accompanying text for a detailed description of this measure). See
  supra note 723 for dataset description and supra note 883 for
  methodology. This analysis uses data from prior to the implementation
  of the MDI Rules and results may be different following the
  implementation of the MDI Rules. See supra note 882 and section
  VII.C.1.(d)(2).

    While price improvement and the size enhancement rate are
moderately correlated for national securities exchanges, implying that
information from these two measures overlaps to some extent, this
correlation is comparatively low for off-exchange market centers. The
fact that price improvement and the size enhancement rate are not
perfectly overlapping (i.e., are not perfectly correlated) implies that
each of these measures to some degree conveys different information
about execution quality, particularly for off-exchange market centers.
Therefore, including information that could be used to calculate a size
improvement measure such as the size enhancement rate into Rule 605
reporting requirements would provide market participants with more
information about an additional dimension of execution quality that is
not fully captured by current Rule 605 statistics.
    Lastly, the proposed amendment specifying that market centers
should include riskless principal trades in the category of trades
executed away from the market center \885\ would increase transparency
about internalization by wholesalers, as information on the extent to
which wholesalers internalize order flow is currently obscured by the
inclusion of riskless principal trades into the category of trades
executed at, rather than away from, the market center.\886\ Market
participants would be more informed about potential differences in
execution quality between wholesalers that largely internalize order
flow as compared to those whose orders are subject to competition from
other interested parties quoting on external market centers.
---------------------------------------------------------------------------

    \885\ See proposed Rule 605(a)(1)(i)(D). See also supra note 418
and accompanying text.
    \886\ See supra section VII.C.2.(c)(8) for a discussion of how
classifying riskless principal trades in the category of executions
taking place at the market center may obscure the extent to which
wholesalers internalize order flow.
---------------------------------------------------------------------------

(v) Modifications to Information Required for Market, Marketable Limit,
Marketable IOC, and Beyond-the-Midpoint Limit Orders
    Several of the proposed amendments would modernize the information
required for market, marketable limit, marketable IOC, and beyond-the-
midpoint limit orders, which would promote transparency by increasing
the relevance of the information contained in Rule 605 reports for
these types of orders, including information about time-to-execution
and price improvement.
    First, the proposed amendment requiring reporting entities to
report, for shares executed with price improvement, executed at the
quote, or executed outside the quote, a wider range of time-to-
execution statistics, including the average,\887\ median,\888\ and 99th
percentile \889\ period from the time of order receipt to the time of
order execution, would increase transparency about the execution speeds
offered by a reporting entity. Given that outliers could skew the
share-weighted average time to execution, information about the
distribution of execution speeds in addition to the average would be
useful.\890\ Therefore, including a variety of statistics (mean, median
and 99th percentile) would help ensure that market participants have
sufficient information about the distribution of time-to-execution in
order to account for any outliers. This would facilitate comparisons
across reporting entities on the basis of execution speeds.
---------------------------------------------------------------------------

    \887\ For shares executed with price improvement, executed at
the quote, or executed outside the quote, respectively, see proposed
Rules 605(a)(1)(ii)(C), 605(a)(1)(ii)(G), and 605(a)(1)(ii)(L).
    \888\ For shares executed with price improvement, executed at
the quote, or executed outside the quote, respectively, see proposed
Rules 605(a)(1)(ii)(D), 605(a)(1)(ii)(H), and 605(a)(1)(ii)(M).
    \889\ For shares executed with price improvement, executed at
the quote, or executed outside the quote, respectively, see proposed
Rules 605(a)(1)(ii)(E), 605(a)(1)(ii)(I), and 605(a)(1)(ii)(N).
    \890\ Consider, for example, a reporting entity (``Reporting
Entity A'') that executes one hundred equally-sized orders with a
time-to-execution of 1 millisecond, but a single order at a time-to-
execution of 100,000 milliseconds (100 seconds), and compare to a
reporting entity (``Reporting Entity B'') that executes the same
size and amount of orders all at a time-to-execution of 1,001
milliseconds. Both reporting entities' average time-to-execution
statistic would be 1,001 milliseconds. However, comparing these two
statistics would not reveal that Reporting Entity A nearly always
offers a faster execution time than Reporting Entity B, except for a
single outlier. Median time-to-execution statistics, however, would
reveal that Reporting Entity A has a median time-to-execution of 1
millisecond, while Reporting Entity B has a median time-to-execution
of 1,001 milliseconds, which would allow for comparison accounting
for Reporting Entity A's outlier.
---------------------------------------------------------------------------

    Second, the proposed amendment requiring, for marketable order
types (i.e., market, marketable limit, marketable IOC, and beyond-the-
midpoint limit orders), reporting entities to disclose price
improvement statistics using the best available displayed price as the
benchmark \891\ would give market participants access to price
improvement information relative to a benchmark price that more
accurately reflects liquidity available in the market. For example, if
a market center internalizes an order with $0.05 of price improvement
relative to the NBBO, but odd-lots are available on another market
center at prices that are $0.10 better than the NBBO, this measure
would reflect a price dis-improvement of $0.05. This would indicate
that the investor could have received a better price if the market
center had routed the order to execute against the available odd-lot
liquidity.

This would thus allow market participants (including broker-dealers) to
identify those market centers that execute orders at prices better than
the best available displayed price, taking into account all available
displayed liquidity.\892\
---------------------------------------------------------------------------

    \891\ See proposed Rule 600(b)(14) (defining the ``best
available displayed price'') and proposed Rule 605(a)(1)(ii)(O)
through (S). See also supra section IV.5 for further discussion of
these amendments.
    \892\ If only the NBBO is used as the benchmark for the proposed
price improvement statistic relative to the best available displayed
price, because, for example, odd-lots inside the NBBO are not
available or because information about the best odd-lot orders
available in the market inside the NBBO is not or is not yet
available in consolidated market data, then these additional price
improvement statistics would be the same as the price improvement
statistics currently included in Rule 605 and would not have
significant economic effects. See supra note 423.
---------------------------------------------------------------------------

(vi) Additional Required Information for Executable NMLOs, Executable
Stop Orders, and Beyond-the-Midpoint Limit Orders
    The proposed amendments would increase the relevance of the
information contained in Rule 605 reports for executable NMLOs,
executable stop orders, and beyond-the-midpoint limit orders.
Specifically, the proposed amendment requiring reporting entities to
report the number of shares that executed while an executable NMLO was
in force \893\ would promote transparency regarding differences in the
execution probabilities of NMLOs between reporting entities.\894\
Market participants would be able to determine if a reporting entity is
unable to achieve an execution in an executable NMLO despite the fact
that a large number of shares are executing at that NMLO's limit price
elsewhere in the market, enabling investors and their broker-dealers to
make better informed routing decisions. Furthermore, the proposed
amendment requiring the reporting of the number of orders that received
either a complete or partial fill would provide important additional
information about the nature of a market center or broker-dealer's NMLO
and stop order executions--e.g., whether a high executed cumulative
count represents, on average, larger execution sizes or a higher count
of orders receiving executions.\895\
---------------------------------------------------------------------------

    \893\ See proposed Rule 605(a)(1)(iii)(B). See also supra
section IV.B.6 for further discussion of this proposed amendment.
    \894\ One commenter suggested a similar execution quality metric
called a ``non-marketable benchmark.'' See supra notes 442-443 and
accompanying text.
    \895\ For example, say that a reporting entity discloses in its
Rule 605 reports that it received 100 orders sized 100 round lots or
greater in a stock with a 100-share round lot, with a and that these
orders had a cumulative number of shares of 1,000,000, and
furthermore that it executed 990,000 of those shares. Information on
the number of complete or partial fills would help to clarify
whether the reporting entity, e.g., executed 99 orders of 10,000
shares each, or a single order of 990,000 shares.
---------------------------------------------------------------------------

(3) Proposed Summary Execution Quality Reports
    The proposed amendment requiring reporting entities to prepare
human-readable summary reports \896\ would facilitate comparisons
across reporting entities on the basis of execution quality by
increasing the accessibility of the information contained in Rule 605
reports.\897\ The data generated under Rule 605 is complex, and the raw
data may be difficult for some market participants to interpret and
aggregate. Summary reports would give market participants access to
standardized information that could be used to quickly compare across
reporting entities. This would be particularly useful for those
investors that may not have access to the resources to retrieve and
process the raw data in Rule 605 reports, such as some individual
investors.
---------------------------------------------------------------------------

    \896\ See proposed Rule 605(a)(2). See also supra note 462 and
accompanying text.
    \897\ In several contexts in which the Commission has received
general feedback on equity market structure, commenters have
suggested that the Commission require a simplified execution quality
report, particularly for retail investors. See supra notes 135-138
and corresponding text. Commenters have also suggested that the
Commission require broker-dealers to produce a summary report. See
supra notes 451-454.
---------------------------------------------------------------------------

    However, as differences in execution quality can be driven by
differences between reporting entities other than differences in their
skills at handling and/or executing orders, such as differences in the
characteristics of their order flow,\898\ the Commission recognizes
that it is important to strike a balance between sufficient aggregation
of orders to produce statistics that are meaningful and sufficient
differentiation of orders to facilitate fair comparisons of execution
quality across reporting entities.\899\ The Commission believes that
the statistics required in the summary reports would strike this
balance.
---------------------------------------------------------------------------

    \898\ See supra note 513 for an example of how differences in
order flow characteristics may impact inferences about execution
quality.
    \899\ See, e.g., Adopting Release, 65 FR 75414 (Dec. 1, 2000) at
75423.
---------------------------------------------------------------------------

(b) Improvements in Execution Quality
    The Commission believes that the proposed amendments would serve to
improve execution quality for both individual and institutional
investors, as these investors would be able to make better informed
decisions about where to route their orders to achieve better quality
executions. Execution quality would further improve, as the flow of
orders and customers to those reporting entities offering better
execution quality would promote increased competition on the basis of
execution quality, both in the market for brokerage services and in the
market for trading services. This would result in improvements to
overall levels of execution quality, as well as improvements to
particular components of execution quality, such as execution prices,
execution speeds, size improvement, and fill rates.
    The magnitude of the improvements in order execution quality that
individual and institutional investors may experience may be lower when
the MDI Rules are implemented, because the availability of faster
consolidated market data with more data on odd-lot information, auction
information, and depth of book information from competing consolidators
could result in improved execution quality for customer orders if their
broker-dealers currently utilize SIP data and switch to consuming the
expanded consolidated market data. However, there is uncertainty with
respect to how these benefits would change because there is uncertainty
regarding how the price improvement wholesalers would provide retail
investors would change as well as uncertainty regarding how the NBBO
midpoint will change for stocks with prices above $250 when the MDI
Rules are implemented.\900\ The Commission believes that the Proposal
would still lead to improvements in individual and institutional
investor order execution quality, as well as improvements in price
discovery, relative to a baseline in which The MDI Rules are
implemented.
---------------------------------------------------------------------------

    \900\ See supra section VII.C.1.(d)(2) for further details on
how the rules adopted in Market Data Infrastructure could affect the
NBBO.
---------------------------------------------------------------------------

(1) Increased Competition on the Basis of Execution Quality
    The Commission believes that the proposed amendments would have the
general effect of increasing levels of execution quality, as both
broker-dealers and market centers would experience increased
competition on the basis of execution quality. The Commission expects
that these improvements in overall levels of execution quality would
likely be the result of improvements to broker-dealer routing practices
and improvements to market centers' execution practices, as well as
generally improvements in market participants' ability to use Rule 605
reports to compare information across reporting entities as a result of
better and more accessible data.

(a) Improvements to Broker-Dealer Routing Practices
    The Commission believes that execution quality would improve as a
result of increased competition between broker-dealers on the basis of
execution quality.\901\ The proposed amendment expanding the scope of
Rule 605 reporting entities to include larger broker-dealers would
promote increased transparency regarding the execution quality achieved
by broker-dealers.\902\ Hence, market participants would be better able
to compare execution quality information across broker-dealers.
Customers could then use this information to compare across broker-
dealers and select those broker-dealers offering better execution
quality. The flow of customers to the broker-dealers that provide
better execution quality would improve the execution quality of
customers that route their orders to high-quality broker-dealers and
also increase the extent to which broker-dealers rely on execution
quality information when making their order routing decisions in order
to compete with other broker-dealers for customer order flow.
---------------------------------------------------------------------------

    \901\ The Commission believes that these effects would
principally accrue to larger broker-dealers, who would be required
to prepare Rule 605 reports, but may spill over to effect smaller
broker-dealers as well. See discussion in infra section
VII.D.1.(d)(1).
    \902\ See supra section VII.D.1.(a)(1)(a) for a discussion of
how the proposed amendment requiring larger broker-dealers to
publish Rule 605 reports would promote increased transparency about
the execution quality of larger broker-dealers.
---------------------------------------------------------------------------

    Broker-dealers would increase their competitive position with
respect to execution quality by investing in or otherwise adjusting
their routing practices to increase the extent to which they route
orders to the market centers offering better execution quality and
limit the extent to which they route orders for other potential
reasons. For example, broker-dealers that face conflicts of interest
that would otherwise misalign their interests with their customers'
interest in receiving the best possible execution quality would be
better incentivized to manage these conflicts as a result of an
increase in their need to compete on the basis of execution
quality.\903\ Specifically, as the gains to broker-dealers of
conflicted routing practices would be more likely to be outweighed by a
loss of customer order flow, because they offer lower execution
quality, these broker-dealers would base more of their routing
decisions on the execution quality of market centers, rather than on
which market centers are more likely to benefit them (e.g., because of
higher PFOF or lower access fees).
---------------------------------------------------------------------------

    \903\ See supra section VII.C.2.(a)(1) for a discussion of
potential conflicts of interest in broker-dealer routing decisions.
---------------------------------------------------------------------------

    The magnitude of the improvements in order routing practices may be
lower when the MDI Rules are implemented, because the availability of
faster consolidated market data with more data on odd-lot information,
auction information, and depth of book information from competing
consolidators could result in improved order routing for customer
orders if their broker-dealers currently utilize SIP data and switch to
consuming the expanded consolidated market data.\904\ However, the
Commission believes that the proposed amendments would lead to
improvements in broker-dealer order routing decisions relative to a
baseline in which the MDI Rules are implemented.
---------------------------------------------------------------------------

    \904\ See supra section VII.C.1.(d)(2) for further discussion.
---------------------------------------------------------------------------

(b) Improvements to Market Centers' Execution Practices
    The Commission believes that execution quality would improve as a
result of increased competition between market centers on the basis of
execution quality. As a result of the proposed amendments' effects
increasing the transparency of reporting entities' execution quality,
including market centers,\905\ broker-dealers would be better informed
about the execution quality of market centers when making their routing
decisions. The flow of orders to those market centers that provide
better execution quality would improve the execution quality of those
broker-dealers (and their customers) that route their orders to these
higher-quality market centers, and also increase the extent to which
market centers must improve their execution practices in order to
better compete with other market centers to attract customer order
flow.
---------------------------------------------------------------------------

    \905\ See supra section VII.D.1.(a)(2) for a discussion of how
the proposed modifications to Rule 605 disclosure requirements would
promote increased transparency about execution quality.
---------------------------------------------------------------------------

    The flow of orders to market centers that provide better execution
quality would be further enhanced by improvements in broker-dealer
routing practices,\906\ resulting from an increase in the extent to
which broker-dealers \907\ compete on the basis of execution quality as
a result of the proposed amendments increasing the transparency of
larger broker-dealers' execution quality.\908\ Broker-dealers would be
more likely to account for market centers' execution quality, further
promoting the flow of orders to market centers offering better
execution quality. The flow of orders to those market centers offering
better execution quality could also result in further improvements in
execution quality for their customers, as liquidity externalities and
the consolidation of orders onto high-quality market centers would
increase the liquidity of these venues.\909\
---------------------------------------------------------------------------

    \906\ See supra section VII.D.1.(b)(1)(a) for a discussion of
the effects of the proposed amendments on broker-dealer routing
practices.
    \907\ The Commission believes that these effects would
principally accrue to larger broker-dealers, but may spill over to
effect smaller broker-dealers as well. See supra note 901.
    \908\ See supra section VII.D.1.(a)(1)(a) for a discussion of
how the proposed amendment requiring larger broker-dealers to
publish Rule 605 reports would promote increased transparency about
the execution quality of larger broker-dealers.
    \909\ However, liquidity externalities may have adverse effects
on the competition between market centers if they result in the exit
of some market centers. See infra section VII.D.1.(d)(4) for a
discussion.
---------------------------------------------------------------------------

    Additionally, the proposed amendments modifying the scope of
reporting entities to specify that broker-dealers post separate Rule
605 reports for their ATSs and require that market centers operating
SDPs and qualified auctions post separate reports for each market
center would facilitate comparisons of execution quality across similar
types of market centers, by allowing market participants to be better
informed about the execution quality of each type of market
center.\910\ This would increase the extent to which these market
centers would compete on the basis of execution quality in order to
attract orders.
---------------------------------------------------------------------------

    \910\ See supra section VII.D.1.(a)(1) for a discussion of how
the proposed amendments modifying the scope of reporting entities
would promote increased transparency about execution quality.
---------------------------------------------------------------------------

    The magnitude of the improvements in execution practices may be
lower when the MDI Rules are implemented, because the availability of
faster consolidated market data with more data on odd-lot information,
auctions information, and depth of book information from competing
consolidators could result in more informed customer order routing by
broker-dealers that switch to consuming the expanded consolidated
market data, which could separately increase the flow of orders to
trading venues offering better execution quality.\911\ However, the
Commission believes that the proposed amendments would lead to
improvements in execution practices over and above the improvements
that might result from the implementation of the MDI Rules.
---------------------------------------------------------------------------

    \911\ See supra section VII.C.1.(d)(2) for further discussion.

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

(c) Improvements to Information Used To Make Apples-to-Apples
Comparisons of Execution Quality
    The Commission believes that competition between reporting entities
on the basis of execution quality would also be enhanced by the
proposed amendments modernizing the information included in Rule 605
reports used to make apples-to-apples comparisons of execution quality.
Some of the information required to be reported by Rule 605 does not
measure execution quality directly but serves the purpose of providing
context to execution quality metrics. This enables investors to make
better apples-to-apples comparisons across reporting entities whose
order flows consist of different mixes of securities, order sizes, and
order types,\912\ and to ascertain how entities may handle orders
during different market conditions.\913\ If market participants have
access to more (and/or more relevant) information that improves their
ability to compare execution quality across reporting entities, this
would further promote competition between reporting entities on the
basis of execution quality, resulting in improvements in execution
quality for investors. Such information includes the proposed
amendments expanding and modernizing order size and order type
categories,\914\ which permit market participants to control for
potential differences in the characteristics of reporting entities'
order flow, as well as the proposed amendments modifying the
calculation of realized spreads,\915\ which allows market participants
to control for potential differences in the extent to which reporting
entities handle orders during periods of adverse market conditions.
---------------------------------------------------------------------------

    \912\ See supra note 513 for an example of how differences in
order flow characteristics may impact inferences about execution
quality.
    \913\ See supra note 701 and accompanying text for a discussion
of how handling order flow during adverse market conditions affects
execution quality.
    \914\ See supra sections VII.D.1.(a)(2)(b) and
VII.D.1.(a)(2)(c)(i)-(ii) for discussions of how the proposed
amendments expanding the coverage of orders, as well as modifying
the existing order type and size categories, respectively, would
promote increased transparency about execution quality.
    \915\ See supra section VII.D.1.(a)(2)(c)(iv) for a discussion
of how the proposed amendments modifying the reporting requirements
for realized spreads, including expanding and modernizing the time
horizon used to calculate the average realized spread, as well as
including information about percentage average realized spreads,
would promote increased transparency about execution quality.
---------------------------------------------------------------------------

    Furthermore, as market participants have access to more useful
information about the execution quality of particular order types and
sizes, the extent to which reporting entities would need to compete on
the basis of execution quality to attract these types of orders would
increase, and order flow would accumulate to the reporting entities
offering the highest execution quality for these types of orders. This
would in turn translate into improved execution quality for investors
for these types of orders. For example, as a result of the proposed
amendment expanding the order size categories to include information
about odd-lots, market participants' improved access to information
about a market center's offering of price improvement and timely
execution of odd-lots would improve both the price and speed at which
odd-lot orders are executed, which would be beneficial for both
institutional and individual investors.\916\
---------------------------------------------------------------------------

    \916\ See supra section VII.C.2.(b)(1)(a) for a discussion of
the use of odd-lots by both individual and institutional investors.
---------------------------------------------------------------------------

(d) Improvements to Accessibility
    The Commission believes that execution quality would also increase
as a result of the proposed amendment requiring reporting entities to
prepare human-readable summary reports,\917\ as market participants
would be better able to use information from Rule 605 reports to
compare execution quality across reporting entities and competition
between reporting entities on the basis of execution quality would
increase as a result.\918\ Specifically, individual investors, who may
be less likely to have access to the resources to retrieve and process
the raw data in Rule 605 reports, would be better able to access
information from Rule 605 reports to compare execution quality across
larger broker-dealers, which would increase the extent to which these
broker-dealers would need to compete on the basis of execution quality
to attract and retain these customers.
---------------------------------------------------------------------------

    \917\ See proposed Rule 605(a)(2). See also supra note 462 and
accompanying text.
    \918\ See supra section VII.D.1.(a)(3) for a discussion of how
the proposed amendment requiring reporting entities to prepare
human-readable summary reports would result in increased
transparency about execution quality.
---------------------------------------------------------------------------

(2) Improvements to Components of Execution Quality
    The Commission believes that the proposed amendments would have the
effect of improving the quality of executions along specific dimensions
of execution quality, including execution prices, size improvement,
execution speeds, and execution probabilities (i.e., fill rates), as
investors (and their broker-dealers) would be better able to identify
and route orders to those reporting entities that offer better quality
executions in terms of a particular dimension of execution
quality,\919\ and as reporting entities would further compete with one
another on the basis of these dimensions of execution quality.\920\ The
Commission believes that the proposed amendments would lead to
improvements in execution quality relative to a baseline in which the
MDI Rules are implemented, i.e., over and above any improvements in
execution quality that may result from the implementation of the MDI
Rules.\921\
---------------------------------------------------------------------------

    \919\ See supra section VII.D.1.(a) for a discussion of the
benefits to the proposed amendments for increased transparency.
    \920\ See supra section VII.D.1.(b)(1) for a discussion of the
impact of the proposed amendments on competition between reporting
entities on the basis of execution quality.
    \921\ See supra section VII.C.1.(d)(2) for further discussion.
---------------------------------------------------------------------------

(a) Execution Prices
    The Commission believes that the proposed amendments would improve
execution quality in terms of execution prices by increasing the extent
to which reporting entities seek out executions at prices better than
the NBBO; i.e., increasing the extent to which market centers execute
order with price improvement, and/or increasing the extent to which
broker-dealers route to market centers offering price improvement.
    First, the proposed amendment to require information on the average
percentage effective spread in addition to the average effective spread
in dollar terms would facilitate more apples-to-apples comparisons of
execution prices across reporting entities, permitting greater
competition and resulting in lower effective spreads; i.e., better
execution prices.\922\ Second, the proposed amendment to require
information about effective spreads for NMLOs, in addition to market
and marketable limit orders, would allow providers of limit orders (and
their broker-dealers) to make comparisons across market centers based
on the profitability of their limit order strategies, permitting
greater competition and resulting in lower (i.e., more negative)
effective spreads for NMLOs.\923\ Third, the proposed amendment to
require price improvement statistics using the best available displayed
price as the benchmark for market, marketable limit,

marketable IOC, and beyond-the-midpoint limit orders, would promote
incentives for reporting entities to seek out or offer price
improvement relative to the best displayed price, taking into account
all available displayed liquidity (including odd-lots).\924\ Continuing
the example from section VII.C.2.(c)(6), in which a market center
internalizing an order could post a positive price improvement metric
even though a better-priced odd-lot was available at another market
center, this would not be the case for price improvement metrics
measured relative to the best displayed price. Instead, the market
center may be incentivized to increase its offering of price
improvement from $0.05 above the NBBO to $0.15 above the NBBO (i.e.,
$0.05 above the best displayed price), in order to maintain the same
level of price improvement in its Rule 605 report. Lastly, the proposed
amendment to require reporting entities to report effective over quoted
spreads would make more readily available a measure that is already
often used and well understood by industry participants, and would
result in improved execution prices as a result of the effects on
competition.\925\
---------------------------------------------------------------------------

    \922\ See supra section VII.D.1.(a)(2)(b)(iv) for a discussion
of the effect of the proposed amendment to include the average
percentage effective spread on transparency.
    \923\ See id. for a discussion of the effect of the proposed
amendment to include the average effective spread for NMLOs on
transparency.
    \924\ See supra section VII.D.1.(a)(2)(b)(v) for a discussion of
the effect of the proposed amendments related to include information
about price improvement relative to the best displayed price on
transparency.
    \925\ See supra section VII.D.1.(a)(2)(b)(iv) for a discussion
of the benefits to transparency of the proposed amendments related
to include information about E/Q into Rule 605 reporting
requirements.
---------------------------------------------------------------------------

(b) Size Improvement
    The proposed amendments would improve execution quality in terms of
size improvement by increasing the extent to which market centers
execute orders beyond the liquidity available at the NBBO; i.e.,
execute order with size improvement, and by increasing the extent to
which broker-dealers route to market centers offering size improvement.
The proposed amendment would require reporting entities to report a
benchmark metric calculated as the consolidated reference quote size,
capped at the size of the order.\926\ In order to attract broker-dealer
order flow,\927\ market centers would be incentivized to compete on the
basis of size improvement, for example by executing orders against
their own inventory at or better than the NBBO, or offering additional
incentives to attract hidden liquidity priced at or better than the
NBBO. Investors that particularly value the ability of reporting
entities to offer size improvement, such as investors trading in larger
order sizes, would be able to use this metric to discern which
reporting entity might offer better size improvement to their orders,
which would allow them to make better routing decisions and obtain
increased size improvement as a result.\928\ Competition on the basis
of size improvement among reporting entities would also increase in
order to attract these customers and their orders.
---------------------------------------------------------------------------

    \926\ See supra note 720 for an example.
    \927\ See supra section VII.D.1.(b)(1)(a) for a discussion of
how the proposed amendments would increase competition between
broker-dealers on the basis of execution quality.
    \928\ For example, compare the example of Market Center B
offering size improvement to a 200-share order in note 718, supra,
to the example of Market Center B offering price improvement to a
100-share order in note 719, supra. A trader that tends to submit
200-share orders would want to know a market center's ability to
offer the first scenario, while a trader that tends to submit 100-
share orders would want to know the market center's ability to offer
the second scenario. However, in both examples the Rule 605 report
would show an effective spread statistic of $0.05 for orders in the
order size category of 100-499 shares, which means that these
traders would not be able to use this statistic to discern a market
center's execution quality according to the dimension of execution
quality that they find most valuable.
---------------------------------------------------------------------------

(c) Execution Speeds
    The proposed amendments would also improve execution quality by
increasing execution speeds for those investors that value fast
executions.\929\ The proposed amendments increasing the granularity of
the timestamp conventions required by Rule 605 from seconds to
milliseconds, replacing the time-to-execution categories currently
defined in Rule 605 with time-to-execution statistics, and measuring
time-to-execution for NMLOs from the time that the order becomes
executable, rather than from the time of order receipt, would lead to
improved execution times for investors, as the increased transparency
around reporting entities' execution times would increase their ability
to identify and route orders to reporting entities offering faster
execution speeds.\930\
---------------------------------------------------------------------------

    \929\ See supra section VII.C.2.(c)(4) for a discussion of
current executions speeds. The Commission expects these benefits to
mainly accrue to investors that value faster executions, as these
investors (and their broker-dealers) would benefit from an improved
ability to compare execution speeds across trading venues and route
their orders accordingly. However, to the extent that changes in
order flow would result in an increase in market centers' incentives
to offer faster executions, e.g., by investing in faster trader
technology, this could result in a market-wide increase in trading
speeds for all investors.
    \930\ See supra section VII.D.1.(a)(2)(b)(iii) for a discussion
of how these amendments to timestamp conventions would promote
transparency on the basis of execution quality.
---------------------------------------------------------------------------

    Investors that may prioritize fast execution times would be able to
better identify the reporting entities offering better execution
quality in terms of time-to-execution. Different investors benefit from
faster execution times for different reasons. Individual investors
often benefit from faster executions to the extent that faster
executions result in better prices. For example, market orders benefit
from fast execution as any delay in execution could result in worse
price if prices are increasing (for buy orders) or decreasing (for sell
orders). This is particularly true for market orders submitted with
stop prices, which tend to be triggered during rapidly declining
markets, and which an analysis finds constitute 6.44% of market orders
submitted by individual investors.\931\ For IOCs, a faster execution
implies a faster routing time, which would reduce the chance of another
order stepping in and removing liquidity before the order gets a chance
to execute, thus increasing the order's probability of execution.
---------------------------------------------------------------------------

    \931\ See Table 4 in supra section VII.C.2.(b)(2).
---------------------------------------------------------------------------

    For institutional investors, the benefits of fast execution may be
different.\932\ Institutional investors, who often need to trade large
positions, may care more about reducing the price impact of their order
rather than executing the order quickly.\933\ However, the academic
literature suggests that institutional investors with short-lived
private information may benefit from faster time-to-executions, as they
are able to profit from trading against other, slower
institutions.\934\ On the same note, faster time-to-executions benefit
slower institutional investors by reducing their exposure to adverse
selection as much as possible.\935\ Institutional investors may also
care about the execution speed of their child orders.
---------------------------------------------------------------------------

    \932\ While institutional investors are likely to have access to
alternative sources of more granular information about execution
speeds, such as reports obtained through TCA, the information on
execution quality that is individually collected by institutional
investors is typically non-public and highly individualized, and
therefore limited to the execution quality obtained from broker-
dealers with which the institutional investors currently does
business. Since Rule 605 reports are public, institutional investors
could use these reports to assess the execution quality of the
broker-dealers and market centers with which they do not currently
do business. See supra section VII.C.1.(c)(2) for further
discussion.
    \933\ See supra section VII.C.3.(a)(1)(b) for a discussion of
the handling of institutional orders by broker-dealers as not held
orders.
    \934\ See, e.g., Ohad Kadan, Roni Michaely & Pamela C. Moulton,
Trading in the Presence of Short-Lived Private Information: Evidence
from Analyst Recommendation Changes, 53 J. Fin. Quantitative
Analysis 1509 (2018).
    \935\ See, e.g., Jonathan Brogaard, Bjorn Hagstr[ouml]mer, Lars
Nord[eacute]n & Ryan Riordan, Trading Fast and Slow: Colocation and
Liquidity, 28 Rev. Fin. Stud. 3407 (2015).

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

(d) Fill Rates
    The Commission believes that the proposed amendments would improve
execution quality in terms of increased fill rates.\936\ Specifically,
the proposed amendment for reporting entities to report the number of
shares that executed while an executable NMLO was in force would
increase the ability of investors and their broker-dealers to route
orders to those reporting entities with higher fill rates of executable
NMLOs, as market participants would have access to information about
the extent to which a NMLO did not execute or executed after a large
number of shares executed elsewhere in the market, despite the fact
that the NMLO was executable.\937\ In order to attract this order flow,
reporting entities would need to improve their ability to achieve
executions for executable NMLOs. Market centers could achieve higher
fill rates for NMLOs, for example, by reducing access fees to encourage
more marketable orders to execute against resting NMLOs, or by
discouraging excessive submissions and cancellations of NMLOs, for
example by instituting or raising excessive messaging fees.\938\
Broker-dealers could achieve higher fill rates for NMLOs by improving
their order routing methods and by routing orders to market centers
that achieve higher fill rates for NMLOs.
---------------------------------------------------------------------------

    \936\ See supra note 519 for a definition of the fill rate.
    \937\ See supra section VII.D.1.(a)(2)(b)(vi) for a discussion
of how the proposed amendment requiring reporting entities to report
the number of shares that executed while an executable NMLO was in
force increase transparency.
    \938\ See, e.g., Price List--Trading Connectivity, NASDAQ,
available at https://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2, which describes how one market
center charges its members a penalty for exceed a certain ``Weighted
Order-to-Trade Ratio.''
---------------------------------------------------------------------------

(c) Other Benefits
    To the extent that the proposed amendments to Rule 605 increase
incentives for reporting entities to compete in areas other than
improved execution quality, customers may benefit from improvements
that are not directly related to execution quality, such as lower fees,
higher rebates, new products or functionalities, or better customer
service. Note that improvements in other quality areas as a result of
the increase in competition among reporting entities may be either
complementary to or a substitute for improvements in execution quality.
Investors are more likely to see an overall benefit from the proposed
amendments to the extent that these improvements are complementary.
Furthermore, to the extent that the proposed amendments increase
competition in related markets, market participants could benefit from
lower costs and/or improved quality in these markets. For example, the
quality of TCA reports may improve if their publishers need to offer
better products in order to complete with the publicly available data
under Rule 605.
(d) Potential Limitations to Benefits
    There are certain factors, however, that could limit the effects of
the proposed amendments on transparency and competition, which would
limit the effectiveness of the proposed amendments in improving
execution quality.
(1) Effect on Smaller Broker-Dealers
    The expanded scope of Rule 605 only includes larger broker-dealers.
Hence, investors, as they gain transparency into the execution at these
larger broker-dealers, may route more transactions to these broker-
dealers at the expense of smaller broker-dealers who are not included
in the scope of Rule 605. That said, smaller broker-dealers may gain a
competitive advantage in the form of lower costs as a result of not
having to prepare Rule 605 reports. Also, increased levels of
competition between larger broker-dealers may spill over to affect
smaller broker-dealers, as their customers may expect more
transparency, and smaller broker-dealers would continue to be able to
publish ad hoc execution quality reports that focus on execution
quality metrics in which they perform well.\939\ Altogether, the
Commission preliminarily believes that the cumulative effects on
smaller broker-dealers, who handle only a small fraction of all
orders,\940\ are likely to be minimal, and limiting the scope of Rule
605 to large broker-dealers should suffice for the purposes of
achieving the competitive effects discussed in prior sections.\941\
---------------------------------------------------------------------------

    \939\ These information asymmetries are described in more detail
in supra section VII.C.1.(a).
    \940\ See infra section VII.E.1.(a) for a discussion of an
analysis showing that broker-dealers with 100,000 customers or
greater handled 66.6% of customer orders and 1.5% of customer
accounts identified in the data sample. Note that, if these smaller
broker-dealers would attract enough customers such that they
represent a more significant fraction of orders, it is likely they
would also subsequently fall above the customer account threshold
and be required to begin publishing Rule 605 reports.
    \941\ See supra section VII.D.1.(b)(1) for a discussion of the
effects of the proposed amendments on competition between reporting
entities on the basis of execution quality.
---------------------------------------------------------------------------

    It is also possible that, as a result of the proposed amendments,
smaller broker-dealers that are unable,\942\ or choose not, to offer
the same levels of transparency as larger broker-dealers may lose
customers to larger broker-dealers for which better execution quality
information is available, which could cause some smaller broker-dealers
to exit the market. The Commission is unable to quantify the likelihood
that a brokerage firm would cease operating as a result of the proposed
amendments. Even if some smaller broker-dealers were to exit, the
Commission does not believe this would significantly impact competition
in the market for brokerage services because the market is served by a
large number of broker-dealers.\943\ The Commission recognizes that
smaller broker-dealers may have unique business models that are not
currently offered by competitors, but the Commission believes other
broker-dealers, including new entrants, could create similar business
models if demand was adequate.
---------------------------------------------------------------------------

    \942\ For example, if investors make use of third-party
summaries of Rule 605 reports, these summaries may not incorporate
execution quality information outside of ``official'' Rule 605
reports. In that way, smaller broker-dealers would be unable to
offer the same level of transparency even if they were to prepare an
execution quality report containing all of the information and
according to the exact specifications of Rule 605.
    \943\ See supra section VII.C.3.(a)(1) for a discussion of the
current structure of the market for brokerage services.
---------------------------------------------------------------------------

(2) Switching Costs
    The effects of the proposed amendments on competition among
reporting entities \944\ may be limited if investors incur high costs
to switch between broker-dealers, and/or if broker-dealers incur costs
to switch between market centers in response to information about
execution quality. To the extent that competition between reporting
entities on the basis of execution quality is limited, this would limit
the extent to which execution quality would improve as a result of the
proposed amendments.\945\
---------------------------------------------------------------------------

    \944\ See supra section VII.D.1.(b)(1) for a discussion of the
effects of the proposed amendments on competition between reporting
entities on the basis of execution quality.
    \945\ The effect of switching costs on competition may also
depend on the variability of reporting entities' execution quality
over time. For example, if the execution quality of any given
reporting entity varies significantly over time, customers of those
reporting entities may find it optimal to switch between reporting
entities with some frequency, which would increase their overall
switching costs. On the other hand, if the execution quality of
reporting entities is relatively constant over time, the number of
times that a customer would optimally want to switch between
reporting entities would likely be more limited, and in this case
switching costs may be a relatively small and/or short-term
friction.

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

    First, if the costs for customers to switch broker-dealers are
significant,\946\ this would limit the extent to which Rule 605
promotes competition among broker-dealers on the basis of execution
quality. However, switching costs for both individual and institutional
investors may be limited. For example, institutional investors are
likely to have multiple broker-dealers, which would facilitate the
transfer of business to better-performing broker-dealers, and, for
individual investors, transferring between retail brokers may be less
costly, for example, because some retail brokers will compensate new
customers for transfer fees that their outgoing broker-dealer may
charge them.\947\
---------------------------------------------------------------------------

    \946\ See supra section VII.C.3.(a)(1) for a discussion of
switching costs related to switching broker-dealers.
    \947\ See supra note 745 for an example.
---------------------------------------------------------------------------

    Second, the presence of switching costs that broker-dealers incur
from changing the primary trading venues to which they route orders
\948\ may limit the effects of the proposed amendments on competition
among market centers. However, the Commission expects this to be less
of an issue for the larger broker-dealers that would be required to
produce Rule 605 reports,\949\ as these broker-dealers would likely
face lower switching costs. For example, larger broker-dealers are
likely already connected to multiple national securities exchanges.
They are experienced with routing order flow across a larger variety of
market centers and/or have sufficient bargaining power to renegotiate
any agreements that they might have with individual market centers.
---------------------------------------------------------------------------

    \948\ See supra section VII.C.3.(b)(1) for discussions of
switching costs broker-dealers may face when switching trading
venues.
    \949\ The Commission believes that the competitive effects of
the proposed amendments would principally accrue to larger broker-
dealers, who would be required to prepare Rule 605 reports, and thus
these would be the broker-dealers most likely to be incentivized to
switch market-centers as a result of additional information about
market center execution quality. However, these effects may spill
over to smaller broker-dealers as well per the discussion in supra
section VII.D.1.(d)(1). For these smaller broker-dealers, switching
costs may be more binding.
---------------------------------------------------------------------------

(3) Limited Usage and Search Costs
    The benefits of the proposed amendments for transparency,
competition, and execution quality may be limited if market
participants are not likely to make use of the additional information
available under the proposed amendments, e.g., because this information
is difficult to access or is not useful to market participants due to
the availability of other sources of information about execution
quality.
    For example, investors currently have access to information about
the execution quality achieved by their broker-dealers for their not
held orders,\950\ which in certain circumstances may be more relevant
for institutional investors than aggregate information about the
execution quality of broker-dealers' held orders \951\ and may lead to
a low usage rate by institutional investors of larger broker-dealers'
Rule 605 reports as proposed to be required. This would limit the
benefits of the proposed amendments for competition in the market for
institutional brokerage services. However, to the extent that
institutional investors' alternative sources of execution quality
information do not contain information about all of their relevant
orders, and/or cannot be easily used to compare across broker-dealers
that an investors does not do business with,\952\ the proposed
amendments would likely impact competition for institutional brokerage
services as well.
---------------------------------------------------------------------------

    \950\ See supra note 60 and accompanying text discussing broker-
dealers' requirements under Rule 606(b)(3) to provide individualized
reports of execution quality upon request for not held orders.
    \951\ See supra section VII.C.3.(a)(1)(b) for a discussion of
institutional investors' usage of not held orders.
    \952\ See discussion in supra section VII.C.1.(c)(2).
---------------------------------------------------------------------------

    Furthermore, the volume and complexity of data produced by Rule 605
reports (i.e., both the number of rows and columns of Rule 605 reports)
would increase as a result of the proposed amendments to modify the
coverage of orders and expand the information required by Rule 605.
Both of these factors could make the evaluation of the raw data in Rule
605 reports costlier. If, in order to avoid this additional complexity,
market participants would not incorporate the data elements or orders
types that are proposed to be added to Rule 605 reports under the
proposed amendments into their analyses of consumption of Rule 605
data, this would limit the potential benefits of the proposed
amendments. However, market participants that currently have the
resources to process and analyze the raw data contained in Rule 605
reports are likely to have the resources to process and analyze the
additional data elements. To the extent that some investors may not
have access to the resources to directly analyze the raw Rule 605 as a
result of its increase in complexity,\953\ the Commission expects that
independent analysts, consultants, broker-dealers, the financial press,
and market centers would continue to respond to the needs of investors
by analyzing the disclosures and producing more digestible information
using the data.\954\
---------------------------------------------------------------------------

    \953\ See supra section VII.C.1.(c)(1) for a discussion of the
difficulties that individual investors may face when accessing Rule
605 reports.
    \954\ See supra note 545-546 for examples of how third parties
currently use Rule 605 data to produce information meant for public
consumption.
---------------------------------------------------------------------------

    The benefits of the proposed amendments for transparency,
competition, and execution quality may also be limited by the presence
of search costs. The proposed amendments are expected to increase the
number of Rule 605 reporting entities from 236 to 359.\955\ For those
market participants that would seek to collect a complete or mostly
complete set of Rule 605 reports, these market participants would need
to search through and download reports from a greater number of
websites, which would increase their search costs.\956\ If, in order to
avoid this increase in search costs, market participants would not
incorporate execution quality information from the proposed additional
reporting entities into their search or analysis of Rule 605 reports,
this would limit the benefits of the proposed expansion of Rule 605
reporting entities.
---------------------------------------------------------------------------

    \955\ See supra section VI.C for a description of these
estimates.
    \956\ See supra section VII.C.2.(d) for a discussion of the
search costs associated with collecting information from Rule 605
reports.
---------------------------------------------------------------------------

(4) Liquidity Externalities
    The effects of the proposed amendments on competition between
market centers \957\ may be limited by the development of liquidity
externalities, or the consolidation of liquidity on a few dominant
market centers.\958\ Under such circumstances, while the consolidation
of liquidity on market centers offering superior execution quality may
benefit market participants in the short run, it may also lead to
barriers to entry in the market for trading services, as new entrants
may have a harder time attracting sufficient liquidity away from
established liquidity centers. This could also lead to consolidation or
exit by smaller market centers. This could have the effect of reducing
competition in the market for trading services. The Commission is
unable to quantify the likelihood that

some smaller market centers would cease operating.
---------------------------------------------------------------------------

    \957\ See supra section VII.D.1.(b)(1) for a discussion of the
effects of the proposed amendments on competition between reporting
entities on the basis of execution quality.
    \958\ For theoretical discussions of liquidity externalities see
Marco Pagano, Trading Volume and Asset Liquidity, 104 Q. J. Econ.
255 (1989): Ananth Madhavan, Consolidation, Fragmentation, and the
Disclosure of Trading Information, 8 Rev. Fin. Stud. 579 (1995).
---------------------------------------------------------------------------

(5) Dimensions of Execution Quality Not Captured by Rule 605 Reports
    The expected benefits from the proposed amendments to Rule 605 may
be lessened to the extent that there are dimensions of execution
quality not captured by Rule 605 reports which drive order handling
decisions. For example, the ability of customers and/or traders to
remain anonymous or limit information leakage may not be a dimension
that is easily discernible from looking at Rule 605 data, though it is
a feature of execution quality that may be valued by some
investors.\959\ Similarly, the extent to which the reported statistics
are perceived to fail to serve as an acceptable or timely proxy for a
reporting entities' ability to secure favorable executions may dampen
the benefits of proposed amendments for execution quality. This may
happen if, for example, future market developments render the monthly
reporting requirement to be too infrequent to be useful.
---------------------------------------------------------------------------

    \959\ See, e.g., Carole Comerton-Forde & Kar Mei Tang,
Anonymity, Liquidity and Fragmentation, 12 J. Fin. Mkt. 337 (2009),
who found evidence of evidence of a migration in order flow from the
non-anonymous New Zealand Exchange (NZX) to the Australian Stock
Exchange after the latter increased anonymity by removing broker
identifiers from the central limit order book.
---------------------------------------------------------------------------

2. Costs
    As discussed in detail below, the Commission recognizes that the
proposed amendments to Rule 605 would result in initial and ongoing
compliance costs to reporting entities. The Commission quantifies the
costs where possible and provides qualitative discussion when
quantifying costs is not feasible. Most of the compliance costs related
to the proposed amendments to Rule 605 involve a collection of
information, and these costs are discussed above in relation to the
expected burdens under the Paperwork Reduction Act, with those
estimates being used in the economic analysis below.\960\
---------------------------------------------------------------------------

    \960\ See supra section VI.D for a discussion of how the
proposed amendments would create burdens under the PRA.
---------------------------------------------------------------------------

(a) Compliance Costs
    The Commission believes that the majority of costs related to the
proposed amendments would be in the form of compliance costs, including
both initial and ongoing. Table 9 provides a summary of the estimated
change in compliances costs \961\ resulting from the proposed
amendments. The majority of both initial and ongoing compliance costs
would be related to the proposed expansion of the scope of reporting
entities. However, a significant portion of initial compliance costs
would also result from the proposed amendments modifying the coverage
of orders and information required by Rule 605, as current reporters
would need to update their systems and additionally some new market
centers trading in fractional shares would be required to report.
Lastly, compliance costs resulting from the proposed amendment
requiring reporting entities to prepare summary execution quality
reports would mostly be ongoing.
---------------------------------------------------------------------------

    \961\ Note that the discussion in section VI.D considers the
total expected ongoing compliance costs for all reporting entities,
both new respondents and current respondents. To focus on the costs
that would directly follow from the proposed amendments, this
section focuses on the expected change in ongoing costs, which
excludes the portions of ongoing costs that current respondents
currently incur.

          Table 9--Estimated Compliance Costs, by Cost Category
------------------------------------------------------------------------
                                              Initial         Ongoing
                                            compliance      compliance
              Cost category                    costs           costs
                                             (million)       (million)
------------------------------------------------------------------------
Expanding the Scope of Reporting                    $3.8            $3.9
 Entities...............................
Modifications to Information Required...             3.4             1.9
Proposed Summary Execution Quality                   1.7             1.1
 Reports................................
                                         -------------------------------
    Total...............................             8.9            6.8
------------------------------------------------------------------------
Table 9: Estimated Compliance Costs, by Cost Category. This table
  presents estimates of the compliance costs related the to three broad
  categories of the proposed amendments to Rule 605 (expanding the scope
  of reporting entities, modifications to the coverage of orders and
  information required, and the proposed amendment requiring the
  preparation of summary reports). Numbers are based on the estimated
  number of respondents and PRA costs in sections VI.C and VI.D supra
  and have been rounded to the nearest tenth of million to avoid false
  precision. Further breakdowns of these estimates are presented in
  Tables 10, 11, and 12.

    Table 9 further breaks compliance costs down into three separate
categories--costs related to the expansion of reporting entities, costs
related to modifications to information required, and costs related to
the preparation of summary execution quality reports.
    Estimates for the costs in each of these categories depend on a
number of factors, including wages, inflation, and firm size, and the
Commission acknowledges that the costs presented could be
underestimated to the extent that wages and/or inflation are higher
than those used in the estimation. Meanwhile, costs in each of these
categories may also be overestimated if, instead of preparing reports
in-house, reporting entities contracted with third-party vendors to
prepare their reports.\962\ The costs in Table 9 are based on the
assumption that reporting entities would prepare their Rule 605 reports
in-house. Due to their ability to leverage their technical expertise
and potential economies of scale, third-party vendors may be able to
prepare Rule 605 reports for a lower cost than if each individual
reporting entity prepares its own report, and could pass these lower
costs on to their customers, resulting in lower compliance costs.
However, the Commission is unable to know the percentage of entities
that currently make use of third-party vendors to prepare their Rule
605 reports, nor the percentage of entities that would make use of
third-party vendors following the proposed amendments. Therefore,
Commission is basing its compliance cost estimates on the potentially
higher costs of in-house preparations of Rule

605 reports in order to be as conservative as possible.
---------------------------------------------------------------------------

    \962\ Specifically, the Commission estimates that, while
preparing in-house reports would result on an annualized ongoing
cost of $37,248 per respondent, contracting with a third party to