S&P500 Index * H....................................        ***-2.27  ..............  ..............        *** 9.09
    S&P500 Index * I....................................        *** 2.27       *** 30.15
    S&P500 Index * J....................................        *** 4.16       *** 30.29  ..............        *** 5.06       *** 20.47
    S&P500 Index * K....................................  ..............       *** 43.18  ..............  ..............       *** 12.26
    S&P500 Index * L....................................        *** 2.22       *** 28.53  ..............        *** 9.07            0.59
    S&P500 Index * M....................................        *** 2.15       *** 48.26  ..............       *** 10.94       *** 14.03
    S&P500 Index * N....................................  ..............  ..............  ..............        *** 5.58        ***-5.78
Observations............................................      13,258,370      15,015,886         864,846       1,776,195       2,085,181         102,046
Adjusted R \2\..........................................           7.55%           3.35%           4.11%          11.43%           4.26%           5.84%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Data is from the Rule 605 reports and CRSP, and includes years from 2012 to 2017. The variable categories that are dropped are: Market orders, one
  trading venue, order size from 100-499 shares, and the 2012 calendar year (for the regression using data from January 2012 through August 2016). Note
  that the regression using data from October 2016 through September 2017 included quarter-fixed effects instead of year-fixed effects. Also, note that
  for the regression using data from October 2016 through September 2017, the analysis did not include CBSX and NSX because these two exchanges stopped
  operating. The control variables are indicators for marketable limit order; order size for 500-1,999 shares, 2,000-4,999 shares, and >= 5,000 shares;
  and security specific variables including dollar volume, market capitalization, and daily return variance. T-statistics are estimated from White
  standard errors. *** indicates significance of a 2-tailed test at the 1% level, ** at the 5% level, and * at the 10% level. The Chi-square tests are
  used to test the null hypothesis that all of the exchange coefficients, with the exception of the intercept coefficient, are jointly zero. The
  pairwise F tests are used to test the null hypothesis that pairs of the exchange coefficients, with the exception of the intercept coefficient, are
  zero.

    Similar to Table 2 in Section V.C.2.d.i.1., the staff's analysis
focuses on whether customers or others can use the market-specific
routing information to assess the execution quality they get from their
broker-dealers. Specifically, if the order routing decisions by broker-
dealers differ by the exchanges where stocks are listed, e.g., if
broker-dealers route orders differently for NYSE-listed stocks compared
to NASDAQ-listed stocks, the removal of listing exchanges from the
reports will not provide this information to customers and the
public.\732\ Such information can be useful for customers and the
public, as long as order routing decisions determine execution quality.
Specifically, Commission staff analyzed execution quality as measured
by effective spreads from Rule 605 reports for common stocks with
different primary listing exchanges, with different market centers, and
with S&P 500 index information to determine whether the cost of
executing a market or a marketable limit order for common stock varies
across market centers and primary listing exchanges, while also
accounting for the effects of the S&P 500 index inclusion.
---------------------------------------------------------------------------

    \732\ The Commission notes that there are differences in order
routing decisions depending on the primary listing exchange because
of existing rules, regulations, and practices. For example, the NYSE
does not trade NASDAQ- or NYSEAMER-listed stocks. As a result,
orders for a NYSE-listed stock can be routed to the NYSE, NASDAQ,
and other market centers, whereas orders for NASDAQ-listed stocks
can be routed to NASDAQ and other market centers, but not to the
NYSE. This level of information will be lost when reporting by
primary listing exchanges is removed.
---------------------------------------------------------------------------

    In the Proposing release, the Commission reported the results of a
staff analysis that found that reporting order routing information by
listing exchange would provide useful information and, therefore,
removing this partition would impose a cost on investors. Because the
Commission is adopting a different partition than proposed,
specifically replacing a listing-exchange partition with a partition
based on S&P 500 inclusion, the Commission staff has revised its
analysis to examine whether a listing-exchange partition would provide
useful information beyond that information investors could learn from
S&P 500 inclusion. Specifically, the analysis examines whether, after
accounting for S&P 500 inclusion, listing exchange still affects the
relative rank of costs to trade on the various market centers. Such a
result would indicate that an S&P 500 partition is not a direct
substitute for all of the information captured by a listing-exchange
partition. The staff's analysis controls for stock and order
characteristics.\733\ Accordingly, the staff's analysis considers
whether execution quality depends on primary listing exchanges in
addition to S&P 500 index inclusion as a means to assess whether the
amendment might reduce some of the usefulness of the reports.\734\
---------------------------------------------------------------------------

    \733\ See supra note 725.
    \734\ See Section V.C.2.e.i.1, which discusses the usefulness of
using execution quality measures in the analysis.
---------------------------------------------------------------------------

    Table 3 presents the results of the staff's analysis of effective
spreads for common stocks listed on the NYSE, NASDAQ, and AMEX. Columns
1 through 3 report the results for each of these primary listing
exchanges. The market center rows in the table report the basis point
difference between the average effective spreads on that market center
and the average effective spreads on the primary listing exchange. The
S&P 500 index rows in the table report the basis point difference
between the average effective spreads on stocks that are included in
the S&P 500 index and the average effective spreads on each listing
exchange. The rows for interaction terms of each market center and S&P
500 index in the table report the basis point difference between the
average effective spreads of S&P 500 stocks on that market center and
the average effective spreads on each listing exchange.
    As an illustrative example, the intercept in Column 1 indicates
that the average effective spread for market orders for NYSE-listed
stocks that are executed on the NYSE is 18.60 basis points and the -
3.47 estimate for Exchange A indicates that the effective

spreads for NYSE-listed stocks traded on Exchange A are 3.47 basis
points lower after controlling for differences due to stock and order
characteristics. The -12.86 estimate for the S&P 500 index indicates
that the effective spreads for S&P 500 stocks are 12.86 basis points
less than non-S&P 500 index stocks, and the 2.73 estimate for the
interaction between Exchange A and the S&P 500 index indicate that the
effective spreads for S&P 500 stocks that are traded on Exchange A are
2.73 basis points higher.
    Table 3 indicates that the average effective spreads vary
significantly by the market center where the orders were executed.
Table 3 shows that most market center effective spreads are
significantly different than those of the listing exchange. For
example, after controlling for the effect of stock and order
characteristics and the effect of the S&P 500 index inclusion, Column 1
shows that, for NYSE-listed stocks, the average effective spread on
Exchange A is 3.47 basis points less than on the NYSE itself, and the
average effective spread on NASDAQ is 1.31 basis points higher than on
the NYSE. Table 3 also indicates that the average effective spreads
vary significantly by listing exchange. For example, the staff's
analysis suggests that NASDAQ-listed stocks tend to have higher average
effective spreads than NYSE-listed stocks because the intercept
estimates are much larger in Column 2 compared to Column 1.\735\ Table
3 also shows that AMEX-listed stocks tend to have even higher average
effective spreads than NASDAQ-listed stocks by comparing the results in
Column 3 with those in Column 2.
---------------------------------------------------------------------------

    \735\ The Commission recognizes that the staff analysis did not
control for stock and order characteristic differences across the
columns, and the staff did not estimate a matched-sample comparison.
These other analysis types would facilitate a more fulsome
comparison of effective spreads in similar stocks by listing
exchange than the staff's analysis in Table 3. However, because the
606 reports do not distinguish individual stocks, the Commission
believes that the staff analysis is appropriate for assessing the
costs of the adopting amendments.
---------------------------------------------------------------------------

    The results in the table suggest that because the relative ranking
of each market center changes depending on the listing exchange, the
adopted amendment to remove listing exchanges from the report could
reduce the usefulness of Rule 606 reports. If the ranking of the
effective spreads on each market center were the same across the three
primary listing exchanges, where a stock is listed will have little or
no relationship to whether order routing information informs on
execution quality. Such a result implies that removing listing
exchanges from order routing reports would not reduce the amount of
information in the reports. However, upon examination, Table 3 shows
that the ranking of the market centers by effective spreads is
different depending on the primary listing exchange even after
considering the effect of the S&P 500 index.
    For example, the five market centers that have the best execution
quality relative to the NYSE-listed stocks are Exchange B, J, F, G, and
A, in descending order. However, for the same NYSE-listed stocks, the
ranking of the market centers for S&P 500 stocks by effective spreads
changes. For S&P 500 stocks, the five market centers that have the best
execution quality relative to the NYSE-listed stocks are Exchange J, B,
H, G, and L, in descending order.\736\ Similarly, the five market
centers that have the best execution quality relative to the NASDAQ-
listed stocks are Exchange M, K, E, B, and I, in descending order.
However, for the same NASDAQ-listed S&P 500 stocks, the five market
centers that have the best execution quality relative to the NASDAQ-
listed stocks are Exchange B, C, F, A, and L, in descending order. The
analysis indicates that there seem to be differences among market
centers in terms of effective spreads for stocks with different primary
listings. The Commission acknowledges that the staff's analysis
presented in Table 3 may not be a perfect test of assessing whether the
partition based on S&P 500 index inclusion relative to the omission of
information of listing venues would have more useful information in the
report. Instead, the staff analysis assesses whether S&P 500 inclusion
encompasses all of the information in the listing exchanges.
Specifically, the staff's analysis shows that listing venues contain
information relevant to execution quality, and therefore, broker-
dealers' order routing, after accounting for the effects of S&P 500
index inclusion.
---------------------------------------------------------------------------

    \736\ The analysis in Table 3 includes an indicator for each
market center, an indicator for being included in the S&P 500 index,
and an interaction term between each market center and S&P 500 index
for each listing exchange. Therefore, in order to obtain the
rankings for execution quality for S&P 500 stocks, Commission staff
calculated the sum of the three estimates and compared the relative
magnitudes of the summed estimate across market centers for each
listing exchange.
---------------------------------------------------------------------------

    On the basis of the staff's analysis, the Commission recognizes
that replacing the listing exchange partition with an S&P 500 index
partition, as in the adopted amendment, could provide additional
information to customers and the public, as discussed in Section
V.C.2.e.i.1. At the same time, the Commission also acknowledges that
eliminating the listing information from the report required by Rule
606(a)(1), as in the adopted amendment, could reduce the information
content of the reports.
    The Commission recognizes that because the amendments change which
orders are covered by Rule 606(a)(1), the analysis does not directly
provide evidence of the costs of eliminating the listing information
from the report, but rather provides an indication of potential costs.
The public order handling reports will cover a different set of orders
than are covered in the Rule 605 data, and the Rule 605 data do not
have information to distinguish orders covered by Rule 606(a)(1) from
orders covered by Rule 606(b)(3). Therefore, Commission staff cannot
conduct a separate analysis for orders covered by Rule 606(a)(1). The
Commission believes, however, that it can reasonably assume that
execution quality for orders covered by Rule 606(a)(1) is sufficiently
correlated with the execution quality for orders covered by Rule
606(b)(3) for the analysis to provide informative results because
exchanges have few mechanisms that would treat the orders differently.
ii. Other Amendments to Reporting
    The Commission believes that the amendments to Rule 606(a)(1) to
require quarterly public order routing reports to be broken down by
calendar month will allow customers to better assess whether their
broker-dealers' routing decisions are affected by changes in fee
structures and the extent to which such changes affect execution
quality. Multiple commenters stated that disclosing the information
contained in the public routing reports by calendar month could enable
customers to better assess and monitor broker-dealers' routing
decisions.\737\ This adopted amendment will, however, require an
initial cost to change the process for completing the reports. The
Commission believes this cost to be small because broker-dealers
typically process data daily and reporting the data broken down by
month will be a change only in the aggregation of the data, from
quarterly to monthly.
---------------------------------------------------------------------------

    \737\ See, e.g., Markit Letter at 29; Fidelity Letter at 9.
---------------------------------------------------------------------------

    In addition, the Commission is adopting the requirement that the
public order routing report required by Rule 606(a)(1) and the
customer-specific order routing report required by Rule 606(b)(1) be
made available using an XML schema and associated PDF renderer
published on the Commission's

website. The benefits and costs associated with this requirement are
discussed in Section V.C.4. The Commission believes that requiring both
the public and the customer-specific order routing reports to be
provided in this format should be useful to customers, as it will allow
them to more easily analyze and compare the data provided in both types
of reports across broker-dealers, for the reasons discussed above.\738\
The amendments to Rule 606(a)(1) and Rule 606(b)(1), as adopted, will
require an initial cost to change the process for completing the
reports.\739\
---------------------------------------------------------------------------

    \738\ See supra Section III.A.3.
    \739\ The benefits and costs associated with this requirement
more generally are discussed in Section V.C.4.
---------------------------------------------------------------------------

    Finally, the Commission is amending Rules 605(a)(2) and 606(a)(1),
as adopted, to require market centers and broker-dealers to keep the
reports posted on a website that is free and readily accessible to the
public for a period of three years from the initial posting on the
website. As commenters stated,\740\ such analysis may lead to increased
transparency with regard to execution quality and may lead broker-
dealers to compete along this dimension through routing decisions,
resulting in a higher probability of execution and improved execution
in terms of costs. Under the adopted amendments to Rule 605(a)(2) and
606(a)(1), customers and the public could examine the order execution
of a market center and broker-dealers' order routing through time.
---------------------------------------------------------------------------

    \740\ See, e.g., Citadel Letter at 1; Markit Letter at 29.
---------------------------------------------------------------------------

    Regarding the requirement to make the reports available for three
years, the Commission believes that, once the report is posted,
maintaining the reports on the website will not pose any additional
burden on broker-dealers, and thus any additional costs to maintain the
report on the website will be negligible.\741\ In addition, the adopted
amendment could impede third-party vendors that aggregate the time
series of 605 and 606 reports because customers may find third-party
services less useful, particularly for the three years that the reports
are publicly available. As a contrast, the customers of third-party
vendors could avoid costs associated with third-party sources because
under the adopted amendment, customers could directly access the
information for the three-year period.
---------------------------------------------------------------------------

    \741\ See infra Section V.C.2.f.
---------------------------------------------------------------------------

f. Compliance Costs for Rule 606(a)(1) Order Routing Reports
    As discussed in more detail in Section IV.D.4., the Commission
estimates the costs to comply with the amendments to Rule 606(a) that
require broker-dealers to distinguish between marketable and non-
marketable limit orders and with adopted Rule 606(a)(1)(iii) that
requires disclosure of net payment for order flow and transaction fees
and rebates by Specified Venue are as follows.
    As discussed in Section IV.D.4.ii., the Commission estimates that
the initial hourly burden will be 240 hours \742\ for a broker-dealer
that routes orders subject to the disclosures required by Rule
606(a)(1) to both update its data capture systems and format the report
required by the rule, resulting in a monetized cost burden of $76,800
per broker-dealer.\743\ The Commission estimates that the one-time,
initial burden for a broker-dealer that routes orders subject to the
disclosures required by Rule 606(a)(1) and that does not currently
create the required order handling information to engage a third-party
to program its systems to implement the requirements of the amendments
to Rule 606(a) will be 20 hours, resulting in an estimated monetized
cost burden of $6,410 per broker-dealer.\744\ Also, as discussed in
Section IV.D.4.ii, the Commission further estimates a fee of $32,000
per broker-dealer to reflect the complexities associated with requiring
broker-dealers to distinguish between marketable and non-marketable
limit orders.
---------------------------------------------------------------------------

    \742\ See supra note 566.
    \743\ See id.
    \744\ See supra note 567.
---------------------------------------------------------------------------

    The Commission estimates that all 292 broker-dealers that route
orders covered by Rule 606(a)(1) will need to update their systems to
capture the information required by the rule. The Commission believes
that some broker-dealers will implement the changes in-house, while
others will engage a third party vendor. Accordingly, the Commission
believes that it is reasonable to estimate that one third of the 292
broker-dealers that route such orders--97 broker-dealers--will
implement the changes in-house, while the remaining number--195 broker-
dealers will engage a third-party vendor to do so.\745\
---------------------------------------------------------------------------

    \745\ See supra note 560.
---------------------------------------------------------------------------

    The Commission estimates the initial burden for broker-dealers that
will program their systems in-house to capture the data and produce a
report to comply with the rule as 23,280 hours.\746\ The Commission
estimates that the total initial cost for broker-dealers that will
engage a third-party vendor to program their systems to capture the
data and produce a report to comply with the rule as 3,900 hours and
$6,240,000.\747\
---------------------------------------------------------------------------

    \746\ See supra note 568.
    \747\ See supra note 570.
---------------------------------------------------------------------------

    Therefore, the Commission estimates that the total initial burden
to comply with Rule 606(a) for all 292 broker-dealers that the
Commission estimates route retail orders is 27,180 hours, resulting in
a monetized cost burden of $8,699,550,\748\ plus an additional cost of
$6,240,000\749\ to third-party service providers.
---------------------------------------------------------------------------

    \748\ See supra notes 572.
    \749\ See supra note 570.
---------------------------------------------------------------------------

    The Commission believes that once the initial costs described above
have been incurred to allow a broker-dealer to obtain the required
information, the cost to produce a quarterly report will remain the
same compared to a quarterly report previously required under Rule
606(a).\750\ However, broker-dealers will need to monitor payment for
order flow or profit-sharing relationships and potential SRO rule
changes that could impact their order routing decisions and incorporate
any new information into their reports. Thus, the Commission estimates
the annual burden for a broker-dealer to comply with the adopting
amendments to Rule 606(a)(1)(i) through (iii) to be 10 hours, resulting
in a monetized cost burden of $3,380.\751\ With 292 broker-dealers that
route retail orders required to comply with the adopting amendments,
the Commission estimates the total annual burden to be 2,920 hours,
resulting in a monetized cost burden of $986,960.\752\
---------------------------------------------------------------------------

    \750\ See supra Section IV.D.4.b.
    \751\ See supra note 574.
    \752\ See supra note 576.
---------------------------------------------------------------------------

    As discussed in Section IV.D.4.a.ii., because Rule 606(b)(1) prior
to today's amendments applies to all customer orders, broker-dealers
must now modify their systems to provide the disclosures for the
following types of orders, regardless of market value: (i) Orders in
NMS stocks that are submitted on a held basis; (ii) orders in NMS
stocks that are submitted on a not held basis and are exempt from the
disclosure requirements of Rule 606(b)(3); or (iii) orders in NMS
securities that are option contracts.
    The Commission believes that it is reasonable to estimate that one
third of the 292 broker-dealers that route orders subject to the
disclosures required by Rule 606(b)(1)--97 broker-dealers--will
implement these changes in-house, while the remaining number--195
broker-dealers--will engage a third-party vendor to do so.\753\ The
Commission estimates the initial burden

for a broker-dealer that will program its systems in-house to comply
with Rule 606(b)(1) as 24 hours.\754\ The Commission estimates the
initial burden for a broker-dealer that will engage a third-party
vendor to program its systems to comply with the rule as 3 hours and
$979.\755\
---------------------------------------------------------------------------

    \753\ See supra note 560.
    \754\ See supra note 578.
    \755\ See supra note 579.
---------------------------------------------------------------------------

    Therefore Commission estimates the total initial burden for all 292
broker-dealers to program their systems to comply with Rule 606(b)(1)
as 2,913 hours \756\ and $975,000.\757\
---------------------------------------------------------------------------

    \756\ See supra note 581.
    \757\ See supra note 582.
---------------------------------------------------------------------------

    As discussed in Section IV.5., the amendments being adopted today
add several defined terms to Rule 600 of Regulation NMS which will
impose an initial burden on market centers and the broker-dealers that
will have to review and update compliance manuals and written
supervisory procedures and update citation references to any such
defined term. The Commission estimates that it will take each of 381
market centers and 4,024 broker-dealers two hours to make these updates
in house at a one-time burden of two hours for each respondent.\758\
Therefore the Commission estimates the total initial cost to be 8,810
hours.\759\ As discussed in Section IV.5, there is no annual burden
associated with this requirement.
---------------------------------------------------------------------------

    \758\ See supra note 592.
    \759\ See supra note 593.
---------------------------------------------------------------------------

3. Disclosure of Order Execution Information
    The adopted amendment to Rule 605(a)(2) requires market centers to
keep reports required pursuant to Rule 605(a)(1) posted on a website
that is free and readily accessible to the public for a period of three
years from the initial date of posting on the Website.
a. Benefits
    Similar to the analogous requirements in Rules 606(a), as adopted,
described above, the Commission believes that requiring the previous
three years of past order execution information to be available to
customers and the public generally should be useful to those seeking to
analyze historical order execution information at various market
centers. This will allow broker-dealers to compare different market
centers more easily, market centers to compare themselves to other
market centers more easily, and third-party vendors to provide their
services on the basis of the data more easily. Several commenters
stated that the adopted amendment to Rule 605(a)(2) could better enable
investors to evaluate the impact that routing decisions have on the
quality of their order executions and provide information regarding
broker-dealers' potential conflicts of interest.\760\
---------------------------------------------------------------------------

    \760\ See, e.g., Angel Letter at 3-5; Dash Letter at 2-3; FSR
Letter at 1.
---------------------------------------------------------------------------

b. Costs
    As discussed in Section V.C.2.e. above, the Commission believes
that the costs to market centers for making the order execution reports
readily accessible to the public for a period of three years from the
date of initial publication are negligible. In addition, specifying a
minimum length of time for making the Rule 605 reports available may
make the data owned by third-party vendors aggregating the time series
of 605 reports less useful because, for three years, the data will be
publicly available and more easily accessible.
4. Structured Format of Reports
    The Commission is adopting the requirement that the Rule 606(b)(1)
order routing and Rule 606(b)(3) order handling reports be made
available using the Commission's XML schema and associated PDF
renderer. The Commission is also adopting the requirement that the
public order handling reports required under Rule 606(a)(1) be made
available using an XML schema and associated PDF renderer published on
the Commission's website. As discussed earlier, the Commission believes
that requiring the reports to be made available in an XML format will
facilitate enhanced search capabilities and statistical and comparative
analyses across broker-dealers and date ranges.\761\ In addition, the
associated PDF renderer will provide users with an instantly human-
readable format for those who prefer to review manually individual
reports, while still providing a uniform presentation. Multiple
commenters stated that presenting the data in a consistent, machine
readable format such as XML could make data analysis easier and could
enable customers to make more informed decisions in selecting broker-
dealers.\762\
---------------------------------------------------------------------------

    \761\ See supra Section III.A.5.
    \762\ See FIF Letter at 17; CFA Letter at 11; FIA Letter at 1;
HMA Letter at 12; Markit Letter at 17, 28; and Better Markets Letter
at 2.
---------------------------------------------------------------------------

    The Commission understands that varying degrees of structuring have
varying costs. Most, if not all, broker-dealers already have experience
applying the XML format to their data. For example, all FINRA members
must use FINRA's Web EFT system, which requires that all data be
submitted in XML.\763\ For the end users, with the data in the reports
structured in XML, they could immediately download the information
directly into databases and analyze it using various software. This
will enhance their ability to conduct large-scale analysis and
immediate comparison of broker-dealers across date ranges. Moreover, as
an open standard, XML is widely available to the public at no cost.
---------------------------------------------------------------------------

    \763\ See http://www.finra.org/industry/web-crd/web-eft-schema-documentation-and-schema-files.
---------------------------------------------------------------------------

    The Commission also believes that if the reports are provided in a
structured format, users could avoid costs associated with third-party
sources that might otherwise extract and structure the data and then
charge for access to that structured data. Users could also avoid the
additional time it would take for them to manually review and
individually structure the data if they wanted to conduct large-scale
analysis, comparison, or aggregation. The Commission also acknowledges
that the required reporting in structured format could hurt certain
third-party vendors that charge for access to structured data of data
reported in an unstructured format, because customers may find that
third-party service is less useful for them. However, without the need
to spend time in manually reviewing and rekeying the unstructured
information for analysis, some third-party vendors may be able to
conduct more comprehensive analysis in a more timely fashion than they
could have offered previously.
    The XML schema will also incorporate certain validations to help
ensure consistent formatting among all reports help to ensure data
quality. However, these validations will not be designed to ensure the
underlying accuracy of the data.
    The Commission considered alternative formats to XML, such as CSV
and XBRL. The Commission does not believe the CSV format is suitable,
because it does not lend itself to validations. As a result, the data
quality of the reports will likely be diminished as compared to XML,
impairing comparability, aggregation, and large-scale analysis. While
the XBRL format enables users to capture the rich complexity of
financial information presented in accordance with U.S. Generally
Accepted Accounting Principles, XBRL is not necessary to accurately
capture the information for the required reports. The Commission
believes the simpler characteristics of the information in the required
reports are better suited for XML.

    Two commenters raised concerns regarding the need for providing
such reports in the XML/PDF format specifically of the Rule 606(b)(1)
reports, stating that customers rarely request these reports, and
stating their view that the cost of implementing the proposed format
would outweigh the benefits.\764\ However, for the reasons stated
above, the Commission believes providing these reports in XML has
benefits and would not impose substantial costs to broker-dealers to
produce the XML/PDF format of the reports. To the extent that broker-
dealers would need to abide by the requirement of Rule 606(b)(1) only
when customers request such reports, and, as discussed in Section
V.C.1.a.ii., to the extent that customers typically placing held orders
may not have a need for additional customer-specific reports required
by Rule 606(b)(1) and therefore would not frequently request such
reports, Rule 606(b)(1) would not impose significant ongoing compliance
costs to broker-dealers to create the XML/PDF format of the reports.
Moreover, as discussed in Section V.C.1.a.i., although customers
placing held orders would rarely request reports set forth in
606(b)(1), customers will have an option to request additional
information if they choose to do so. As a result, customers that
request 606(b)(1) reports would be able to better compare and monitor
broker-dealers' order handling practices, which could promote better
execution quality of held orders and competition among broker-dealers.
Therefore, the Commission believes that the use of the XML/PDF format
will enable customers to more easily analyze and compare the
individualized data provided.
---------------------------------------------------------------------------

    \764\ See Thomson Reuters Letter at 2; FIF Letter at 9, 12.
---------------------------------------------------------------------------

5. Other Definitions in Adopted Amendments to Rule 600
a. Definition of Non-Marketable Limit Order in Adopted Rule 600(b)(54)
    The Commission believes that the amendments to Rule 600(b)(54) will
help ensure consistent and correct interpretation and application of
the adopting amendments to Rule 606(a)(1) for retail orders. The
Commission also believes that there are no costs associated with
adopting Rule 600(b)(54), because it is a definition that is widely
used by market participants.
b. Definitions of ``Orders Providing Liquidity'' and ``Orders Removing
Liquidity'' in Adopted Rule 600(b)(58) and (59)
    The Commission believes that Rules 600(b)(58) and (59), as adopted,
will help ensure consistent and correct interpretation and application
of Rule 606(b)(3), as adopted, for institutional orders. The Commission
also believes that there are no costs associated with adopted Rules
600(b)(58) and (59) because the Commission understands that the two
definitions are widely used by market participants.

D. Alternatives Considered

1. Alternative Scope for the Customer-Specific Reports
    In addition to the alternative of adopting the proposed $200,000
threshold in the definition of ``institutional order,'' as discussed
above, the Commission also considered an alternative in which the
Commission would adopt a new entity-centric definition of
``institutional order'' and require order handling disclosure in Rule
606(b)(3) for such ``institutional'' orders. Several commenters
suggested that the applicability of the customer-specific disclosures
be based on the entity placing the order.\765\ The entity-centric
approach could be based on the definition of ``institutional order,''
that draws from FINRA Rules 2210(a)(4) and 4512(c) in defining an
institutional order.\766\
---------------------------------------------------------------------------

    \765\ See ICI Letter at 6-7; MFA Letter at 3; Fidelity Letter at
3; STA Letter at 4; CFA Letter at 8; SSGA Letter at 1; CFA Letter at
8; Bloomberg Letter at 13.
    \766\ See supra Section III.A.1.b.ii.
---------------------------------------------------------------------------

    The definition of ``institutional investor'' in FINRA Rule
2210(a)(4) and the definition of ``institutional account'' in FINRA
Rule 4512(c) are well-established existing definitions that are
familiar to most market participants and apply to entities that the
Commission believes are broadly considered to be institutional by
market participants. Therefore, broker-dealers' familiarities with
FINRA definitions would facilitate compliance with and might reduce
potential compliance costs for such a definition for participants
already familiar with the FINRA rules. In addition, commenters
suggested that funds are considered to be institutional market
participants and that their orders should qualify as institutional
orders,\767\ and one commenter specifically characterized private funds
as traditional institutional investors.\768\ This is consistent with
the Commission's understanding, as reflected by its statement in the
Proposing Release that a hedge fund--a type of private fund--is an
example of a type of institutional customer,\769\ that market
participants are accustomed to considering private funds to be
institutional investors.
---------------------------------------------------------------------------

    \767\ See ICI Letter at 6; IDC Letter at 1-2; Capital Group
Letter at 3; Ameritrade Letter at 1-2.
    \768\ See Dash Letter at 3.
    \769\ See Proposing Release, supra note 1, at 49433 n.1.
---------------------------------------------------------------------------

    The Commission recognizes that the alternative definition, which is
an entity-based definition of an institutional order, would capture
most orders submitted by institutional market participants and is
likely to reduce the potential misclassification of institutional
orders as non-institutional orders and vice versa. The Commission also
recognizes that the scope of FINRA Rules 2210(a)(4) and 4512(c), as
incorporated into the definition of institutional order in the
alternative, is generally tailored to cover the broad range of
institutions that would likely benefit from the order handling
disclosures required by Rule 606(b)(3), while minimizing the potential
misclassification of institutional orders. However, as explained below,
the Commission did not adopt this alternative.
    As discussed in Section III.A.1.b.ii., the entity-centric approach
suggested by commenters would require the Commission to set forth the
types of customers that may request the Rule 606(b)(3) disclosures for
their NMS stock orders, but would not entail any differentiation in the
types of orders covered by Rule 606(b)(3). As result, NMS stock orders
from qualifying customers that are submitted on a held basis would be
covered by the Rule 606(b)(3) disclosures. This is a suboptimal outcome
that is avoided by the adopted order type-based approach to Rule
606(b)(3)'s applicability. Including held orders within the Rule
606(b)(3) disclosures would be inconsistent with the purpose of the
disclosures to provide insight into how a broker-dealer exercises order
handling and routing discretion because broker-dealers must attempt to
execute held orders immediately and are provided no discretion in
handling them. Moreover, including a customer's held orders in the Rule
606(b)(3) report could obfuscate the reports' depiction of the
discretion actually exercised by the broker-dealer. Order handling and
routing behavior dictated by the fact that the customer submitted a
held order could be misunderstood in the report as the product of
broker-dealer discretion.

    The alternative approach also would require the Commission to
prescribe institutional status criteria that customers must fit in
order to be entitled to receive the disclosures. A risk with such an
approach is that the criteria could be over-inclusive or under-
inclusive. The Commission is particularly concerned about potential
under-inclusiveness because customers that do not fit the criteria
would not be entitled to receive the disclosures. Under FINRA Rule
4512, a broker-dealer is not required to obtain for ``institutional
accounts'' certain additional information that it is required to obtain
for accounts that are not ``institutional accounts.'' \770\ Likewise,
under FINRA Rule 2210(a)(4), a broker-dealer is subject to less
prescriptive review requirements for ``institutional communications''
that are solely to ``institutional investors'' than it is subject to
for other, ``retail communications.'' \771\ Under both of these FINRA
rules, exclusion from the defined ``institutional'' criteria triggers a
more stringent due diligence or review obligation for the broker-
dealer. The opposite would be true under an entity-centric approach to
Rule 606(b)--if the institutional status criteria adopted by the
Commission were not met, the market participant would be excluded from
the more detailed disclosure regime.\772\
---------------------------------------------------------------------------

    \770\ See FINRA Rule 4512(a)(2).
    \771\ See FINRA Rule 2210.
    \772\ See supra Section III.A.1.b.
---------------------------------------------------------------------------

    The alternative could create costs to customers because of
misclassification of orders if broker-dealers are not able to easily
discern whether an order meets the definition to be included in the
customer-specific reports. Specifically, orders for NMS stock from
persons that have total assets under $50 million and that are not a
type of market participant expressly covered by the adopted definition
would not be included in the reports under the alternative. Broker-
dealers would not be obligated to provide these persons with the order
handling disclosures in the adopted Rule 606(b)(3), because these
persons do not fall within the definition under this alternative.
Therefore, these persons would not benefit from the increased order
handling transparency provided for in new Rule 606(b)(3). These persons
instead would receive the order handling disclosures made available by
amended Rule 606(b)(1).\773\
---------------------------------------------------------------------------

    \773\ Additionally, if an institutional order were misclassified
as a retail order, the order would be subject to the Rule 606(a)(1)
and Rule 606(b)(1) order routing disclosure requirements, therefore
reducing the accuracy of public retail order routing reports and
reducing the benefits of increased transparency of retail order
routing disclosure that are discussed in Section V.C.2.a.ii.
---------------------------------------------------------------------------

    Furthermore, the alternative could create costs to retail investors
due to misclassification of orders if broker-dealers cannot easily
discern whether an order meets the definition of a retail order. Such a
misclassification would exclude retail market participants that should
be included, or include an institutional market participant that should
be excluded. Under this scenario, the 606(a)(1) report could contain
less accurate information regarding retail order routing, reducing the
benefit of increased transparency of the public retail order report.
Also, because misclassified retail orders would be subject to the
requirements of 606(b)(3) reports under the adopted rule, retail
investors would not receive the benefit of 606(a)(1) reports. As
discussed in Section V.C.1.a.i.1., information pertinent to
understanding broker-dealers' order handling practices for customers'
orders that retail investors typically place is not the same as for
institutional market participants. In addition, as discussed in Section
V.C.2.a.i., because the information contained in 606(a)(1) reports
could be more relevant to retail orders than 606(b)(3) reports,
misclassification of orders would limit the benefits that retail
customers could receive from the enhanced transparency of the retail
order routing reports.
2. Scope of Broker-Dealer's Obligation Under Rule 606(b)(3)
    The Commission is adopting the Rule 606(b)(3) requirement that
every broker-dealer must, on request of a customer that places,
directly or indirectly, one or more orders in NMS stocks that are
submitted on a not held basis with the broker-dealer, disclose to such
customer a report on its handling of institutional orders for that
customer, unless a de minimis exception in Rules 606(b)(4) or (b)(5)
applies. In addition, the Commission is maintaining the exclusion of
broker-dealers from the current definition of ``customer'' and that
exclusion is maintained for purposes of Rule 606(b)(3), which cross-
references the term ``customer.''
    The Commission considered an alternative that would apply the
disclosure requirements to broker-dealers that receive not held NMS
stock orders from other broker-dealers. Compared to the adopted Rule
606(b)(3), this alternative could enable customers to receive more
comprehensive order handling data, which could improve customers'
understanding of execution details of their orders, such as payment for
order flow, rebates, and access fees. As some commenters stated, this
alternative could help customers make more informed investment
decisions.\774\ Thus, this alternative could benefit customers by
providing them with additional information on their order handling by
broker-dealers, so that customers could assess and monitor their
broker-dealers' order routing practices, which could promote
competition among broker-dealers.
---------------------------------------------------------------------------

    \774\ See Dash Letter at 4-5; FIF Letter at 3, 7-8; and SIFMA
Letter at 3-4.
---------------------------------------------------------------------------

    However, this alternative could also increase compliance and
reporting costs to broker-dealers. As one commenter stated,\775\ to the
extent that broker-dealers may outsource order routing technology to
other broker-dealers, executing broker-dealers may be required to
create individual order handling reports and make their execution data
available to customers with whom they have no prior relationship.
---------------------------------------------------------------------------

    \775\ See Bloomberg Letter at 16.
---------------------------------------------------------------------------

    Additionally, the competition among broker-dealers could provide
incentives for broker-dealers to provide order-handling information to
customers regardless of the scope of the reporting requirements. For
instance, customers could choose not to send orders on a not held basis
to introducing broker-dealers that are unable to provide the
information, which could incentivize introducing broker-dealers to
request the information from their executing broker-dealers that, in
turn, may risk losing introducing broker-dealers as customers unless
they provide the information. As one commenter stated, such competitive
market forces could motivate broker-dealers to provide additional
information that could address customers' expectations.\776\ Moreover,
customers could choose to negotiate with broker-dealers for additional
disclosures, such as introducing broker-dealers requesting the
information from their executing broker-dealers. With the information,
customers could assess whether their broker-dealer is adequately
serving its investing and trading expectations, as well as whether they
would be better served by utilizing the services of a broker-dealer
that is able to provide the full suite of detailed order handling
information set forth in Rule 606(b)(3).
---------------------------------------------------------------------------

    \776\ See id.
---------------------------------------------------------------------------

3. Public Availability of Aggregated Rule 606(b)(3) Order Handling
Information
    Proposed Rule 606(c) required public quarterly reports broken down
by

calendar month on the order routing and execution quality of aggregated
institutional orders by each broker-dealer. Under the rule amendments
for not held NMS stock orders as adopted, but not as proposed, broker-
dealers are required only to provide customer-specific order handling
reports required by Rule 606(b)(3), and none of the information set
forth in Rule 606(b)(3) is required to be made public.
    Prior to and after today's amendments, Rule 606 does not require a
broker-dealer to provide public reports for not held NMS stock
orders.\777\ While an institutional customer or a customer that submits
NMS stock orders on a not held basis can request individualized reports
from broker-dealers about the handling of its orders, the lack of
public reports relating to such orders makes it difficult for a
customer to compare handling of such orders by broker-dealers that the
customer does not have a business relationship with. Further, for the
broker-dealers that the customer does send orders to, the customer is
not able to compare these broker-dealers more generally based on all
orders those broker-dealers handle rather than only the orders the
customer sends to the broker-dealers.\778\
---------------------------------------------------------------------------

    \777\ Separately, there are no publicly available reports about
the handling of institutional or not held NMS stock orders published
by independent researchers and analysts, academic researchers, the
public at large, or third-party vendors.
    \778\ Prior to today's amendments, a customer placing not held
NMS stock orders could only compare broker-dealers on the basis of
the orders it had sent to the broker-dealers because only those are
contained in the ad hoc reports the broker-dealers provide upon
request, and the customer cannot compare how its broker-dealers
handle the orders it had sent compared to all of the not held NMS
stock orders the broker-dealers had received. In addition, the ad
hoc reports provided by the broker-dealers upon request by a
customer placing not held NMS stock orders may be provided in
different formats and contain different and potentially inconsistent
information, which makes the comparison of the order routing
decisions and execution quality of broker-dealers more difficult and
less useful.
---------------------------------------------------------------------------

    The Commission considered the proposed Rule 606(c) as an
alternative to this adopted rule. Specifically, this alternative would
require broker-dealers to publicly report, on a quarterly basis,
aggregated Rule 606(b)(3) order handling information. As discussed in
Section III.B., several commenters provided critiques of or suggested
revisions to the proposed rule regarding the proposed public aggregated
order handling reports.\779\ The Commission has considered these
comments and has revised its analysis of the economic effects of such
public aggregated reports since the Proposal.
---------------------------------------------------------------------------

    \779\ See Fidelity at 6; Market Letter at 6.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, proposed Rule 606(c) would
provide the benefits of increasing the transparency of order handling
and providing additional information to customers beyond that provided
by customer-specific reports required by amended Rule 606(b)(3).
Customers would be able to compare their broker-dealers not just based
on the orders they send to the broker-dealers, but also based on all
Rule 606(b)(3) orders handled by the broker-dealers.\780\ The
aggregated reports would assist customers in facilitating discussions
with their broker-dealers about the broker-dealers' handling of their
orders. The reports would also allow current and prospective customers
to compare broker-dealers' order handling and, ultimately, to inform
their choice of broker-dealers. For example, the reports could allow
customers to compare the execution services of their current broker-
dealers with other competitors, who might route orders more often to
the venues offering better average execution quality. Moreover, this
alternative could promote competition as broker-dealers may seek to
differentiate their services and expertise in an effort to retain
current customers and attract the business of prospective customers.
Further, the public aggregated order handling reports could improve the
extent and quality of information available for independent research
and analysis by academic researchers, the public at large, or third-
party venders, thereby furthering the public monitoring of broker-
dealers conflicts of interest and enhancing the benefits of increased
transparency.
---------------------------------------------------------------------------

    \780\ See Fidelity at 6.
---------------------------------------------------------------------------

    In light of the comments received and after further consideration,
the Commission now believes that the aggregated information in the
proposed public report would provide more limited benefits than those
described in the Proposal. In particular, the reports might not allow
for meaningful insight into the quality of broker-dealers' order
routing performance or comparisons of order handling performance across
broker-dealers. Moreover, the aggregation required for the reports
would dilute the information necessary to compare one customer to a
broker-dealer's customers more generally or to compare across broker-
dealers.\781\
---------------------------------------------------------------------------

    \781\ See supra notes 337-339 and accompanying text.
---------------------------------------------------------------------------

    Further, the Commission does not believe that it could easily
design the aggregated reports to limit such dilution without raising
the risk of revealing sensitive information of customers that submit
not held NMS stock orders, in particular the institutional customers
that typically submit such orders. Each customer has a unique set of
circumstances, goals, and order flow that dictates how a broker-dealer
handles that customer's orders. For example, if a broker-dealer were to
aggregate together the orders of both its quantitative trading firm and
mutual fund clients in a single, aggregated public report, the dilutive
effect would result in a washing out of the routing nuances that are
relevant to each type of customer and that are important to
understanding a broker-dealer's routing decisions when granted full
discretion.\782\
---------------------------------------------------------------------------

    \782\ If a broker-dealer were not required to aggregate the
orders, however, the report might reveal the strategies of each type
of customer.
---------------------------------------------------------------------------

    In addition, not held NMS stock orders from customers frequently
limit broker-dealer discretion in some manner, which would reduce the
value of the reports in providing information about the broker-dealer's
own decisions in order handling. For broker-dealers that do not
typically have full discretion on the handling of a not held NMS stock
order, an aggregated order handling report could be more of an
indication of its client mix and the preferences of its clients than
about the broker-dealer's performance.
    Even a customer comparing its own individual report to the
aggregate report of its own broker-dealer might not be able to realize
the potential benefit of making meaningful comparisons without knowing
the specific nature, practices, and requests of the broker-dealer's
other customers. In theory, a customer could ask its broker-dealers to
explain how the customer's report fits into the aggregate report, which
could allow the customer to make meaningful comparisons and receive the
benefits of additional transparency. However, this would result in
additional costs to broker-dealers and customers because the broker-
dealers would need to spend their time and resources to provide
explanations to their customers regarding how individual reports fit
into aggregated information. The greater these costs to the customers,
the less likely they would be to use the reports.
    Further, a broker-dealer may not be willing to provide a lengthy
explanation of its public aggregated report to an institutional or
retail investor that is not its customer, significantly limiting the
potential benefit to customers of comparing their broker-dealers to
broker-dealers the customer does not have a business relationship with.
This may also lead to public analyses and

commentary regarding order routing practices that are not informed by
any meaningful understanding of the customer types and routing
preferences included in aggregate reports.
    Even in the absence of public aggregated reports, consultants and
providers of TCA for customers--particularly institutional customers--
could perform aggregate analysis, but in a much more meaningful and
productive way by aggregating the data of customers that submit NMS
stock orders on a not held basis with like trading characteristics.
Consultants could collect information with the permission of such
customers, aggregate the data of customers with like trading
characteristics, and provide reports that would be more readily and
meaningfully comparable across broker-dealers. Although using
consultants might provide comparable reports to customers, it would
result in monetary costs to customers in paying for the service of
consultants.
    In addition to viewing the benefits to public aggregated reports in
proposed Rule 606(c) to be somewhat more limited than those in the
discussion in the Proposing Release, the Commission believes the
aggregated reports would have the potential to result in additional
costs for broker-dealers and their customers. In particular, customers
could be confused to the extent that an aggregated public report
suggests substandard order handling practices even if a broker-dealer
is performing very competently. Broker-dealers would be at a
disadvantage if the reports did not adequately summarize relevant
information about the quality of customer service. Such a
misinterpretation of the aggregate report could result in the customer
sub-optimally switching broker-dealers. For example, a customer could
use the aggregated public reports to compare its broker-dealer to other
broker-dealers and could switch to another broker-dealer. If the new
broker-dealer is performing worse than the previous broker-dealer, the
customer could get worse order handling treatment. This would also
result in costs to the original broker-dealer because of the loss of
customers.
    Given the Commission's understanding of the limitations of the
benefits and the addition of costs per the discussion of the public
aggregated reports in the Proposing Release, the Commission believes
that customers could alter their behavior in recognition of the
limitations of the public report in the long-run if not in the short-
run. For example, communications with broker-dealers in explaining how
the customer's data fits into the aggregate report could facilitate the
customer's learning process, which could help customers potentially
achieve some positive benefits from the reports and avoid responding in
a manner that results in worse order handling for them. On the other
hand, the customers could also manage this cost by deciding not to use
the reports at all. Such a response would also result in no benefits
from the report. In addition, under this alternative, broker-dealers
would incur additional reporting costs because they would need to
prepare public reports and disseminate the order routing information to
the public regularly. As stated in the Proposing Release,\783\ the
Commission estimated that the estimated total burden per year for all
broker-dealers that route institutional orders to comply with the
reporting requirement under the alternative would have been
approximately 5,920 hours, resulting in a monetized cost burden of
$1,046,640, plus an additional third-party service provider fee of
$130,000.\784\
---------------------------------------------------------------------------

    \783\ See Proposing Release, supra note 1, at 49491.
    \784\ 40 hours per broker-dealer that routes institutional
orders who will create the required reports x 135 such broker-
dealers + 8 hours per broker-dealer that routes institutional orders
who will use a third-party service provider to create the required
reports itself x 65 such broker-dealers = 5,920 hours. The
Commission estimates the total monetized burden for this requirement
to be $1,046,640 ($6,840 per broker-dealer that will create the
reports itself x 135 such broker-dealers + $1,896 per broker-dealer
that uses a third-party service provider to create the required
reports x 65 such broker-dealers = $1,046,640). Also, $2,000 per
broker-dealer that will use a third-party service provider to
prepare its reports x 65 such broker-dealers = $130,000.
---------------------------------------------------------------------------

4. Automatic Provision of Customer-Specific Not Held Order Handling
Report (Adopted Rule 606(b)(3))
    The Commission considered an alternative to adopted Rule 606(b)(3)
that would not require that customers request customer-specific
standardized reports on not held NMS stock order handling, but would
instead require broker-dealers to provide them to customers
automatically, either by sending the reports out or by providing a
portal where customers can view or download the reports. This
alternative could reduce the cost to customers, compared to both the
baseline and the amendment, of acquiring such order handling reports,
because customers would not need to request the reports. At the same
time, this alternative may not benefit customers compared to the
adopted amendment, as discussed in the Proposing Release.\785\ In
addition, as one commenter stated,\786\ to the extent that some
institutional customers may request firm-specific customized reports
and may not need the additional information in the order handling
report, this alternative may not provide additional benefits compared
to the rule as adopted.
---------------------------------------------------------------------------

    \785\ See Proposing Release, supra note 1, at 49501-02.
    \786\ See Fidelity Letter at 4-5.
---------------------------------------------------------------------------

    With respect to the costs to broker-dealers, the alternative would
impose additional initial costs compared to the baseline, as broker-
dealers would be required to automatically provide reports to all
customers, not just those that request reports, and would have to build
infrastructure to generate these reports. The Commission believes,
however, that these initial costs likely would be minimal, because the
alternative would involve slight modifications to the systems that
produce the required order handling reports. Moreover, as discussed in
the Proposing Release, the effect of this alternative on the costs to
broker-dealers, compared to the cost of the rule as adopted, is
unclear.\787\
---------------------------------------------------------------------------

    \787\ See id.
---------------------------------------------------------------------------

5. Submission to the Commission of Not Held NMS Stock Order Handling
Reports (Adopted Rule 606(b)(3))
    The Commission considered an alternative to adopted Rule 606(b)(3)
that would require these customer-specific order handling reports to be
submitted to the Commission. With direct access to the reports under
this alternative, the Commission could potentially use the reports, to
investigate best execution concerns, assist in risk-based examination
decisions, and/or conduct market analyses on order handling to promote
data-driven rulemaking, which could benefit investors and the market in
the form of enhanced investor protection and better informed
rulemaking.\788\
---------------------------------------------------------------------------

    \788\ See Proposing Release supra note 1, at 49502.
---------------------------------------------------------------------------

    While providing some benefits, this alternative would also impose
additional costs to broker-dealers to submit their reports to the
Commission. Further, the Commission believes that acquiring the reports
from each broker-dealer could impose burdens on Commission resources,
though the magnitude of those burdens is unknown. Receiving customer-
specific order handling reports could impose further costs on the
Commission, as the Commission would need to take steps to safeguard
personally sensitive information, though it might be able to leverage
its experience dealing with the receipt of sensitive information in
other contexts to minimize those costs.

6. Categories of NMS Stocks for Rule 606(a)
    The Commission considered an alternative that would partition the
report required by Rule 606(a)(1) by both listing markets and S&P 500
index inclusion instead of by S&P 500 index inclusion alone. As
discussed in Section V.C.2.e.i., the Commission staff's analysis
indicates that partitioning by listing exchange could provide
additional information to customers beyond the information contained in
reporting by S&P 500 index inclusion. Therefore, this additional
partition could allow customers to combine the Rule 606(a)(1) reports
with the Rule 605 reports to help investors better judge the effect of
broker-dealers' routing decisions on execution quality.
    This alternative could result in broker-dealers incurring
additional reporting and compliance costs relative to the adopted rule,
because broker-dealers would need to change the reporting format to
include both S&P 500 index inclusion and listing markets information.
Compared to the adopted rule, the benefits of such order reports could
be limited to the extent that the Rule 606(a)(1) order reports divided
by both listing markets and S&P 500 index are less clear for customers
and the public to understand. As discussed in Section V.C.2.e.i., staff
analysis showed that S&P 500 index and listing markets have distinct
information that is correlated with execution quality. To the extent
that customers may not understand the information content of the order
reports divided by both listing markets and S&P 500 index, customers
would not be able to better assess the order routing and execution
quality under this alternative, which, in turn, could make it less
efficient for the customers to evaluate and select broker-dealers.
7. Disclosure of Additional Information About Not Held NMS Stock Order
Routing and Execution
    The Commission considered requiring additional measures to be
included in adopted Rule 606(b)(3) reports for orders submitted on a
not held basis. In particular, the Commission considered an alternative
that would categorize orders by routing strategy in the reports and an
alternative to report additional execution quality statistics.
    Currently, as such order handling reports are not standardized and
vary by broker-dealer or by customer, the Commission understands that
some of these reports group order routing strategies by their
aggressiveness, while other reports do not. Rule 606(b)(3) does not
require the order handling report to be categorized by order routing
strategy for each venue to which the broker-dealer routed the
customer's orders submitted on a not held basis.
    The Commission considered the proposed categorization as an
alternative to the adopted rule. Under the alternative, order routing
strategies for such orders would be categorized into three general
strategy categories: (1) A ``passive order routing strategy,'' which
emphasizes the minimization of price impact over the speed of execution
of the entire order; (2) a ``neutral order routing strategy,'' which is
relatively neutral between the minimization of price impact and speed
of execution of the entire order; and (3) an ``aggressive order routing
strategy,'' which emphasizes speed of execution of the entire order
over the minimization of price impact.
    This alternative could facilitate comparisons among broker-dealers
by customers placing not held NMS stock orders because it would allow
customers to control for the fact that broker-dealers may get different
types of order flow. For example, to satisfy customer order
instructions one broker-dealer may tend to use an aggressive order
routing strategy and another broker-dealer may tend to use a passive
order routing strategy, and simply comparing these two broker-dealers
without considering the order routing strategy category may lead to
incorrect or misleading conclusions.
    Customers preferring passive order routing strategies may be
willing to wait longer for an execution but may want to limit price
impact. Customers preferring aggressive order routing strategies,
however, may endure some price impact to trade quickly. Therefore, a
broker-dealer implementing a passive order routing strategy may,
compared to an aggressive order routing strategy, tend to route to a
dark pool where execution may be less certain, but likely at a better
price.\789\ Similarly, a broker-dealer implementing passive order
routing strategies may be able to place orders providing liquidity more
often, thereby capturing more rebates.\790\ As a result, the routing
statistics of a broker-dealer that implements predominantly passive
order routing strategies should differ from those of a broker-dealer
that implements predominantly aggressive order routing strategies.
Therefore, including the categories of order routing strategies in the
order handling report can facilitate an assessment of how well a
broker-dealer manages its conflicts of interest and provides execution
quality that matches customer preferences because it provides
information on the preferences communicated by that broker-dealers'
customers.
---------------------------------------------------------------------------

    \789\ See, e.g., Albert J. Menkveld, Bart Zhou Yueshen, and
Haoxiang Zhu, Shades of Darkness: A Pecking Order of Trading Venues,
124 Journal of Financial Economics, (2017). The authors find that
there exists a pecking order of trading venues that puts low-cost-
low-immediacy venues on top and high-cost-high-immediacy venues at
the bottom. This suggests that if an order is a passive order and
executed with passive order routing strategy, the broker-dealer
would prefer low-cost-low-immediacy venues, which the paper
identifies as dark pools that execute at the midpoint.
    \790\ Compared to an aggressive order routing strategy, a
passive order routing strategy may reduce transaction costs and
allow the capture of rebates, but immediate execution is not
certain. See Lawrence Harris and Joel Hasbrouck, Market vs. Limit
Orders: The SuperDOT Evidence on Order Submission Strategy, 31
Journal of Financial and Quantitative Analysis 213, 230 (1996).
---------------------------------------------------------------------------

    The alternative to differentiate the adopted disclosures into the
three order routing strategy categories could help mitigate the
possibility that the reports could be interpreted incorrectly. However,
there could still be differences among broker-dealers in how they
classify orders into the three strategy categories, which could make
straight comparisons between broker-dealers difficult.
    This alternative could also create unnecessary subjectivity, as
broker-dealers may categorize similar routing strategies differently,
which could limit the utility and comparability of the reports.
Moreover, as several commenters stated,\791\ trading algorithms these
days may use multi-layered methodologies that would fit into more than
one of the adopted categories, which makes categorizing orders into
three types too simplistic to adjust to changing market conditions or
to reflect complex routing strategies. For these reasons, the
Commission believes dividing order routing strategies into a fixed
number of order routing categories would not provide a useful basis for
comparison.
---------------------------------------------------------------------------

    \791\ See, e.g., Better Markets Letter at 5; Capital Group
Letter at 5; Fidelity Letter at 5; FIF Letter at 4; ICI Letter at 8;
Markit Letter at 2, 20-21; MFA Letter at 4; KCG Letter at 6-7; SIFMA
Letter at 4.
---------------------------------------------------------------------------

    Moreover, this alternative could result in higher implementation
costs relative to adopted Rule 606(b)(3), by requiring differentiating
order routing strategies for not held NMS stock orders into three
types. The Commission believes that broker-dealers would incur costs
associated with creating their methodologies, assigning each order
routing strategy for such orders into one of these three categories
according to the methodologies, and promptly updating the assignments
any time an existing strategy is amended or a new strategy is created.

    Furthermore, as adopted, customers remain able to negotiate with
their broker-dealers for additional disclosures or categorizations that
could address their interests better, such as categorizations by
routing strategy. With this information, institutional customers could
obtain information to evaluate and monitor their broker-dealers
performance in order routing.
    The Commission considered another alternative that would require
Rule 606(b)(3) reports to contain additional execution quality
measures, such as realized spread and effective spread, price
improvement statistics, the percentages of effective spreads and quoted
spread percentages, time to execution, or implementation shortfall,
which represent varying dimensions of execution quality. As several
commenters stated, adding these statistics would increase the
information content and the usefulness of the reports relative to Rule
606(b)(3), and would provide execution quality statistics that would
reflect changes in market structure.\792\ Additionally, relative to the
execution quality measures under adopted Rule 606(b)(3), this
alternative would enable customers to use different execution quality
statistics that are more informative for their needs.
---------------------------------------------------------------------------

    \792\ See, e.g., Angel Letter at 5; Better Markets Letter at 5-
8; Capital Group Letter at 6; FSR Letter at 5-6; HMA Letter at 10;
ICI Letter at 9; Markit Letter at 9-10; and Schwab Letter at 2.
---------------------------------------------------------------------------

    This alternative could result in higher implementation costs
relative to adopted Rule 606(b)(3) by requiring additional execution
quality statistics in the report. In addition, for some execution
quality metrics, the computation costs would be larger than for others.
Furthermore, as raised by a number of commenters,\793\ the volume
disclosures could overwhelm retail and some institutional customers
that would therefore not benefit from additional information on
execution quality statistics. To the extent that customers are not
familiar with certain execution quality metrics, additional execution
quality measures more than required by the adopted rule may not be
useful to investors to better compare broker-dealers and may not
promote competition among broker-dealers along the execution quality
dimensions provided in the reports.
---------------------------------------------------------------------------

    \793\ See, e.g., STA Letter at 3.
---------------------------------------------------------------------------

    Furthermore, if customers wish to obtain additional information on
execution quality, customers could negotiate for additional execution
quality statistics with their broker-dealers that could address
customers' interests better. By doing so, customers could obtain
relevant information to evaluate their broker-dealers performance in
order routing.
8. Order Handling Reports at the Stock Level (Adopted Rule 606(b)(3))
    The Commission considered requiring the order handling information
required by Rule 606(b)(3) to be reported at the individual stock level
rather than aggregated across stocks. This alternative would enhance
transparency to customers relative to Rule 606(b)(3) because the
reports would be more detailed as discussed in the Proposing
Release.\794\ Specifically, as one commenter stated, reporting at the
individual stock level could provide additional information that
reflects stock liquidity or market conditions that may affect broker-
dealers' order routing decisions, which could enable customers to
better assess their broker-dealers.\795\
---------------------------------------------------------------------------

    \794\ See Proposing Release supra note 1, at 49503-04.
    \795\ See Capital Group Letter at 5.
---------------------------------------------------------------------------

    Because the reports would be more detailed, however, this
alternative would increase the costs of producing the reports, as well
as the costs of using the reports relative to Rule 606(b)(3). However,
as discussed in the Proposing Release, the Commission believes that any
potential increase in costs of producing the reports would be
negligible.\796\
---------------------------------------------------------------------------

    \796\ See Proposing Release supra note 1, at 49504.
---------------------------------------------------------------------------

9. Alternative to Three-Year Posting Period (Adopted Amendments to
Rules 605(a)(2) and 606(a)(1))
    The Commission considered requiring broker-dealers and market
centers to make the reports required by Rule 605(a) and 606(a)(1)
available for a minimum length of time of less than three years or more
than three years. If public reports are available for less than three
years, then historical data might not be as readily available to
customers and the public who are seeking to analyze past routing
behavior of broker-dealers or past execution quality of market centers,
as it would be under the adoption of a three-year posting period.
Customers and the public would either have to download the data more
often or have to rely on third-party vendors who download and aggregate
the data. Compared to the adopted three-year posting period, this
alternative would reduce the execution quality of market centers and
the transparency of broker-dealer routing decisions for customers
placing orders covered by the reports required by Rule 605(a) and
606(a)(1). A shorter minimum length of time would reduce the costs
broker-dealers incur associated with posting reports relative to a
three-year posting period. However, as discussed above, the Commission
believes these incremental costs to be small and that the cost savings
associated with a shorter minimum length of time would not justify the
costs of historical data potentially being less readily available to
customers and the public.
    If public reports are available for more than three years, the
historical data would be even more readily available to customers and
the public who are seeking to analyze past routing behavior of broker-
dealers or past execution quality of market centers than it would be
under a three-year posting period. Customers and the public would have
to download the data less frequently to have access to historical data
that is older than three years. However, the Commission believes that
the additional benefit of a minimum length of time of more than three
years would be small because three years is a meaningful time period
considering the rapid changes in financial markets and customers, and
the public would only need to download data every three years to be
able to access historical data older than three years. While some
commenters stated similar benefits of keeping public reports for more
than three years as discussed above, commenters also stated the out-of-
date information may lead to misleading analysis of past routing
behavior of broker-dealers or past execution quality of market
centers.\797\ As a result, keeping public records for an extended
period compared to the adopted rule would not provide additional
benefits to customers. The Commission also understands that maintaining
public reports for more than three years may represent a burden and
result in an additional cost to broker-dealers. However, as discussed
above, the Commission believes the additional cost to be small.
---------------------------------------------------------------------------

    \797\ See Citadel Letter at 1; FIF Letter at 13; Markit Letter
at 29.
---------------------------------------------------------------------------

E. Economic Effects and Effects on Efficiency, Competition, and Capital
Formation

    Section 23(a)(2) of the Exchange Act requires the Commission, when
making rules under the Exchange Act, to consider the anti-competitive
effects of any rules it adopts.\798\ Specifically, Exchange Act Section
23(a)(2) prohibits the Commission from adopting any rule that will
impose a burden on

competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.\799\ Furthermore, Section 3(f) of the Exchange Act
requires the Commission, whenever it engages in rulemaking where it is
required to consider or determine whether an action is necessary or
appropriate in the public interest, to consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition, and capital formation.\800\ We consider these effects
below.
---------------------------------------------------------------------------

    \798\ 15 U.S.C. 78c(f).
    \799\ See id.
    \800\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

1. Effects of Adopting Amendments on Efficiency and Competition
a. Amendments to Public Disclosures for Orders Covered by Rule 606(a)
and 606(b)(1)
    The adopted amendments to Rule 606(a)(1) require broker-dealers
that route non-directed orders in NMS stocks submitted on a held basis
and non-directed orders that are customer orders in NMS securities that
are options contracts to make public enhanced aggregated reports
regarding such orders detailing order routing practices and information
regarding marketable and non-marketable limit orders in addition to
information on payment for order flow arrangements, payment from any
profit-sharing relationship received, and transaction fees paid and
rebates received per share and in aggregate for such orders. In
addition, the adopted amendments to Rules 606(a)(1) require those
reports to be made available using an XML schema and associated PDF
renderer on the Commission's website. Finally, the adopted amendment to
Rule 606(a)(1) requires the public reports to be maintained on a
website that is free and readily accessible to the public for a period
of 3 years.\801\
---------------------------------------------------------------------------

    \801\ Consistent with the adopted amendments to Rule 606, the
Commission is adopting amendments to Rule 605(a)(2) to require
market centers to keep public execution reports required by the rule
posted on an website that is free and readily accessible to the
public for a period of three years from the initial date of posting
on the website. The Commission believes that making past order
execution information available to customers and the public
generally will be useful to those seeking to analyze historical
order execution information from different market centers. The
adopted requirement to keep public execution reports required by
Rule 605 for a period of three years is expected to make it easier,
and thus more efficient, for the public to collect historical data
for analysis. The Commission believes the adopted requirement could
enhance efficiency in the data collection process of those seeking
to retrieve and analyze historical order execution information from
different market centers.
---------------------------------------------------------------------------

    As explained in detail below, the Commission believes that the
enhanced disclosures for orders covered by Rule 606(a)(1), which
require broker-dealers to describe any terms of payment for order flow
arrangements and profit-sharing relationships with Specified Venues
that may influence their order routing decisions for such orders,
should promote competition and enhance efficiency.
    First, per the discussion above, the additional information
required by the amendments relative to the information required by Rule
606(a)(1) will allow customers to better assess the order routing and
execution quality provided by their broker-dealers,\802\ which, in
turn, will enable the customers to more efficiently evaluate and select
broker-dealers.\803\ The adopted amendments to Rule 606(a) will require
broker-dealers, for orders covered by Rule 606(a)(1), to differentiate
between marketable and non-marketable limit orders and to publicly
report the net aggregate amount of any payment for order flow, payment
from any profit-sharing relationship received, the transaction fees
paid, and transaction rebates received, both as a total dollar amount
and on a per share basis, for each of the following order types: Market
orders, marketable limit orders, non-marketable limit orders, and other
orders. As discussed in Sections V.C.2.b. through d., the Commission
believes that this will allow customers and the public to better
understand the potential conflicts of interest broker-dealers may face
when routing such orders and to assess if and how well broker-dealers
manage these potential conflicts of interest. This will enable
customers to make a more informed decision as to which broker-dealers
to use for such orders. The Commission believes that this will enhance
the competition for such order flow between broker-dealers, which could
improve order routing services and execution quality. Customers could
use additional information to evaluate and retain the services of a
broker-dealer or to discontinue the use of such services, and broker-
dealers may use the information required by the adopted amendments to
Rule 606(a) as a means to evaluate and enhance their order routing and
execution services, to compare their order routing and execution
services to those of other firms, and to use such comparison in selling
their services to customers. As a result, the Commission believes that
competition between broker-dealers could provide better execution
quality for such orders.
---------------------------------------------------------------------------

    \802\ See supra Section V.C.2.
    \803\ The adopted amendments to Rule 606(a)(1), which will no
longer require reports to be divided into separate sections for
stocks listed on different exchanges, may be an exception to this.
As discussed below, to the extent that order routing decisions may
differ for stocks that are listed on different exchanges, the
reports that aggregate the data as required by the adopted
amendments to Rule 606(a)(1) may provide less information to retail
customers and the public and therefore may reduce the efficiency
with which customers and the public are able to evaluate and select
broker-dealers on the basis of the order routing and execution
quality they provide.
---------------------------------------------------------------------------

    In addition, if broker-dealers change their routing behavior in
response to the public reports required by adopted amendments to Rule
606(a)(1), the Commission believes that competition between trading
centers might be enhanced as trading centers could better compete for
such order flow, which might result in better execution quality for
such orders and innovation by existing or new trading centers. As
discussed in Section V.C.1.b.i.1., one way a trading center can attract
order flow is through innovation, thereby differentiating itself from
other trading centers.
    Further, to the extent that the adopted amendments to Rule 606(a)
lead to better execution quality provided by broker-dealers and trading
centers, the Commission believes that the adopted amendments will lead
to lower transaction costs for customers. Because transaction costs can
be viewed as a measure for efficiency in the trading process, lower
transaction costs would indicate enhanced efficiency in the trading
process. In addition, to the extent that the adopted amendments to Rule
606(a) make the trading process more efficient by lowering trading
costs, the Commission believes the adopted amendments will reduce
market friction and therefore have a positive effect on the efficiency
of prices.
    As discussed above, however, the adopted amendments to Rule
606(a)(1) could result in costs that may have an effect on efficiency
and competition. For example, the adopted amendments will impose
certain costs on broker-dealers that currently route orders covered by
Rule 606(a)(1) as well as on broker-dealers that would like to start
routing such orders and will also have to comply with the adopted
amendments to Rule 606(a)(1). To the extent that the costs for a
broker-dealer entering the market for such orders are higher following
the amendments to Rule 606(a)(1), these higher costs could lead to a
higher barrier to entry and thereby reduce competition. However, the
Commission believes that any difference in costs under amended Rule
606(a)(1) would be relatively small and, alone, would not deter broker-
dealers from entering the market for routing such orders.

    Under the adopted amendments to Rule 606(a)(1), the broker-dealer
may be concerned about the perception of acting on a conflict of
interest. As a result, a broker-dealer may be incentivized to route
fewer non-marketable limit orders to the trading center offering the
highest rebate, even if this negatively affects execution quality, in
an effort to ensure that a customer does not misconstrue the intent
behind the broker-dealer's routing decisions. Such a potential outcome
could reduce to some degree the intensity of competition between
broker-dealers on the dimension of execution quality. However, the
Commission believes that such a scenario is not likely as customers are
likely to review the 606(a)(1) reports in conjunction with execution
quality statistics currently required pursuant to Rule 605 and can
discuss with their broker-dealers the order routing and execution
quality the broker-dealer provides.
b. Amendments to Disclosures for Orders Covered by 606(b)(1)
    The adopted amendments to Rule 606(b)(1) require a broker-dealer,
upon customer request, to provide the disclosures set forth in Rule
606(b)(1) for orders in NMS stock that are submitted on a held basis,
and for orders in NMS stock that are submitted on a not held basis and
for which the broker-dealer is not required to provide the customer a
report under Rule 606(b)(3). In addition, the adopted amendments to
606(b)(1) require those reports to be made available using an XML
schema and associated PDF renderer on the Commission's website.
    The Commission believes that the adopted amendments to Rule
606(b)(1), which require broker-dealers to provide, upon customer
request, information relating to orders not covered by Rule 606(b)(3),
should promote competition and enhance efficiency. As discussed in
Section III.A.1.b.vi., Rule 606(b)(1) disclosures will allow customers
to better assess the order routing and execution quality provided by
their broker-dealers, which, in turn, will enable the customers to more
efficiently evaluate and select broker-dealers. If requested, these
disclosures provide the customer with information as to the venues to
which its orders were routed, whether the orders were directed or non-
directed, and the time of any transactions that resulted from the
orders. Rule 606(b)(1) cover held NMS stock orders and should provide
customers that submit NMS stock orders on a held basis with disclosures
designed to provide more transparency into potential financial
inducements and potential conflicts of interest faced by broker-
dealers. The Commission believes that these disclosures provide
information that is sufficient to provide a basis for the customer to
engage in further discussions with its broker-dealer regarding the
broker-dealer's order handling practices, should the customer so
choose. As a result, the Commission believes that competition between
broker-dealers could provide better execution quality for orders
covered by Rule 606(b)(1).
    In addition, if broker-dealers change their routing behavior in
response the customer-specific reports required by the adopted
amendment to Rule 606(b)(1), the Commission believes that competition
between trading centers might be enhanced as trading centers could
better compete for such order flow, which might result in better
execution quality for such orders and innovation by existing or new
trading centers. As discussed in Section V.C.1.b.i.1., one way a
trading center can attract order flow is through innovation, thereby
differentiating itself from other trading centers.
    The Commission also believes that the adopted amendment to Rule
606(b)(1) will provide additional benefits of better execution quality
and reduced transaction costs, but acknowledges that these benefits are
attainable only when customers request 606(b)(1) reports. To the extent
that customers actually request Rule 606(b)(1) reports and the adopted
amendments to Rule 606(b)(1) lead to better execution quality provided
by broker-dealers and trading centers, the Commission believes that the
adopted amendments will lead to lower transaction costs for customers.
Because transaction costs can be viewed as a measure for efficiency in
the trading process, lower transaction costs would indicate enhanced
efficiency in the trading process. In addition, to the extent that the
adopted amendments to Rule 606(b)(1) make the trading process more
efficient by lowering trading costs, the Commission believes the
adopted amendments will reduce market friction and therefore have a
positive effect on the efficiency of prices.
    As discussed above, however, the adopted amendments to Rule
606(b)(1) could result in costs that may have an effect on efficiency
and competition. For example, the adopted amendments will impose
certain costs on broker-dealers that currently route orders covered by
Rule 606(b)(1), as well as on broker-dealers that would like to start
routing such orders and will also have to comply with the adopted
amendments to Rule 606(b)(1). To the extent that the costs for a
broker-dealer entering the market for such orders are higher following
the amendments to Rule 606(b)(1), these higher costs could lead to a
higher barrier to entry and thereby reduce competition. However, the
Commission believes that any difference in costs under amended Rule
606(b)(1) would be relatively small and, alone, would not deter broker-
dealers from entering the market for routing such orders.
c. Adopted Rules for Disclosures for Not Held NMS Stock Orders
    For NMS stock orders submitted on a not held basis, Rule 606(b)(3),
as adopted, will require broker-dealers that route such orders to
provide detailed reports to customers that submit such orders upon the
request of the customer, unless such broker-dealer is excepted from
this requirement as provided in new Rules 606(b)(4) and (b)(5). In
addition, these rules will require reports on such orders to be
provided using an XML schema and associated PDF renderer published on
the Commission's website. As discussed below, the Commission believes
that these disclosures of order routing decisions by broker-dealers for
such orders could promote competition and enhance efficiency.
    First, the disclosures required by Rule 606(b)(3) will inform
customers as to the order routing practices of and the execution
quality provided by a particular broker-dealer, as described in further
detail above. As a result, customers will be able to use that
information to compare the order routing and execution quality of their
broker-dealers, on the basis of the orders submitted to those broker-
dealers as reported in the customer-specific reports required by Rule
606(b)(3).
    These enhanced disclosures will better enable customers to analyze
order routing and execution quality provided by broker-dealers, which
will allow customers to more efficiently monitor, evaluate, and select
broker-dealers. In addition, customers and broker-dealers will be able
to evaluate execution quality of orders covered by Rule 606(b)(3) on
different trading centers more efficiently.\804\ Customers also will be
better informed as to the order routing and execution quality they
received from a particular broker-dealer. If a customer feels it
received poor order routing and execution quality from a particular
broker-dealer, the customer could initiate a dialogue with the broker-
dealer for an explanation, which may lead to better order routing

decisions and execution quality by the broker-dealer. The customer may
also decide to use different broker-dealers in order to seek better
order routing and execution quality. This could enhance competition
between broker-dealers.
---------------------------------------------------------------------------

    \804\ See supra Section V.C.1.
---------------------------------------------------------------------------

    Further, the Commission believes that Rule 606(b)(3), as adopted,
might enhance competition between trading centers. First, if broker-
dealers change their routing decisions in response to the reports
required by Rule 606(b)(3), trading centers will have an additional
incentive to compete for order flow covered by Rule 606(b)(3). Second,
the reports required by Rule 606(b)(3) are structured by trading
center, so that the execution quality at each trading center would be
clearly visible. This may lead broker-dealers to change their routing
behavior, but also, more directly, customers could compare the
execution quality of all trading centers, which may again lead to
enhanced competition among trading centers. The Commission believes
that the enhanced competition between trading centers could lead to
innovation by existing and new trading centers, resulting in better
execution quality for customers placing orders covered by Rule
606(b)(3). As discussed in Sections V.C.2.b.i., V.C.2.c.i., and
V.C.2.d.i., if a trading center were to lose order flow to other
trading centers because of lower execution quality, it would have the
incentive to innovate to improve its execution quality.
    To the extent that Rule 606(b)(3) leads to broker-dealers and
trading centers providing better execution quality, the Commission
believes that the rule might lead to lower transaction costs for orders
covered by Rule 606(b)(3). As discussed above, lower transaction costs
indicate enhanced efficiency in the trading process, and the Commission
believes that, as a result, the adopting rules will reduce market
friction and therefore have a positive effect on the efficiency of
prices.
    In addition, the Commission believes that the requirement of
standardized customer-specific order handling reports in Rule 606(b)(3)
will enhance efficiency for customers in processing the information
contained in the reports, as compared to the ad hoc reports customers
may currently receive from their broker-dealers.\805\ Because the data
will be presented in a standardized format, customers will be able to
more efficiently aggregate, compare, and analyze the data than they
could before adoption of this rule.
---------------------------------------------------------------------------

    \805\ See supra Section V.B.1. for a discussion of the ad hoc
reports and Section V.C.4. for a discussion of the standardization
and format for the reports required by adopted Rules 606(b)(3).
---------------------------------------------------------------------------

    In addition, as discussed above, the Commission understands that
not held NMS stock orders are typically submitted by institutional
customers and many broker-dealers that handle institutional orders
currently voluntarily provide reports to institutional customers upon
request. However, the Commission understands that how willing a broker-
dealer is to provide such reports and the level of detail in the
reports might depend on the size of an institutional customer. To that
extent, larger institutional customers have an advantage over smaller
institutional customers. Rule 606(b)(3), as adopted, will provide
access to reports on order handling to all customers, regardless of
their size, unless an exception in Rules 606(b)(4) or (b)(5) applies.
    The Commission notes that, even without the adoption of Rule
606(b)(3), institutional and other customers could still request
customized reports from their broker-dealers and broker-dealers would
have an incentive to provide such reports in order to attract order
flow. As is currently the case, broker-dealers might be more willing to
provide such customized reports to larger institutional customers and
the customized reports might provide more detailed information for
larger institutional customers. While the Commission believes that Rule
606(b)(3), as adopted, mitigates the advantage of larger institutional
customers in that respect, the Commission believes that larger
institutional customers are likely to continue to have an advantage
over smaller institutional customers to the extent that they are able
to obtain customized reports more easily and that those customized
reports contain information not contained in the reports required by
Rule 606(b)(3). The Commission believes that by reducing the
informational advantage of larger institutional customers over smaller
institutional customers, Rule 606(b)(3), as adopted, will improve
information asymmetries between larger institutional customers and
smaller investors will have more information than before regarding
broker-dealers' routing behavior. Smaller institutional customers will
be able to evaluate and select their broker-dealers with more
efficiency, thereby increasing the efficiency of their investment
process. The Commission believes that this will provide smaller
institutional customers with information to select the broker-dealers
that promote better execution quality, to the benefit of their
investors.
    As discussed above, however, Rule 606(b)(3) could result in certain
costs to broker-dealers that currently route orders covered by Rule
606(b)(3), as well as those who would like to start routing such orders
and thus will have to comply with Rule 606(b)(3). These costs could
lead to a higher barrier to entry and thereby reduce competition.
    However, the Commission believes that the costs associated with
Rule 606(b)(3) are not large enough to meaningfully affect the barriers
to entry and the level of competition due to potential new entrants
into the market for such orders. In addition, the Commission believes
that any negative effect on competition due to heightened barriers to
entry are justified by the expected positive effect on competition of
the disclosures required by Rule 606(b)(3).
    In addition, the adoption of Rule 606(b)(3) may cause broker-
dealers to change how they handle orders covered by Rule 606(b)(3)
because customers' preferences could be skewed toward the metrics as
opposed to their true objectives, which could skew broker-dealer
incentives, potentially limiting the efficiency and competition
benefits of the adopted amendments. First, given that broker-dealers
will be aware of the metrics to be used a priori, they may handle such
orders in a manner that promotes a positive reflection on their
respective services but that may be suboptimal for customers.\806\
Second, the order routing decisions that are indeed optimal for
customers could also be viewed as suboptimal for the customers as
reflected in the reports required by Rule 606(b)(3).
---------------------------------------------------------------------------

    \806\ The Commission believes that the set of metrics provide
customers with a more cost effective view of broker-dealer order
handling practices, but recognizes a risk that the information from
the disclosures may not perfectly align routing practices and
execution quality.
---------------------------------------------------------------------------

    For example, suppose a broker-dealer routes orders covered by Rule
606(b)(3) so that the orders execute at lower cost with a higher fill
rate, shorter duration, and more price improvement than the broker-
dealer's competitors. However, it could be the case that, in order to
achieve these objectives, the broker-dealer routes the majority of non-
marketable limit order shares to the trading center offering the
highest rebate. A customer that reviews the adopted order handling
reports might suspect that the broker-dealer acted in its self-interest
by selecting the highest rebate venue in order to maximize rebates
when, in fact, the broker-dealer made the decision on the basis of
factors

that might not be completely reflected in the adopted reports.\807\
---------------------------------------------------------------------------

    \807\ See id.
---------------------------------------------------------------------------

2. Effects of Adopting Amendments on Capital Formation
    The Commission believes that the amendments to Rules 600, 605, and
606, as adopted, might have positive effects on capital formation, but
predicting the magnitude of such effects is difficult, as the effects
likely will be indirect rather than a direct result of the adopted
amendments.
    As discussed, the Commission believes the adopted amendments to
Rules 600, 605, and 606 will enhance competition among broker-dealers
and trading centers resulting in better execution quality for customers
that place both held or not held NMS stock orders and, to the extent
that better execution quality will lead to lower friction in the
trading process, the adopted amendments will increase market efficiency
in both the trading process and asset pricing. This could lead to more
efficient asset allocation because better execution quality and greater
market efficiency lead to more efficient investment decisions by
customers that place orders with broker-dealers.\808\ For example,
lower transaction costs could allow investors to rebalance their
portfolios more frequently and more efficiently and at more efficient
prices that better reflect the true underlying value. More efficient
asset allocation could have a positive impact on capital formation as
capital is allocated to firms with the most profitable projects, which
ultimately will allow these firms to raise capital more easily.\809\
---------------------------------------------------------------------------

    \808\ Efficient investment allows capital to be allocated to
firms with the most profitable projects, which ultimately will allow
these firms to raise capital more easily. On the other hand, less
efficient investment could result in funding being available for
unprofitable projects, which erode capital.
    \809\ See supra Section V.B.9. for a discussion of how asset
allocation can relate to capital formation.
---------------------------------------------------------------------------

    Another potential effect on capital formation could derive from the
relation between and liquidity and cost of capital. In particular, the
less liquid an asset is, e.g., the higher transaction costs are to buy
or sell it, the higher the rate of return customers could demand as
compensation.\810\ For example, lower transaction costs for stocks
could result in lower required rates of return for stocks. This in turn
could lead to lower cost of capital for the firms, which could have a
positive impact on capital formation because it will allow firms to
raise capital at more favorable conditions. As noted above, the
amendments might improve execution quality for some investors, which is
akin to an improvement in liquidity and lower transaction costs. If
these improvements are significant enough, issuers could experience a
lower cost of capital, resulting in a positive impact on capital
formation.
---------------------------------------------------------------------------

    \810\ See Yakov Amihud and Haim Mendelson, Asset Pricing and the
Bid-Ask Spread, 17 Journal of Financial Economics 223 (1986).
---------------------------------------------------------------------------

VI. Regulatory Flexibility Certification

    The Regulatory Flexibility Act (``RFA'') \811\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) \812\ of the Administrative Procedure
Act,\813\ as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such rulemaking on
``small entities.'' \814\ Section 605(b) of the RFA states that this
requirement shall not apply to any proposed rule or proposed rule
amendment, which if adopted, would not have significant economic impact
on a substantial number of small entities.
---------------------------------------------------------------------------

    \811\ 5 U.S.C. 601 et seq.
    \812\ 5 U.S.C. 603(a).
    \813\ 5 U.S.C. 551 et seq.
    \814\ Although Section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
``small entity'' for purposes of Commission rulemaking in accordance
with the RFA. Those definitions, as relevant to this proposed
rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10. See
Securities Exchange Act Release No. 18452 (January 28, 1982), 47 FR
5215 (February 4, 1982) (File No. S7-879).
---------------------------------------------------------------------------

    For purposes of Commission rulemaking in connection with the RFA
\815\ as it relates to broker-dealers, a small entity includes a
broker-dealer that: (1) Had total capital (net worth plus subordinated
liabilities) of less than $500,000 on the date in the prior fiscal year
as of which its audited financial statements were prepared pursuant to
Rule 17a-5(d) under the Exchange Act,\816\ or, if not required to file
such statements, a broker-dealer with total capital (net worth plus
subordinated liabilities) of less than $500,000 on the last day of the
preceding fiscal year (or in the time that it has been in business, if
shorter); and (2) is not affiliated with any person (other than a
natural person) that is not a small business or small
organization.\817\
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    \815\ See id.
    \816\ 17 CFR 240.17a-5(d).
    \817\ See 17 CFR 240.0-10(c).
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    The amendments to Rule 606 are discussed in detail in Sections II
and III above. We discuss the economic impact, including the estimated
compliance costs and burdens, of the amendments in Section IV
(Paperwork Reduction Act) and Section V (Economic Analysis) and above.
Based on the Commission's analysis of existing information relating to
broker-dealers that would be subject to the amendments to Rule 606, the
Commission believes that such broker-dealers do not fall within the
definition of ``small entity,'' as defined above.\818\ Further, the
amendments to Rule 605 to require reports to remain posted on a website
for a specified period of time will not have a significant impact on
any small entities affected by the Rule because the market centers to
which Rule 605 applies do not fall within the definition of ``small
entity,'' as defined above.\819\ The Commission received no comments
regarding its initial Regulatory Flexibility Analysis.\820\ For the
foregoing reasons, the Commission certifies that the amendments to
Rules 600, 605, and 606 will not have a significant economic impact on
a substantial number of small entities for the purposes of the RFA.
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    \818\ The Commission considered FOCUS Report data in making this
determination.
    \819\ See supra Section IV.D.5.
    \820\ See Proposing Release, supra note 1, at 59508.
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VII. Statutory Authority and Text of the Proposed Rule Amendments

    Pursuant to the Exchange Act, and particularly Sections 3(b), 5, 6,
11A, 15, 17, and 23(a) thereof, 15 U.S.C. 78c, 78e, 78f, 78k-1, 78o,
78q, and 78w(a), the Commission is amending Sections 240.3a51-1,
240.13h-1, 242.105, 242.201, 242.204, 242.600, 242.602, 242.605,
242.606, 242.611, and 242.1000 of chapter II of title 17 of the Code of
Federal Regulations in the manner set forth below.

List of Subjects

17 CFR Part 240

    Brokers, Dealers, Registration, Securities.

17 CFR Part 242

    Brokers, Reporting and recordkeeping requirements, Securities.

    For the reasons stated in the preamble, the Commission is amending
title 17, chapter II of the Code of Federal Regulations as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

0
1. The authority citation for part 240 continues to read in part as
follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,

78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20,
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., and
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350;
Pub. L. 111-203, 939A, 124 Stat. 1887, (2010); and secs. 503 and
602, Pub. L. 112-106, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *

Sec.  240.3a51-1   [Amended]

0
2. In Sec.  240.3a51-1, paragraph (a) introductory text is amended by
removing the text ``Sec.  242.600(b)(47)'' and adding in its place
``Sec.  242.600(b)(48)''.

Sec.  240.13h-1   [Amended]

0
3. In Sec.  240.13h-1, paragraph (a)(5) is amended by removing the text
``Section 242.600(b)(46)'' and adding in its place ``Sec.
242.600(b)(47)''.

PART 242--REGULATIONS M, SHO, ATS, AC, NMS AND SBSR AND CUSTOMER
MARGIN REQUIREMENTS FOR SECURITY FUTURES

0
4. The authority citation for part 242 continues to read as follows:

    Authority:  15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2),
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g),
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and
80a-37.

Sec.  242.105   [Amended]

0
5. Section 242.105 is amended:
0
a. In paragraph (b)(1)(i)(C) by removing the text ``Sec.
242.600(b)(22)'' and adding in its place ``Sec.  242.600(b)(23)''.
0
b. In paragraph (b)(1)(ii) by removing the text ``Sec.
242.600(b)(64)'' and adding in its place ``Sec.  242.600(b)(68)''.

Sec.  242.201  [Amended]

0
6. Section 242.201 is amended:
0
a. In paragraph (a)(1) by removing the text ``Sec.  242.600(b)(47)''
and adding in its place ``Sec.  242.600(b)(48)''.
0
b. In paragraph (a)(2) by removing the text ``Sec.  242.600(b)(22)''
and adding in its place ``Sec.  242.600(b)(23)''.
0
c. In paragraph (a)(4) by removing the text ``Sec.  242.600(b)(42)''
and adding in its place ``Sec.  242.600(b)(43)''.
0
d. In paragraph (a)(5) by removing the text ``Sec.  242.600(b)(49)''
and adding in its place ``Sec.  242.600(b)(51)''.
0
e. In paragraph (a)(6) by removing the text ``Sec.  242.600(b)(55)''
and adding in its place ``Sec.  242.600(b)(59)''.
0
f. In paragraph (a)(7) by removing the text ``Sec.  242.600(b)(64)''
and adding in its place ``Sec.  242.600(b)(68)''.
0
g. In paragraph (a)(9) by removing the text ``Sec.  242.600(b)(78)''
and adding in its place ``Sec.  242.600(b)(82)''.

Sec.  242.204   [Amended]

0
7. In Sec.  242.204, paragraph (g)(2) is amended by removing the text
``Rule 600(b)(64) of Regulation NMS (17 CFR 242.600(b)(64))'' and
adding in its place ``Sec.  600(b)(68) of Regulation NMS (17 CFR
242.600(b)(68))''.

0
8. Section 242.600 is amended by:
0
a. Redesignating paragraphs (b)(52) through (83) as paragraphs (b)(56)
through (87);
0
b. Redesignating paragraphs (b)(49) through (51) as paragraphs (b)(51)
through (53);
0
c. Adding new paragraphs (b)(50), (54), and (55);
0
d. Redesignating paragraphs (b)(1) through (48) as paragraphs (b)(2)
through (b)(49);
0
e. Adding new paragraph (b)(1).
0
f. Amending newly redesignated paragraph (b)(5)(i) by removing the text
``paragraph (b)(3)'' and adding in its place ``paragraph (b)(4)''; and
0
g. Revising newly redesignated paragraphs (b)(20) and (49).
    The additions and revisions read as follows:

Sec.  242.600   NMS security designation and definitions.

* * * * *
    (b) * * *
    (1) Actionable indication of interest means any indication of
interest that explicitly or implicitly conveys all of the following
information with respect to any order available at the venue sending
the indication of interest:
    (i) Symbol;
    (ii) Side (buy or sell);
    (iii) A price that is equal to or better than the national best bid
for buy orders and the national best offer for sell orders; and
    (iv) A size that is at least equal to one round lot.
* * * * *
    (20) Directed order means an order from a customer that the
customer specifically instructed the broker or dealer to route to a
particular venue for execution.
* * * * *
    (49) Non-directed order means any order from a customer other than
a directed order.
* * * * *
    (50) Non-marketable limit order means any limit order other than a
marketable limit order.
* * * * *
    (54) Orders providing liquidity means orders that were executed
against after resting at a trading center.
    (55) Orders removing liquidity means orders that executed against
resting trading interest at a trading center.
* * * * *

Sec.  242.602   [Amended]

0
9. Section 242.602 is amended:
0
a. In paragraph (a)(5)(i) by removing the text ``Sec.  242.600(b)(73)''
and adding in its place ``Sec.  242.600(b)(77)''; and
0
b. In paragraph (a)(5)(ii) by removing the text ``Sec.
242.600(b)(73)'' and adding in its place ``Sec.  242.600(b)(77)''.

0
10. Section 242.605 is amended by removing the preliminary note, adding
introductory text, and adding a sentence at the end of paragraph
(a)(2).
    The additions read as follows:

Sec.  242.605   Disclosure of order execution information.

    This section requires market centers to make available
standardized, monthly reports of statistical information concerning
their order executions. This information is presented in accordance
with uniform standards that are based on broad assumptions about order
execution and routing practices. The information will provide a
starting point to promote visibility and competition on the part of
market centers and broker-dealers, particularly on the factors of
execution price and speed. The disclosures required by this section do
not encompass all of the factors that may be important to investors in
evaluating the order routing services of a broker-dealer. In addition,
any particular market center's statistics will encompass varying types
of orders routed by different broker-dealers on behalf of customers
with a wide range of objectives. Accordingly, the statistical
information required by this section alone does not create a reliable
basis to address whether any particular broker-dealer failed to obtain
the most favorable terms reasonably available under the circumstances
for customer orders.
    (a) * * *
    (2) * * * Every market center shall keep such reports posted on an
internet website that is free and readily accessible to the public for
a period of three years from the initial date of posting on the
internet website.
* * * * *

0
11. Section 242.606 is amended by revising paragraphs (a) and (b) to
read as follows:

Sec.  242.606   Disclosure of order routing information.

    (a) Quarterly report on order routing. (1) Every broker or dealer
shall make publicly available for each calendar quarter a report on its
routing of non-directed orders in NMS stocks that are submitted on a
held basis and of non-directed orders that are customer orders in NMS
securities that are option

contracts during that quarter broken down by calendar month and keep
such report posted on an internet website that is free and readily
accessible to the public for a period of three years from the initial
date of posting on the internet website. Such report shall include a
section for NMS stocks--separated by securities that are included in
the S&P 500 Index as of the first day of that quarter and other NMS
stocks--and a separate section for NMS securities that are option
contracts. Such report shall be made available using the most recent
versions of the XML schema and the associated PDF renderer as published
on the Commission's website for all reports required by this section.
Each section in a report shall include the following information:
    (i) The percentage of total orders for the section that were non-
directed orders, and the percentages of total non-directed orders for
the section that were market orders, marketable limit orders, non-
marketable limit orders, and other orders;
    (ii) The identity of the ten venues to which the largest number of
total non-directed orders for the section were routed for execution and
of any venue to which five percent or more of non-directed orders were
routed for execution, the percentage of total non-directed orders for
the section routed to the venue, and the percentages of total non-
directed market orders, total non-directed marketable limit orders,
total non-directed non-marketable limit orders, and total non-directed
other orders for the section that were routed to the venue;
    (iii) For each venue identified pursuant to paragraph (a)(1)(ii) of
this section, the net aggregate amount of any payment for order flow
received, payment from any profit-sharing relationship received,
transaction fees paid, and transaction rebates received, both as a
total dollar amount and per share, for each of the following non-
directed order types:
    (A) Market orders;
    (B) Marketable limit orders;
    (C) Non-marketable limit orders; and
    (D) Other orders.
    (iv) A discussion of the material aspects of the broker's or
dealer's relationship with each venue identified pursuant to paragraph
(a)(1)(ii) of this section, including a description of any arrangement
for payment for order flow and any profit-sharing relationship and a
description of any terms of such arrangements, written or oral, that
may influence a broker's or dealer's order routing decision including,
among other things:
    (A) Incentives for equaling or exceeding an agreed upon order flow
volume threshold, such as additional payments or a higher rate of
payment;
    (B) Disincentives for failing to meet an agreed upon minimum order
flow threshold, such as lower payments or the requirement to pay a fee;
    (C) Volume-based tiered payment schedules; and
    (D) Agreements regarding the minimum amount of order flow that the
broker-dealer would send to a venue.
    (2) A broker or dealer shall make the report required by paragraph
(a)(1) of this section publicly available within one month after the
end of the quarter addressed in the report.
    (b) Customer requests for information on order routing. (1) Every
broker or dealer shall, on request of a customer, disclose to its
customer, for:
    (i) Orders in NMS stocks that are submitted on a held basis;
    (ii) Orders in NMS stocks that are submitted on a not held basis
and the broker or dealer is not required to provide the customer a
report under paragraph (b)(3) of this section; and
    (iii) Orders in NMS securities that are option contracts, the
identity of the venue to which the customer's orders were routed for
execution in the six months prior to the request, whether the orders
were directed orders or non-directed orders, and the time of the
transactions, if any, that resulted from such orders. Such disclosure
shall be made available using the most recent versions of the XML
schema and the associated PDF renderer as published on the Commission's
website for all reports required by this section.
    (2) A broker or dealer shall notify customers in writing at least
annually of the availability on request of the information specified in
paragraph (b)(1) of this section.
    (3) Except as provided for in paragraphs (b)(4) and (5) of this
section, every broker or dealer shall, on request of a customer that
places, directly or indirectly, one or more orders in NMS stocks that
are submitted on a not held basis with the broker or dealer, disclose
to such customer within seven business days of receiving the request, a
report on its handling of such orders for that customer for the prior
six months by calendar month. Such report shall be made available using
the most recent versions of the XML schema and the associated PDF
renderer as published on the Commission's website for all reports
required by this section. For purposes of such report, the handling of
a NMS stock order submitted by a customer to a broker-dealer on a not
held basis includes the handling of all child orders derived from that
order. Such report shall be divided into two sections: One for directed
orders and one for non-directed orders. Each section of such report