\353\ For shares executed with price improvement, executed at
the quote, or executed outside the quote, respectively, see proposed
Rules 605(a)(1)(ii)(D), 605(a)(1)(ii)(H), and 605(a)(1)(ii)(M).
    \354\ For shares executed with price improvement, executed at
the quote, or executed outside the quote, respectively, see proposed
Rules 605(a)(1)(ii)(E), 605(a)(1)(ii)(I), and 605(a)(1)(ii)(N).
    \355\ See proposed Rule 605(a)(1)(iii)(C).
    \356\ See proposed Rule 605(a)(1)(iii)(D).
    \357\ See proposed Rule 605(a)(1)(iii)(E). As a result, the use
of time-to-execution buckets would no longer be necessary. Rule
605(a)(1)(i)(F) through (J) requires statistics for the cumulative
number of shares of covered orders executed in separate time-to-
execution buckets. Those requirements would be eliminated.
---------------------------------------------------------------------------

    The Commission considered compressing the current time-to-execution
buckets to a sub-second level (i.e., less than 50 milliseconds, 50-500
milliseconds, 500 milliseconds to 1 second, and greater than 1 second).
One commenter suggested that even more granular timestamps be
used.\358\ The proposed rule would not require the use of microsecond
timestamps, for the reasons discussed above. The Commission solicits
comment below on whether requiring the use of timestamps more granular
than a millisecond would be appropriate.
---------------------------------------------------------------------------

    \358\ See Healthy Markets II at 3 (suggesting use of the
following execution time categories: less than 500 microseconds; 500
microseconds-1 millisecond; 1-10 milliseconds; 10-100 milliseconds;
100 milliseconds-1 second; and current categories).
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment generally on the changes to the
timestamp conventions within Rule 605. In particular, the Commission
solicits comment on the following:
    27. Should Rule 605 require timestamps to be recorded at
millisecond level granularity? Why or why not? Would it be preferable
in Rule 605 for timestamps to be recorded at microsecond granularity
(as suggested by one commenter) or nanosecond granularity? Please
explain and provide data, if available. Should Rule 605 require market
centers and larger broker-dealers to utilize timestamps in increments
finer than milliseconds to the extent such entities' order handling or
execution systems utilize finer increments? Why or why not? Would
allowing some market centers and broker-dealers to utilize timestamps
in increments finer than milliseconds affect the comparability of their
execution quality statistics?
    28. Do commenters believe the proposed level of timestamp
granularity would enhance the usefulness of execution quality
statistics? Why or why not?
    29. Do commenters believe that the proposed statistical measures
that would be required for time to execution (i.e., average, median,
and 99th percentile) are appropriate? If not, what statistics should be
used?
    30. Should the Commission require share-weighted average time to
execution for non-marketable order types, measured from the time the
order becomes executable? Should the Commission require share-weighted
median and 99th percentile time-to-execution statistics, measured from
the time an order becomes executable?
    31. Should the Commission retain the required time-to-execution
buckets for all order types, with revisions to the time intervals used?
If so, should the Commission use the time buckets proposed by a
commenter (i.e., less than

500 microseconds; 500 microseconds-1 millisecond; 1-10 milliseconds;
10-100 milliseconds; 100 milliseconds-1 second; in addition to the
current categories)?
4. Changes to Information Required for All Types of Orders
(a) Realized Spread
    Rule 605 requires calculation of average realized spread for
executions of all covered orders and is calculated by comparing the
execution price of an order and the midpoint of the NBBO as it stands
five minutes after the time of order execution.\359\ The smaller the
average realized spread, the more prices have moved adversely to
liquidity providers after the order was executed, which shrinks the
spread ``realized'' by the liquidity providers.\360\ A low average
spread indicates that a liquidity provider was providing liquidity even
though prices were moving against it.\361\ In the Adopting Release, the
Commission also stated that the realized spread statistic ``can
highlight the extent to which market centers receive uninformed orders
(as indicated by higher realized spreads than other market centers),
thereby potentially helping to spur more vigorous competition to
provide the best prices to these orders to the benefit of many retail
investors.'' \362\ To the extent realized spreads capture adverse
selection costs faced by liquidity providers, they provide a measure of
the potential profitability of trading for liquidity providers.\363\
---------------------------------------------------------------------------

    \359\ See 17 CFR 242.600(b)(9). For buy orders, realized spread
is double the amount of difference between the execution price and
the midpoint of the NBBO five minutes after the time of order
execution. For sell orders, realized spread is double the amount of
difference between the midpoint of the NBBO five minutes after the
time of order execution and the execution price. See id. The
Commission is proposing to renumber the definition of ``average
realized spread'' as proposed Rule 600(b)(13).
    \360\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75424.
    \361\ See id.
    \362\ Id. See also Securities Exchange Act Release No. 84875
(Dec. 19, 2018), 84 FR 5202, n.587 (Feb. 20, 2019) (``The realized
spread is the portion of the spread that market makers `realize'
after adverse selection costs are taken into account.'').
    \363\ See, e.g., Larry Harris, Trading and Exchanges: Market
Microstructure for Practitioners (Oxford University Press 2003) at
286 (``Informed traders buy when they think that prices will rise
and sell otherwise. If they are correct, they profit, and whoever is
on the other side of their trade loses. When dealers trade with
informed traders, prices tend to fall after the dealer buys and rise
after the dealers sell. These price changes make it difficult for
dealers to complete profitable round-trip trades. When dealers trade
with informed traders, their realized spreads are often small or
negative. Dealers therefore must be very careful when trading with
traders they suspect are well informed.'')
---------------------------------------------------------------------------

    In order to proxy for this, realized spread measures the difference
between the execution price and a future price. An ideal measurement
horizon would be one that aligns with the amount of time an average
liquidity provider holds onto its inventory positions and must be
sufficiently long so that it captures a price reversal rather than a
series of trades representing the same demand as the initial trade but
not so long as to introduce unnecessary noise.\364\
---------------------------------------------------------------------------

    \364\ See, e.g., Roger Huang & Hans Stoll, Dealer Versus Auction
Markets: A Paired Comparison of Execution Costs on NASDAQ and the
NYSE, 41 J. Fin. Econ. 313-357 (1996).
---------------------------------------------------------------------------

    The equities market moves much faster than it did in 2000,\365\ and
correspondingly any changes in market maker or liquidity provider
positions and inventory occur much more quickly in the contemporary
market environment. There is academic literature that argues that the
current five-minute horizon has become inappropriate for a high-
frequency environment.\366\ One study posits that the five-minute time
horizon should be replaced with a horizon of no more than 15 seconds
for large cap stocks and 60 seconds for small cap stocks.\367\
---------------------------------------------------------------------------

    \365\ See supra note 98.
    \366\ See, e.g., Maureen O'Hara, High Frequency Market
Microstructure, 116(2) J. Fin. Econ. 257-270 (2015) (``O'Hara
2015''); Maureen O'Hara, Gideon Saar, & Zhuo Zhong, Relative Tick
Size and the Trading Environment, 9(1) Rev. of Asset Pricing Stud.
47-90 (2019) (``O'Hara et al.''); Jennifer S. Conrad & Sunil Wahal,
The Term Structure of Liquidity Provision, 136(1) J. Fin. Econ. 239-
259 (2020) (``Conrad and Wahal'').
    \367\ See Conrad and Wahal.
---------------------------------------------------------------------------

    Selecting an appropriate time horizon to calculate the realized
spread is important, as realized spreads vary significantly as the time
horizon is changed.\368\ In order to examine this issue, the Commission
analyzed how realized spreads vary when calculated over time horizons
ranging from one second to five minutes, as well as how they differ
based on market capitalization size, using TAQ data from February 2021
for a sample of 400 stocks from four different market capitalization
groups (less than $100 million, $100 million to $1 billion, $1 billion
to $10 billion, and over $10 billion).\369\
---------------------------------------------------------------------------

    \368\ See infra Figure 13.
    \369\ See infra note 706 for dataset description. This analysis
uses data from prior to the implementation of the MDI Rules and the
specific numbers may be different following the implementation of
the MDI Rules. In particular, for certain stocks, the NBBO midpoint
may change, though the Commission is uncertain of the direction of
this effect. This may impact statistics that are based on these
values, including realized spreads. See infra section VII.C.1.(d).
While specific numbers might change, the Commission does not expect
the relative variation in realized spreads across different time
horizons to change as a result of the implementation of the MDI
Rules.
---------------------------------------------------------------------------

    The results are presented in Figure 1, and show that realized
spreads tend to decrease as the time horizon increases, and
additionally show that they tend to decline as market capitalization
size increases. Echoing results from the academic literature, the
persistence of these systematic differences in realized spreads across
market capitalization sizes implies that a time horizon that may be
ideal for large cap stocks may be too short for small cap stocks.\370\
As a result, the Commission believes that including multiple different
time horizons for realized spreads would make this measure more
relevant across a wider range of stocks.
---------------------------------------------------------------------------

    \370\ See Conrad and Wahal.
---------------------------------------------------------------------------

Figure 1: Average Realized Spreads by Market Capitalization, February
2021

[GRAPHIC] [TIFF OMITTED] TP20JA23.000

    Further, the analysis of different time horizons and market
capitalization shows that most of the difference in realized spread
\371\ is captured for the largest stocks at 15 seconds, but less than a
third is captured for smaller cap stocks, as shown in Table 1
below.\372\ However, at least half of the difference is captured for
smaller cap stocks at one minute.\373\ Therefore, the proposed time
horizons of 15 seconds and one minute would capture most of the
realized spread information, in particular for the largest stocks.\374\
---------------------------------------------------------------------------

    \371\ Generally, if most of the difference between realized
spreads is captured at a particular time horizon, then this implies
that most of the relevant information has been incorporated into the
realized spreads.
    \372\ Specifically, analysis shows the 15-second horizon
captures over 66.2% of the overall decline in realized spreads for
the group corresponding to the largest stocks, but captures less
than a third of this decline in the two groups corresponding to
smaller stocks. Analysis also shows that the 15-second horizon
captures almost 50% of the overall decline in realized spreads for
those stocks with a market capitalization of between $1 billion and
$10 billion.
    \373\ By the one-minute horizon, realized spreads have captured
more than 50% of the overall decline in realized spreads for all
stocks, and a substantial majority for the two groups of larger
stocks (79% and 94.9%).
    \374\ For the two smaller-stock groups, a sizeable proportion of
the overall decline (37%) does not occur until the five-minute
horizon. See infra section VII.E.3.(c)(1) for a discussion of
including additional time horizons, including the five-minute
horizon, for calculating realized spreads.

                         Table 1--Variation in Average Realized Spread, by Time Horizon
----------------------------------------------------------------------------------------------------------------
                                                                                Horizon
                Market cap group                    1 sec-5 min  -----------------------------------------------
                                                        ($)         15 sec (%)       1 min (%)       5 min (%)
----------------------------------------------------------------------------------------------------------------
<$100 million...................................           0.021            22.5            40.2            37.3
$100 million-$1 billion.........................           0.019            33.2            29.7            37.1
$1 billion-$10 billion..........................           0.017            48.5            30.5            21.0
>$10 billion....................................           0.013            66.2            28.7             5.1
----------------------------------------------------------------------------------------------------------------
Table 1: Variation in Average Realized Spread, by Time Horizon. This table presents the difference between
  dollar realized spreads calculated using a 1-second time horizon and realized spreads calculated using a 5-
  minute time horizon, along with the percentage of variation in this difference that is captured at various
  time horizons (15 seconds, 1 minute, and 5 minutes), using data from TAQ. See infra note 722 for dataset
  description. This analysis uses data from prior to the implementation of the MDI Rules and numbers may be
  different following the implementation of the MDI Rules. See supra note 369 and infra section VII.C.1.(d).

    Based on this analysis, for executions of covered orders, the
Commission proposes that the average realized spread be calculated at
specified intervals of 15 seconds and one minute after the time of
execution.\375\ The Commission believes that these timeframes are
appropriate for liquid stocks and for thinly traded stocks because, as
suggested by available academic literature and supported by the
analysis in this release, realized spreads are likely to be most
impacted during the first 15 seconds, for large stocks, and one minute,
for small stocks, following a trade.\376\ The Commission is proposing
to require realized spreads to be calculated at both intervals in order

to provide relevant information for symbols with different liquidity
characteristics. While commenters supported moving away from the
current five-minute calculation, they suggested different time
horizons.\377\ Although both shorter (50ms, 100ms) and longer (three
minute, five minute) \378\ time horizons would provide useful
information for certain groups of stocks, each additional time horizon
adds to the computational burden of preparing the reports and increases
the size and complexity of the reports, adding to the costs that market
participants face when collecting, interpreting, and evaluating Rule
605 reports. Additional time horizons would likely only provide
additional benefits for smaller subsets of stocks, while the 15-second
and one minute time horizons would generally provide informative
average realized spread metrics across the universe of stocks with
different market capitalization and different liquidity
characteristics.
---------------------------------------------------------------------------

    \375\ See proposed Rule 605(a)(1)(i)(G) and(I). In order to
accommodate calculation of ``average realized spread'' at two
different time intervals, the Commission proposes to modify the
existing definition of ``average realized spread'' to replace the
reference to five minutes with a ``specified interval.'' See
proposed Rule 600(b)(13).
    \376\ See Conrad and Wahal.
    \377\ Two commenters suggested expanding realized spread into
50ms, 100ms, and three minute buckets to better identify adverse
selection. See KOR Group I at 4; Healthy Markets II at 3. One
commenter suggested that if the realized spread statistic is to
remain, the Commission should either determine an appropriate time-
scale for the measurement or re-affirm the current five minutes
duration. See FIF III at 10.
    \378\ Analysis shows that retaining a five-minute horizon, in
addition to the proposed one-minute and 15-second horizon, would
capture additional information about realized spreads, particular
for the smallest stocks. See infra section VII.D.1.(b)(1)(c)(ii).
However, as stated above, the one-minute time horizon would still
capture more than 50% of the variation in realized spreads for the
smallest cap stocks. See supra note 373.
---------------------------------------------------------------------------

    Finally, in connection with both the average realized spread and
average effective spread \379\ statistics, the Commission has also
considered, but is not including in the proposed rule text, an updated
method by which the spread is calculated by incorporating a weighted
midpoint.\380\ However, as is discussed in section VII.E.3.(c)(3)
below, the midpoint requires data only on the best available bid and
ask price.\381\ In contrast, calculating the weighted midpoint would
require that reporting entities additionally collect data on the depth
available at the NBBO.\382\ Furthermore, the midpoint may be easier to
compute and interpret, as it is more familiar to market participants
than the weighted midpoint.
---------------------------------------------------------------------------

    \379\ See infra section IV.B.4.b).
    \380\ The weighted midpoint is calculated using the following
formula: weighted midpoint = ((bid price x quantity at the ask
price) + (ask price x quantity at the bid price))/(quantity at the
ask price + quantity at the bid price). See, e.g., Bj[ouml]rn
Hagstr[ouml]mer, Bias in the Effective Bid-Ask Spread, 142(1) J.
Fin. Econ. 314-337 (2021).
    \381\ See infra section VII.E.3.(c)(3).
    \382\ This might not be a significant additional cost, as
reporting entities would be required to collect information on NBBO
depth for computing the size improvement benchmark measure under the
proposed amendments. See infra section IV.B.4.(e).
---------------------------------------------------------------------------

(b) Average Effective Spread
    Rule 600(b)(8) defines ``average effective spread'' as the share-
weighted average of effective spreads for order executions calculated,
for buy orders, as double the amount of difference between the
execution price and the midpoint of the national best bid and national
best offer at the time of order receipt and, for sell orders, as double
the amount of difference between the midpoint of the national best bid
and national best offer at the time of order receipt and the execution
price.\383\ Currently, average effective spread is required to be
calculated only for market and marketable limit order types and doing
so requires the comparison of the execution price of an order with the
midpoint of the NBBO at the time of order receipt. The Commission
proposes to expand effective spread reporting requirements to include
all covered orders, and to modify the methodology for calculating this
metric for executable NMLOs, beyond-the-midpoint limit orders, and
executable stop orders.
---------------------------------------------------------------------------

    \383\ See 17 CFR 242.600(b)(8). All orders that require
reference to a consolidated BBO that has been crossed for 30 seconds
or more are exempt. See Letter from Annette L. Nazareth, Director,
Division, Commission, to Stuart J. Kaswell, Senior Vice President
and General Counsel, Securities Industry Association (Mar. 12, 2001)
(``SIA Exemption Letter'').
---------------------------------------------------------------------------

    Average effective spread provides a measure of spread actually paid
by investors at a particular market center.\384\ Generally, for
marketable order types, average effective spread provides a measure of
the price paid for the immediacy of execution. However, because they
are less aggressively priced, NMLOs are not typically submitted with
the expectation that they will be executed immediately. Instead, they
are submitted with the expectation that they rest and provide liquidity
(if executed). Therefore, average effective spread for NMLOs and orders
submitted with stop prices provides a measure of the amount a liquidity
provider could expect to earn for providing liquidity. The Commission
proposes to revise the definition of ``average effective spread'' to
specify that, for order executions of NMLOs \385\ and orders submitted
with stop prices, average effective spread be calculated from the time
the order becomes executable.\386\ Because the concept of
``executable'' controls for prevailing market conditions, benchmarking
average effective spread statistics for these non-marketable order
types from the time such orders become executable would permit average
effective spread statistics for these order types to be more
informative of execution quality received.
---------------------------------------------------------------------------

    \384\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75415.
    \385\ As noted above, beyond-the-midpoint limit orders are a
type of NMLO.
    \386\ See proposed Rule 600(b)(10).
---------------------------------------------------------------------------

    The Commission proposes to prescribe the collection of this data
point for executable NMLOs, beyond-the-midpoint limit orders, and
executable stop orders by adding proposed Rule 605(a)(1)(i)(K) to
require the calculation of average effective spread for executions of
covered orders, which includes executable NMLOs and executable stop
orders.\387\
---------------------------------------------------------------------------

    \387\ See proposed Rule 605(a)(1)(i). The Commission also
proposes to delete the current average effective spread calculation
requirement in Rule 605(a)(1)(ii)(A), which previously applied only
to market and marketable limit orders, because this measurement,
with the inclusion of marketable IOCs, beyond-the-midpoint limit
orders, executable NMLOs, and executable orders with stop prices,
would be included in proposed Rule 605(a)(1)(i)(K).
---------------------------------------------------------------------------

(c) Percentage Spreads (Effective and Realized)
    Currently, Rule 605 statistics include the average realized spread
and average effective spread for executions of covered orders. To
compare these dollar-based statistics across the data population while
taking into account the wide range of stock prices, dollar-based
statistics need to be converted into percentages. While obtaining
historical price information for individual securities is possible, in
the Commission's experience since the implementation of Rule 605, such
calculations are time- and resource-intensive, especially across
multiple time periods and securities. Furthermore, the Commission
believes that using percentage-based spread measures could provide
additional information at the individual stock level if a stock's price
changes significantly during a month.
    Therefore, the Commission proposes requiring dollar-based spread
statistics (i.e., effective spread and realized spread) to also be
reported as percentages because a percentage measure would account for
differing underlying stock prices and better facilitate comparisons of
spread statistics across different time periods and securities.\388\
The proposed definitions for ``average percentage effective spread''
and ``average percentage realized spread'' would provide the same
calculation as the dollar-based effective and realized spread
statistics for the numerator.\389\

The denominator for dollar-based spread percentages would be the
midpoint of the NBBO at either the time of order receipt (for
marketable order types) or the time an order first becomes executable
(for non-marketable order types) in order to provide a consistent
measure of the prevailing stock price from the point when an order
could reasonably be expected to execute. This would then be averaged on
a share-weighted basis for the month.
---------------------------------------------------------------------------

    \388\ See proposed Rule 605(a)(1)(i)(H), (J), and (L).
    \389\ See proposed Rule 600(b)(11) and (12).
---------------------------------------------------------------------------

    Specifically, average percentage effective spread would be
calculated for each transaction as double the amount of the difference
between the execution price and the midpoint divided by the midpoint.
The midpoint used would be at either the time of order receipt \390\ or
the time of executability.\391\ Then the percentage would be averaged
on a share-weighted basis.\392\
---------------------------------------------------------------------------

    \390\ The time of order receipt would be used for market orders,
marketable limit orders, and marketable IOCs. See proposed Rule
600(b)(11).
    \391\ The time an order becomes executable would be used for
NMLOs, beyond-the-midpoint limit orders, and orders submitted with
stop prices. See proposed Rule 600(b)(11).
    \392\ See proposed Rule 600(b)(11).
---------------------------------------------------------------------------

    Similarly, average percentage realized spread would be calculated
as the realized spread for an order, divided by the midpoint of the
NBBO at the time of order receipt (for marketable order types) or
executability (for non-marketable order types).\393\ For each buy
transaction, realized spread would be double the amount of difference
between the execution price and the midpoint of the NBBO at both 15
seconds and one minute after the time of order execution.\394\ For each
sell transaction, realized spread would be double the amount of
difference between the midpoint of the NBBO at both 15 seconds and one
minute after the time of order execution and the execution price.\395\
Then the percentage would be averaged on a share-weighted basis for the
month to calculate that month's average 15-second and one-minute
realized spread percentage for each category.
---------------------------------------------------------------------------

    \393\ See proposed Rule 600(b)(12).
    \394\ Proposed Rule 600(b)(12) provides that the midpoint would
be calculated at a ``specified interval'' after the time of order
execution. Proposed Rule 605(a)(1)(i)(H) and (J) would require
average percentage realized spread to be calculated at 15 seconds
and one minute, respectively, after the time of execution. The
Commission is proposing the use of the 15 second and one minute time
period for the reasons discussed in supra section IV.B.4.(a).
    \395\ See proposed Rule 600(b)(12) and proposed Rule
605(a)(1)(i)(G) and (I).
---------------------------------------------------------------------------

(d) Effective Over Quoted Spread (E/Q)
    The Commission understands that market participants often use
effective over quoted spread (``E/Q'') \396\ as a measure of execution
quality.\397\ E/Q is generally expressed as a percentage that
represents how much price improvement an order received.\398\ An E/Q of
100% means a buy order was executed at the national best offer or a
sell order was executed at the national best bid. An E/Q of 0% means an
order was executed at the midpoint of the NBBO.
---------------------------------------------------------------------------

    \396\ Quoted spread is the difference between the national best
bid and the national best offer at the time an order is received.
    \397\ See, e.g., Bill Alpert ``Who Makes Money on Your Stock
Trades,'' Barron's, Feb. 28, 2015 (retrieved from Factiva database)
(stating ``the industry's acid-test [execution] quality measure is
the ratio of effective spread over the quoted spread, or E/Q'');
https://investor.vanguard.com/about-us/brokerage-order-execution-
quality#:~:text=Effective%20over%20quoted%20spread*,in%20our%20low%20
E%2F. A commenter stated that E/Q is a commonly used metric of
execution quality that measures how effectively a market maker
prices a customer's order relative to the prevailing NBBO. See Citi
Letter at 3.
    \398\ See, e.g., https://us.etrade.com/trade/execution-
quality#:~:text=Effective%20spread%20over%20quoted%20spread,between%2
0the%20bid%20and%20offer.
---------------------------------------------------------------------------

    Rule 605 does not require quoted spreads to be reported, although
average quoted spread can be derived from existing Rule 605
statistics.\399\ However, along with the proposed requirement to
include percentage-based realized and effective spread statistics, it
would improve the comparability of price improvement statistics across
symbols to include share-weighted average E/Q. Further, the Commission
understands E/Q is already often-used and well-understood by industry
participants. Currently, although average E/Q can be derived under Rule
605, E/Q is a relatively simple metric to capture contemporaneously
with an execution. Given the common usage of the metric, requiring a
separate field for E/Q would increase the ability of market
participants to access and utilize E/Q to compare price improvement
statistics across securities, and across market centers and broker-
dealers.
---------------------------------------------------------------------------

    \399\ Average quoted spread can be derived on a per symbol basis
by adding average effective spread and double the amount of total
average per share price improvement or dis-improvement (i.e., amount
of price improvement times price improved share count, less amount
of price dis-improvement times price dis-improved share count,
divided by total number of executed shares).
---------------------------------------------------------------------------

    Deriving average quoted spread from the existing reports involves
additional computational burdens. Further, there are likely to be
differences in E/Q on a per transaction basis that may yield a
different average E/Q than extrapolating an average quoted spread for
the month and using that to calculate an average monthly E/Q, which is
a noisier measure of E/Q.\400\ Therefore, the Commission proposes to
require, for executions of all covered orders, a statistic for the
average effective over quoted spread, expressed as a percentage.\401\
Share-weighted average E/Q would be calculated by dividing effective
spread by quoted spread \402\ for each transaction and then averaging
that over the month (weighted by number of shares). The quoted spread
would be the difference between the national best bid and the national
best offer at either the time of order receipt (for marketable order
types) or the time an order first becomes executable (for non-
marketable order types).\403\ This would provide a consistent measure
of the prevailing quoted spread at the point when an order could
reasonably be expected to execute. Expressing share-weighted average E/
Q as a percentage would provide an additional data point that could be
used to evaluate price improvement across symbols or the entire data
population.
---------------------------------------------------------------------------

    \400\ See infra note 878 and accompanying text.
    \401\ See proposed Rule 605(a)(1)(i)(M).
    \402\ See proposed Rule 600(b)(9) (defining ``average effective
over quoted spread'').
    \403\ See id.
---------------------------------------------------------------------------

(e) Size Improvement
    Rule 605 reports are required to include price improvement metrics
but do not indicate whether orders received an execution of more than
the displayed size at the quote. The Commission considered whether to
add a measure of ``size improvement'' or ``liquidity enhancement'' when
adopting Rule 605, but did not add this type of measure in part to
minimize the complexity and quantity of statistics, and in part because
certain measures, such as effective spread, already reflected a market
center's ability to execute above the displayed size.\404\ Share-
weighted effective spread metrics may provide information about size
improvement, since effective spread will be larger for orders that have
to ``walk the book'' (i.e., consume available depth beyond the best
quotes). However, effective spread combines both price and size
information; therefore, it is difficult to distinguish whether, for
example, a low effective spread arises because the market center
consistently offered better prices to small orders, or was able to
offer better prices to several very large orders. Market participants
have expressed support for a size improvement measure,\405\ and orders
are

often larger than the displayed size at the NBBO.\406\ The Commission
also stated in the MDI Adopting Release that the decimalization of
securities pricing in 2001, and the resulting shift away from the
larger fractional quoting and trading increments, had significant
implications for the amount of liquidity available at the top of
book.\407\ Market participants have raised concerns about reduced price
transparency and difficulty executing large transactions at the best
prices due to lower concentrations of trading interest at the top of
book.\408\ The Commission believes that the use of size improvement
statistics could help address these concerns by providing users of the
statistics with information relating to which market centers and
broker-dealers are more likely to be able to fill larger-sized orders
at or better than the NBBO.
---------------------------------------------------------------------------

    \404\ See Adopting Release, 65 FR at 75425.
    \405\ See, e.g., FIF III, at 2; Virtu Petition at 3-4. The
petitioner states that the ``single biggest shortcoming'' of Rule
605 is that it does not reflect any benefits received by retail
investors on orders that outsize the NBBO, including size
improvement. See Virtu Petition at 3. The petitioner states that
retail investors deserve more complete execution quality reports
that provides transparency about the amount of size improvement that
their orders are receiving. See id. at 4. The petitioner
specifically states that Rule 605 reporting would be more complete
if market participants could assess execution quality by comparing
the fill prices on their orders to a reference benchmark that
includes all displayed liquidity on exchanges, including resting
odd-lots that are visible in market data feeds. See id.
    \406\ For example, the petitioner stated that ``approximately
45% of shares (and 54% of the value traded) filled by [the
petitioner] in 2020 were from orders that outsized the NBBO.'' Virtu
Petition at 3.
    \407\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at
18606.
    \408\ See id. at 16751 n.278 and accompanying text (citing the
Investment Company Institute letter describing the difficulty of
institutional investors' ability to execute large orders). Shortly
after decimalization became a reality, the GAO noted that the
average executed trades size declined by 67% on NYSE and 41% on
NASDAQ. See GAO Report, ``Decimal Pricing Has Contributed to Lower
Trading Cost and a More Challenging Trading Environment,'' May 2005,
at 37.
---------------------------------------------------------------------------

    The Commission proposes adding a benchmark metric that would, in
combination with information about execution sizes, indicate the level
of size improvement, i.e., whether orders received an execution greater
than the displayed size at the quote. Analysis of a sample of 100
symbols during March of 2019 indicates only a moderate level of
correlation between standard price improvement metrics and a measure of
size improvement, indicating that these measures may contain different
information about execution quality.\409\ Given that existing execution
quality metrics do not include metrics for size improvement, nor any
metrics that serve as an adequate proxy for a size improvement
statistic, the Commission proposes to include a benchmark metric for
all executions of covered orders. Specifically, proposed Rule
605(a)(1)(i)(F) requires, for executions of all covered orders, the
reporting of the cumulative number of shares of the full displayed size
of the protected bid at the time of execution, in the case of a market
or limit order to sell; and for the full displayed size of the
protected offer at the time of execution, in the case of a market or
limit order to buy. This would capture the full displayed size at the
quote on the side of the NBBO against which a buy or sell order would
be expected to execute. Pursuant to the proposed rule, for each order,
the share count shall be capped at the order size if the full displayed
size of the national best bid or national best offer is larger than the
order. This would prevent skewing of the size improvement benchmark if
the national best bid or national best offer outsized any particular
order. By limiting this measure to only the full displayed size of the
protected bid or offer that would have been available to a particular
order, the benchmark would represent what could be have been executed
at the protected bid or offer.
---------------------------------------------------------------------------

    \409\ See infra section VII.E.3.(d)(1). See infra notes 882-883
for a description of the sample selection and analysis.
---------------------------------------------------------------------------

    This benchmark metric can be combined with information about the
number of shares that a market center or broker-dealer executed at or
above the quote to measure a market center or broker-dealer's ability
to offer customers execution at the quote (or better), even when an
order's full size at the quote is not available. For example, if a
market center executes a 500 share order to buy at a price at or better
than the national best offer, and there are currently 200 shares
displayed at the national best offer, the associated benchmark metric
for the order would be 200 shares because there were only 200 shares
available to fill the order at the best displayed quote. This benchmark
share count could then be compared to the number of shares executed at
the best displayed quote (in this case, 500 shares) to capture whether
the market center filled any part of the customer order at the national
best offer (or better), even when there was no depth available at the
national best offer (``size improvement share count''). To continue the
preceding example, the size improvement share count would be 500-200 =
300 shares, since the market center was able to offer the best
displayed quote to 300 shares more than the depth available at the
best-displayed quote.\410\
---------------------------------------------------------------------------

    \410\ Note that capping the benchmark metric at the order size
prevents the size improvement share count from turning negative in
situations when depth at the best displayed quote exceeds the
customer-requested order size. For example, consider a case in which
a market center executes an order for 200 shares when there are
currently 500 shares displayed at the national best offer. If the
benchmark share count were not capped at the order size, the size
improvement share count would be 200-500 = -300 and would become
more negative the more depth there is available at the NBBO, which
would reduce a market center's total monthly size improvement share
count, simply for fulfilling the customer's request to only execute
200 shares and not the full 500 shares that were available at the
national best offer. Instead, the benchmark share count would be
capped at the order size, and the benchmark share count would still
be 200 shares. The size improvement share count would be 200-200 = 0
shares, capturing the fact that the market center did not offer the
national best offer price (or better) to any shares over and above
the depth available at the best displayed quote.
---------------------------------------------------------------------------

    The petitioner suggested an alternative metric: real price
improvement (``RPI''), which combines price improvement (i.e., trades
at prices better than the NBBO price) and size improvement (i.e.,
transactions executed for share quantities greater than shares
displayed at the NBBO and at prices at or better than the NBBO
price).\411\ The petitioner stated that RPI reflects the true benefits
received by retail investors.\412\ RPI would use as its benchmark a
price that ``reflects the equivalent size of shares--including depth of
book quotes and odd lot quotes.'' \413\ Because the calculation of RPI
takes into account the complete set of information related to the
consolidated depth of book, RPI may be a more informative measure of
size improvement than a measure that can be calculated using the size
improvement benchmark metric proposed. However, because the complete
set of consolidated depth of book information is not available from
public data sources, the RPI would require market centers and reporting
broker-dealers to subscribe to all exchanges' proprietary depth-of-book
data feeds, which would entail a significant cost for those reporting
entities that do not already subscribe to these feeds.\414\ The

proposed rule would not require an RPI benchmark or measure, as the
Commission preliminarily believes the benefits to market participants
from having access to a potentially more accurate measure of size
improvement are not justified by these potentially significant
additional costs to reporting entities.\415\
---------------------------------------------------------------------------

    \411\ See Virtu Petition at 3.
    \412\ See id. Additionally, the EMSAC suggested a similar
measure--Enhanced Liquidity--designed to indicate for the proportion
of shares greater than the available shares displayed at NBBO that
were executed at or better than the NBBO. See EMSAC III at 2, n.3
and accompanying text.
    \413\ Virtu Petition at 5.
    \414\ In a white paper, one market center estimated its costs
related to subscribing to depth of book data feeds for 11 exchanges
to be between $51,480 and $226,320 per exchange per year. See IEX,
Jan. 2019, ``The Cost Of Exchange Services,'' available at https://iextrading.com/docs/The%20Cost%20of%20Exchange%20Services.pdf.
    \415\ See also infra section VII.E.3.(d)(1) for a more detailed
discussion of the potential benefits and costs of RPI.
---------------------------------------------------------------------------

(f) Riskless Principal
    In effecting riskless principal transactions, a market center
submits a principal order to another market center in order to fulfill
a customer order. Upon execution at the away market center, the
receiving market center executes the customer transaction on the same
terms as the principal execution.\416\ Generally, under the current
Rule, a market center that executes the riskless principal leg of the
trade (i.e., the receiving market center's execution of the customer
order on the same terms as the principal transaction) reports those
orders in its Rule 605 statistics as part of the cumulative number of
shares of covered orders that were executed at the receiving market
center under Rule 605(a)(1)(i)(D), rather than as a part of the
cumulative number of shares of covered orders executed at any other
venue under Rule 605(a)(1)(i)(E).\417\ However, because the away market
center is also reporting execution of the principal order as part of
its shares executed at the receiving market center, this results in
both of these legs of the transaction being counted as executed at the
receiving market center, which could obscure information about how
often a market center internalizes orders. Wholesalers may choose
between internalizing orders or executing orders on a riskless
principal basis. This choice has an effect on execution quality because
internalized orders are not exposed to competition, whereas the
principal order associated with a riskless principal transaction may be
exposed to trading interest from other market participants. Therefore,
it would be useful for investors to be able to observe what percentage
of orders a wholesaler internalizes.
---------------------------------------------------------------------------

    \416\ See Securities Exchange Act Release No. 47364 (Feb. 13,
2003), 68 FR 8686, n. 33 (Feb. 24, 2003) (generally describing
riskless principal transactions ``as trades in which, after
receiving an order to buy (or sell) from a customer, the broker-
dealer purchases (or sells) the security from (or to) another person
in a contemporaneous offsetting transaction'').
    \417\ We note that Commission staff has taken the position that
the market center executing an order as riskless principal should
reflect the order on its monthly report as executed at such market
center, and not at another venue, using the time that the order was
executed at such market center. See Staff Legal Bulletin No. 12R,
``Frequently Asked Questions About Rule 11Ac1-5'' (June 22, 2001).
---------------------------------------------------------------------------

    Accordingly, Rule 605's execution quality statistics would be more
informative to market participants and other users of the Rule 605
reports if riskless principal orders were reported as executed at
another venue, rather than as executed at the market center. The
Commission proposes to carve riskless principal orders out from
proposed Rule 605(a)(1)(i)(D) by providing that the number of shares of
covered orders executed at the receiving market center, broker, or
dealer excludes shares that the market center, broker, or dealer
executes on a riskless principal basis.\418\ As a result, the market
center that executes the riskless principal order would include these
shares as part of the cumulative number of shares executed at any other
venue under Rule 605(a)(1)(i)(E), and only the market center that
executes the corresponding principal order would include those shares
as part of the cumulative number of shares executed at the receiving
market center under proposed Rule 605(a)(1)(i)(D).
---------------------------------------------------------------------------

    \418\ See proposed Rule 605(a)(1)(i)(D).
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment generally on the changes to the
information required for all order types, including the calculation of
average realized spread for executed orders, the calculation of average
effective spread for NMLOs, percentage-based spread statistics, E/Q
statistics, size improvement measures, and the treatment of riskless
principal transactions. In particular, the Commission solicits comment
on the following:
    32. Should realized spread be required to be calculated 15 seconds
and one minute after execution? Why or why not? If not, what
alternative interval(s) do commenters recommend and why? Please explain
and provide data, if available.
    33. Some academic research suggests that the use of a weighted
midpoint would be more appropriate when calculating realized and
effective spreads.\419\ Do commenters believe a weighted midpoint would
be more appropriate? If so, why? Would additional costs be associated
with utilizing a weighted midpoint?
---------------------------------------------------------------------------

    \419\ See supra note 380.
---------------------------------------------------------------------------

    34. Should average effective spread be required to be calculated
for NMLOs and orders submitted with stop prices? Do commenters agree
with the proposed average effective spread calculation methodology that
would be required for executable NMLOs and executable stop loss orders?
    35. Should dollar-based spread statistics (i.e., effective and
realized spread) also be required to be reported as a percentage? Do
commenters believe there are other ways to represent spread statistics
that could be helpful? If so, how should spread statistics also be
reported?
    36. Should share-weighted average E/Q expressed as a percentage be
required to be calculated for all order types? Do commenters agree that
share-weighted average E/Q expressed as a percentage would improve the
comparability of price improvement statistics across symbols? If not,
why?
    37. With respect to proposed Rule 605(a)(1)(i)(F), do commenters
support adding a requirement to include the proposed metric designed
to, in combination with execution metrics, indicate whether orders
received an execution greater than the displayed size at the quote
(i.e., size improvement)? Why or why not?
    38. The Commission seeks comment on whether the addition of the
proposed metric for size improvement would be sufficient to indicate
whether orders received an execution greater than the displayed size of
the quote. Should the Commission require a comparison of fill prices to
a reference benchmark that includes depth of book and odd-lot
information (i.e., RPI), or some other liquidity measurement? \420\ If
so, why?
---------------------------------------------------------------------------

    \420\ As is noted above, the petitioner specifically states that
Rule 605 reporting would be more complete if market participants
could assess execution quality by comparing the fill prices on their
orders to a reference benchmark that includes all displayed
liquidity on exchanges, including resting odd-lots that are visible
in market data feeds. See Virtu Petition at 4.
---------------------------------------------------------------------------

    39. Should riskless principal orders not be required to be counted
as orders executed at the receiving market center, broker, or dealer
for the purpose of computing Rule 605 statistics and instead be
classified as orders executed away? Why or why not?
5. Additional Required Information for Market, Marketable Limit,
Marketable IOC, and Beyond-the-Midpoint Limit Orders
    The MDI Rules expanded the data that will be made available for
dissemination within the national market system (``NMS data'').\421\
One goal of the expansion of NMS data is to increase transparency about
the best-priced quotations available in the market. To further increase
transparency about the

availability of the best priced odd-lot orders in the market, the
Commission also included certain odd-lot information in NMS data as
part of the MDI Rules.\422\ The Commission is proposing to add a
definition for ``best available displayed price,'' which would include
the best priced odd-lot if that price is inside the NBBO in order to
provide additional price improvement statistics.\423\
---------------------------------------------------------------------------

    \421\ See MDI Adopting Release.
    \422\ See 17 CFR 242.600(b)(59); MDI Adopting Release, 86 FR
18596 (Apr. 9, 2021) at 18613. The Commission outlined a phased
transition plan for the implementation of the MDI Rules, including
the implementation of odd-lot order information. See MDI Adopting
Release, 86 FR at 18698-701.
    \423\ The Commission is separately proposing to, among other
things, amend the definition of odd-lot information to include a new
data element to identify the best odd-lot orders available in the
market inside the NBBO. See Minimum Pricing Increments Proposal. The
Commission encourages commenters to review that proposal to
determine whether it might affect their comments on this proposing
release.
---------------------------------------------------------------------------

    Odd-lot information is defined as (1) odd-lot transaction data
disseminated pursuant to the effective national market system plan or
plans required under 17 CFR 242.603(b) as of April 9, 2021,\424\ and
(2) odd-lots at a price greater than or equal to the national best bid
and less than or equal to the national best offer, aggregated at each
price level at each national securities exchange and national
securities association.\425\ The Commission stated that making the best
priced quotations available in core data is consistent with the
Commission's goal in expanding the content of NMS information--
enhancing the availability and usefulness of the information.\426\
---------------------------------------------------------------------------

    \424\ Odd-lot transaction information is currently collected,
consolidated, and disseminated by the exclusive SIPs. See Securities
Exchange Act Release Nos. 70793 (Oct. 31, 2013), 78 FR 66788 (Nov.
6, 2013) (order approving Amendment No. 30 to the UTP Plan to
require odd-lot transactions to be reported to consolidated tape);
70794 (Oct. 31, 2013), 78 FR 66789 (Nov. 6, 2013) (order approving
Eighteenth Substantive Amendment to the Second Restatement of the
CTA Plan to require odd-lot transactions to be reported to
consolidated tape).
    \425\ See 17 CFR 242.600(b)(59); MDI Adopting Release, 86 FR
18596 (Apr. 9, 2021) at 18613. The Commission is separately
proposing to, among other things, accelerate the implementation of
the round lot and the odd-lot information definitions. See Minimum
Pricing Increments Proposal.
    \426\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at
18613.
---------------------------------------------------------------------------

    The Commission is proposing to add a definition for ``best
available displayed price'' which shall mean, with respect to an order
to buy, the lower of (i) the national best offer at the time of order
receipt or (ii) the price of the best odd-lot order to sell at the time
of order receipt as disseminated pursuant to an effective transaction
reporting plan or effective national market system plan; and, with
respect to an order to sell, the higher of (i) the national best bid at
the time of order receipt or (ii) the price of the best odd-lot order
to buy at the time of order receipt as disseminated pursuant to an
effective transaction reporting plan or effective national market
system plan.\427\ In each case, an order to buy or an order to sell
would be benchmarked against the best price on the side of the market
against which it could expect to receive an immediate execution.
Because a beyond-the-midpoint limit order may be a covered order even
if received outside of regular trading hours or when an NBBO is not
being disseminated, the Commission proposes to specify that, for
beyond-the-midpoint limit orders, the best available displayed price
shall be determined at the time such order becomes executable instead
of the time of order receipt.\428\ Generally, the time of order receipt
and the time the order is considered executable would be the same for a
beyond-the-midpoint-limit order, except in those cases where it is
received outside of regular trading hours or when an NBBO is not being
disseminated. Therefore, measuring from the point of executability
would ensure that a best available displayed price can be determined.
---------------------------------------------------------------------------

    \427\ See proposed Rule 600(b)(14). Because the best odd-lot
order to buy or sell would be inside the NBBO, the national best bid
or national best offer would only be used if there is not a best
odd-lot price on the same side of the market as the order.
    \428\ See id.
---------------------------------------------------------------------------

    The Commission is further proposing to add two definitions relating
to the best available displayed price in order to add price improvement
statistics. ``Executed outside the best available displayed price''
shall mean, for buy orders, execution at a price higher than best
available displayed price; and, for sell orders, execution at a price
lower than the best available displayed price.\429\ ``Executed with
price improvement relative to the best available displayed price''
shall mean, for buy orders, execution at a price lower than the best
available displayed price and, for sell orders, execution at a price
higher than the best available displayed price.\430\ Similar to the
existing definitions for ``executed outside the quote'' \431\ and
``executed with price improvement,'' \432\ these definitions would
classify order executions based on their execution price relative to
the best available displayed price.
---------------------------------------------------------------------------

    \429\ See proposed Rule 600(b)(44).
    \430\ See proposed Rule 600(b)(47).
    \431\ See 17 CFR 242.600(b)(35). The Commission is proposing to
renumber the definition of ``executed outside the quote'' as
proposed Rule 600(b)(45).
    \432\ See 17 CFR 242.600(b)(36). The Commission is proposing to
renumber the definition of ``executed with price improvement'' as
proposed Rule 600(b)(46).
---------------------------------------------------------------------------

    The Commission also proposes to add to Rule 605(a)(1)(ii)
additional price improvement statistics specifically related to the
best available displayed price. These statistics mirror the existing
price improvement statistics for marketable order types executed better
than, at, and outside the quote. Specifically, for each category, these
additional price improvement statistics would provide a cumulative
share count and a share-weighted average amount per share that prices
were improved as compared to the best available displayed price. The
Commission is proposing Rule 605(a)(1)(ii)(O), which would require the
reporting of the cumulative number of shares of covered orders executed
with price improvement relative to the best available displayed price.
Proposed Rule 605(a)(1)(ii)(P) would require, for shares executed with
price improvement relative to the best available displayed price, the
share-weighted average amount per share that prices were improved as
compared to the best available displayed price. Proposed Rule
605(a)(1)(ii)(Q) would require the reporting of the cumulative number
of shares of covered orders executed at the best available displayed
price. Proposed Rule 605(a)(1)(ii)(R) would require the reporting of
the cumulative number of shares of covered orders executed outside the
best available displayed price. Finally, proposed Rule 605(a)(1)(ii)(S)
would require, for shares executed outside the best available displayed
price, the share-weighted average amount per share that prices were
outside the best available displayed price. These five metrics, in
conjunction with each other, would allow market participants to
evaluate how well market centers and broker-dealers perform in
executing covered orders relative to the best available displayed
price.
    The Commission outlined a phased transition plan for the
implementation of the MDI Rules, including the implementation of odd-
lot order information.\433\ The Commission stated that competing
consolidators could offer a product that contains only information on
the best priced odd-lot on each exchange.\434\ The Commission is
separately proposing to, among other things: (1) accelerate the
implementation of the round lot and the odd-lot information
definitions; and (2) amend the definition of odd-lot

information to include a new data element to identify the best odd-lot
orders available in the market inside the NBBO.\435\
---------------------------------------------------------------------------

    \433\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at
18698-701.
    \434\ See id. at 18753.
    \435\ See Minimum Pricing Increments Proposal.
---------------------------------------------------------------------------

    As is discussed above \436\ and in the MDI Adopting Release, orders
currently defined as odd-lots often reflect superior pricing.\437\ A
recent academic working paper shows that odd-lots offer better prices
than the NBBO 18% of the time for bids and 16% of the time for
offers.\438\ The Commission believes it would be beneficial to require
price improvement statistics relative to the best available displayed
price for marketable order types (i.e., market, marketable limit,
marketable IOC, and beyond-the-midpoint limit orders). In some cases,
this may be equal to the national best bid or national best offer.
However, in some cases, the best price available may be reflected in an
odd-lot price. Under the current 605 reporting requirements, an order
executed inside the NBBO would be an order executed with price
improvement. Currently, there is no way for market participants to
evaluate the performance of broker-dealers and market centers relative
to the best inside the NBBO odd-lot when such better-priced orders are
present. The Commission believes requiring price improvement statistics
relative to the best available displayed price in the market, whether
that is the NBBO or the best odd-lot order to buy or sell, would
enhance the ability of market participants to evaluate order
performance.
---------------------------------------------------------------------------

    \436\ See supra section IV.B.1.
    \437\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at
18729 (describing analysis that found, among other things, that in
May 2020, ``40% of [odd-lot] transactions (representing
approximately 35% of all odd-lot volume) occurred at a price better
than the NBBO'').
    \438\ See Bartlett et al. (2022). The authors found that this
percentage increases monotonically in the stock price, for example,
for bid prices, increasing from 5% for the group of lowest-price
stocks in their sample, to 42% for the group of highest-priced
stocks.
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment generally on changes to information
required for market, marketable limit, marketable IOC, and beyond-the-
midpoint limit orders, including time-to-execution statistics and price
improvement statistics relative to the best available displayed price.
In particular, the Commission solicits comment on the following:
    40. Do commenters agree with the proposed definition of ``best
available displayed price''? Do commenters believe this definition
would be helpful in the calculation of the price improvement
statistics? Why or why not?
    41. Should the execution quality statistics be required to include
price improvement relative to the best available displayed price? Why
or why not? What additional statistics would be beneficial?
    42. If odd-lot price information is not disseminated pursuant to an
effective transaction reporting plan, what do commenters believe would
be a viable substitute for a best odd-lot price for purposes of
calculating price improvement statistics relative to the best available
displayed price? Would use of substitute data provide a sufficiently
standardized benchmark? Please explain.
6. Additional Required Information for Executable NMLOs, Executable
Stop Orders, and Beyond-the-Midpoint Limit Orders
    As discussed above,\439\ the Commission recognizes the need for
more meaningful measures of execution quality for NMLOs and orders
submitted with stop prices.
---------------------------------------------------------------------------

    \439\ See supra section IV.B.2.
---------------------------------------------------------------------------

    First, proposed Rule 605(a)(1)(iii)(A) would require the reporting
of the number of orders that received either a complete or partial
fill. Although the cumulative number of shares executed is required to
be reported for all order types,\440\ the Commission believes the
number of orders filled would provide important additional information
about the nature of a market center or broker-dealer's NMLO and stop
order executions--e.g., whether a high executed cumulative share count
represents, on average, larger execution sizes or a higher count of
orders receiving executions.
---------------------------------------------------------------------------

    \440\ See proposed Rule 605(a)(1)(i)(D) and (E) (for shares
executed at the receiving market center or broker-dealer and shares
executed away, respectively).
---------------------------------------------------------------------------

    Second, the Commission is proposing Rule 605(a)(1)(iii)(B) to
require the reporting of the cumulative number of shares executed
regular way at prices that could have filled the order while the order
was in force, as reported pursuant to an effective transaction
reporting plan or effective national market system plan.\441\ The
Commission believes that market participants would benefit from more
information about the number of shares that executed while an
executable NMLO or executable order submitted with a stop price was in
force. If a market center or broker-dealer is unable to execute NMLOs
or stop orders despite a large number of shares executing in the market
at large, market participants may want to take that into account when
selecting a market center or broker-dealer. One commenter suggested a
new execution quality metric called a ``non-marketable benchmark.''
\442\ The commenter's benchmark would ``provide a reference for
evaluating the extent to which an NMLO could have been filled'' and
considers shares executed on national market system exchanges as well
as regular way off-exchange executions reported to the FINRA trade
reporting facility.\443\ Under the proposal, the share count for each
order would be capped at the order size. This would allow market
participants to see how much activity took place while executable NMLOs
and executable orders submitted with stop prices were in force and
could give market participants an indication of how effective the
market center or broker-dealer is at executing NMLOs and stop orders.
This is similar to the benchmark metric suggested by the commenter
(i.e., including both exchange and TRF trades), but is qualified by
whether or not the NMLO or stop order is executable (not merely that it
was in force). The Commission believes that by proposing to restrict
the benchmark metric to only those NMLOs or stop orders that are
executable would give a more realistic view of the opportunities
available to that order. If a NMLO or stop order is never actually
executable, inclusion of the order in the metrics could distort the
overall view of a market center or broker-dealer's performance. When
combined with execution information, the metric should provide
information about how many trades executed while a NMLO or stop order
could have been filled. This metric could then be combined with
information on total executions in order to estimate a fill rate that
is conditional on whether market prices reached levels at which NMLOs
or stop order could have been filled (``conditional fill rate'').
---------------------------------------------------------------------------

    \441\ Generally, ``regular way'' refers to bids, offers, and
transactions that embody the standard terms and conditions of a
market whereas a non-regular way transaction refers to one executed
other than pursuant to standardized terms and conditions, such as a
transaction that has extended settlement terms. See, e.g.,
Regulation NMS Adopting Release, 70 FR 37496 (Jun. 29, 2005) at
37537 n.326.
    \442\ See FIF III, Appendix 1 at 8-10.
    \443\ Id.
---------------------------------------------------------------------------

    For example, if a NMLO for 200 shares becomes executable and the
tape reveals that subsequently 100 consolidated shares were executed at
the NMLO's limit price, then the benchmark metric would be 100 shares.
If a market center partially executed 50 shares of the NMLO, the
conditional fill rate would be 50 shares/100 shares =

50%.\444\ If the market center does not execute the NMLO, the
conditional fill rate would be 0 shares/100 shares = 0%.
---------------------------------------------------------------------------

    \444\ The unconditional fill rate (i.e., the number of executed
shares divided by the number of submitted shares) in this case would
be 50 shares/200 shares = 25%, revealing that only a quarter of the
NMLO was executed. The conditional fill rate adjusts for the fact
that available market depth was insufficient to fill the entire
order, and only compares the number of executed shares to the number
of shares that are available at the limit price.
---------------------------------------------------------------------------

    On the other hand, if the tape reveals that 500 consolidated shares
were executed at the 200-share NMLO's limit price subsequent to the
limit order becoming executable, the benchmark metric would be capped
at the order size to be 200 shares, since the market center would have
been able to fully execute the 200-share order. If the NMLO executes,
the conditional fill rate would be 200 shares/200 shares = 100%.\445\
If the NMLO does not execute, the conditional fill rate would be 0
shares/200 shares = 0%. If the market center has two such NMLOs, one
that executes and one that does not, the total conditional fill rate
would be (0 + 200)/(200 + 200) = 50%.
---------------------------------------------------------------------------

    \445\ Note that, if the metric were not capped at the order
size, the conditional fill rate would be 200 shares/500 shares =
40%, which reflects that the order size was smaller than the
cumulative number of shares executed during the NMLO's lifespan.
Capping at the order size therefore will result in the metric only
capturing whether broker-dealers were able to fill order sizes as
given.
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment generally on the reporting of certain
information for beyond-the-midpoint limit orders, executable NMLOs, and
executable orders with stop prices. In particular, the Commission
solicits comment on the following:
    43. Should market centers and broker-dealers be required to report
the number of orders that received either a complete or partial fill?
Why or why not?
    44. Should the Commission also require these entities to report the
cumulative number of shares executed regular way at prices that could
have filled the order while the order was in force? Do commenters
believe this statistic would provide a meaningful point of comparison
for execution quality for non-marketable order types? Why or why not?
Should the Commission require an alternative metric? Why or why not?

V. Proposed Summary Execution Quality Reports

    Rule 605 requires market centers to prepare detailed execution
quality statistics and, as required by the Rule 605 NMS Plan, make this
data available via large electronic data files.\446\ The required
format for the reports makes them machine-readable and suitable for
further processing and analysis.\447\ However, the sheer number of rows
needed to provide symbol-by-symbol data and the fact that human-
readable formatting is not required means that Rule 605 reports are not
readily usable by market participants and other interested parties that
may prefer to review summary statistics, rather than conducting further
analysis on the data. Furthermore, some market participants and other
interested parties do not have access to software or possess
programming skills necessary to conduct such analysis. Accordingly, the
Commission is proposing to require all market centers and broker-
dealers that are subject to Rule 605's reporting obligations to produce
summary execution quality statistics, in addition to the more detailed
reports required by Rule 605(a)(1).\448\
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    \446\ See 17 CFR 242.605(a)(1) and (2); Rule 605 NMS Plan, at V
and VI.
    \447\ See Rule 605 NMS Plan, at V (``Files shall be prepared in
standard, pipe-delimited (`[bond]') ASCII format and compressed
using standard Zip compression.'').
    \448\ While current Rule 605 applies to market centers only, the
Commission also is proposing to expand Rule 605's reporting
obligations to broker-dealers, subject to a customer account
threshold for reporting. See supra section III.A. Requiring broker-
dealers to produce summary reports would align those entities that
would be required to produce detailed execution quality statistics
with those entities that would be required to produce the summary
reports.
---------------------------------------------------------------------------

    As recognized by several commenters to the 2018 Rule 606
Amendments, in recent years a working group associated with the
Financial Information Forum \449\ developed a standardized template
that firms may use when publicly disclosing summary information about
execution quality for retail investor orders in exchange-listed stocks
(``FIF Template'').\450\ Although the reports produced using the FIF
Template may be useful, given that this disclosure is voluntary, only a
few firms are making or have made such disclosures.\451\ Commenters
have suggested that the Commission require broker-dealers to produce a
similar summary report.\452\ For example, one commenter on the 2018
Rule 606 Amendments \453\ stated that this proposal ``neglect[ed] to
include any meaningful retail disclosure requirements relating to
execution quality, either on a customer-specific or publicly aggregated
basis,'' and that the type of disclosure provided in the FIF Template
``must be added to enable investors, third-party analysts, academic

researchers, and regulators to examine the extent to which retail
brokers are best serving their clients.'' \454\
---------------------------------------------------------------------------

    \449\ According to the Financial Information Forum, the
organization was formed in 1996 to provide a centralized source of
information on the implementation issues that impact financial
services and technology firms, and its participants include trading
and back office service bureaus, broker-dealers, market data
vendors, and exchanges. See FIF II at 1 n.1.
    \450\ See Financial Services Roundtable Letter at 4 (stating
that the Financial Information Forum has established a Rule 605/606
working group that has sought to improve the execution quality
statistics for retail investors and that the FIF Template includes
order size, average order size, shares executed at the market quote
or better, price improvement percentage, average savings per order,
and execution speed); Fidelity Letter at 8 (identifying the
commenter as one of the few firms that voluntarily publishes these
industry-standardized statistics); IHS Markit Letter at 30 (stating
that the introduction of voluntary reporting of execution quality
metrics, under the auspices of the Financial Information Forum, has
demonstrated improvement in execution quality). See also Financial
Information Forum, Retail Execution Quality Statistics, available at
https://fif.com/tools/retail-execution-quality-statistics.
    \451\ See EMSAC I at 0099:10-12 (Bill Alpert, Barron's) (``These
are selective disclosures. Only a few brokers and market makers are
making them, so a mandate would be nice.''); Healthy Markets I at 7
n.17 (stating that this information provided is ``incredibly
valuable,'' even if participation is very limited, with just three
retail brokers and three wholesale market-making firms providing
data). See also infra notes 553-555 and accompanying text
(discussing the limited number of firms that have produced reports
utilizing the FIF Template at various points in time).
    \452\ See Healthy Markets I at 7 (suggesting that the Commission
mandate at least the same level of disclosure for retail orders as
was provided pursuant to the FIF Template); Fidelity Letter at 7-8
(suggesting that the Commission require brokers to make publicly
available on their website execution statistics, such as price
improvement, execution price, execution speed, and effective
spread); Financial Services Forum at 5 (stating that although the
disclosed metrics do not have to mirror the FIF Template, the
Commission should consider requiring similar metrics that are output
driven). See also Fidelity Letter at 9 (stating that dividing data
between S&P 500 stocks and other exchange-listed stocks is a
standard metric that is used to break down execution quality
statistics in the FIF Template).
    \453\ Rule 606(b)(1) requires broker-dealers to produce to
customers, upon request, a human-readable report with high-level
customer-specific order routing information, but these reports do
not contain any execution quality information. See supra note 54 and
accompanying text. Although the 2018 Rule 606 Amendments modified
the orders covered by Rule 606(b)(1), the required disclosures under
Rule 606(b)(1) did not change. See 2018 Rule 606 Amendments Release,
83 FR 58338 (Nov. 19, 2018) at 58340 n.24.
    \454\ Consumer Federation II at 1 (suggesting that the
Commission add to the FIF Template information about the NBBO at the
time a marketable order is received, the NBBO at the time the order
is executed, and any difference between them, and stating that these
metrics would give additional information about whether any delays
in routing and execution affect the ultimate price the investor
pays). See also Angel Letter at 3-7 (suggesting that brokerage firms
be required to display summary execution quality statistics on their
websites, providing several alternative formats as samples, and
suggesting that the statistics include information about the number
of customer complaints received); Angel Letter at 2 (stating that
the Rule 605 reports are too raw for most investors and few
investors have the expertise to interpret the reports).
---------------------------------------------------------------------------

    When adopting Rule 605, the Commission made a decision to require
market centers to produce detailed reports in order to avoid the
dangers of overly general statistics.\455\ The Commission stated that
``[a]ssigning a single `execution quality' score to market centers, for
example, would hide major differences in execution quality, potentially
creating far more problems than it solved.'' \456\ The large volume of
statistical data in the Rule 605 reports allows market participants and
other interested parties to select the order characteristics that they
find are most appropriate to use to compare execution quality, and
their ability to conduct analyses would be enhanced by the
modifications to Rule 605 proposed herein.\457\ Yet many commenters
have observed that also requiring firms to produce summary reports of
the voluminous Rule 605 statistics would be useful,\458\ and some
market centers have voluntarily posted summary statistics based on the
detailed execution quality statistics in their Rule 605 reports.\459\
These voluntary reports have some utility, but the practice of
producing summary statistics is not uniform and, even where summary
statistics are provided, different formats may inhibit comparisons
across firms.
---------------------------------------------------------------------------

    \455\ See supra note 161 and accompanying text.
    \456\ Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75419.
    \457\ See supra note 164 and accompanying text.
    \458\ See supra notes 134-135 and 452-454 and accompanying text.
    \459\ See supra notes 450-454 and accompanying text.
---------------------------------------------------------------------------

    Requiring market centers and broker-dealers to produce summary
execution quality reports, in addition to the more detailed reports,
would allow market participants and other interested parties to have
more ready access to high-level data that would allow them to compare
some of the more significant aspects of the execution quality provided
by specific market centers and broker-dealers. In particular, it is
currently challenging for individual investors to use Rule 605 reports,
and these individual investors would be more readily able to use a
summary report to make a more informed choice than they can currently
about selection of a broker-dealer. Because these reports would be
human-readable, individual investors could assess the data by reviewing
and comparing summary reports without needing technical expertise or
relying on an intermediary. The proposed summary reports would contain
significantly more detail than a ``single `execution quality' score''
\460\ and thus would contain quantitative data for interested parties
to assess, rather than imposing a single metric that might require a
subjective judgement or obscure meaningful differences about a market
center's or broker-dealer's execution quality. Moreover, by requiring
reporting entities to produce summary reports in addition to, rather
than instead of, the more detailed statistics called for by the current
Rule, those market participants or other observers that would like to
perform a more detailed or specific analysis would be able to download
the more granular underlying data files and perform such analysis.\461\
---------------------------------------------------------------------------

    \460\ See supra note 456 and accompanying text.
    \461\ Those market participants or other observers that perform
their own analyses using data from Rule 605 reports might find it
useful also to review firms' summary reports to obtain quick access
to an overview of the data or assess information outside the scope
of their own data analyses. Conversely, even if consumers of the
summary reports do not review the more detailed Rule 605 data
themselves, they might benefit from the detailed Rule 605 reports if
independent analysts, consultants, broker-dealers, the financial
press, and market centers analyze the disclosures and produce more
digestible information using the data, which analysis might include
details not present in the summary reports.
---------------------------------------------------------------------------

    Proposed Rule 605(a)(2) would require every market center, broker,
or dealer to make publicly available for each calendar month a report
providing summary statistics on all executions of covered orders that
are market and marketable limit orders that it received for execution
from any person.\462\ Individual investors trading NMS stocks primarily
use marketable orders (including market orders and marketable limit
orders) that seek to trade immediately at the best available price in
the market. Individual investors would be the most likely consumers of
the summary reports, and therefore it would provide significant benefit
for the summary reports to cover the types of orders that individual
investors use most frequently.\463\ Other order types, such as NMLOs,
would not be included in the summary reports because including these
types of orders would increase the amount of information contained in
the summary report, and thus detract from its summary nature, and the
summary execution quality information about these types of orders would
be less likely to be useful to individual investors. In addition to
representing a smaller share of trades by individual investors, a
significant risk of including NMLOs is that they may be more likely to
not be executed during the time period that they are executable and
have a time lag before they become executable again, and therefore it
would become more difficult to assess other aspects of execution
quality, particularly at an aggregate level.
---------------------------------------------------------------------------

    \462\ See proposed Rule 605(a)(2).
    \463\ Similarly, the FIF Template covers standard market orders.
See Fidelity Brokerage Services LLC, Retail Execution Quality
Statistics, available at https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/FIF-FBS-retail-execution-quality-stats.pdf. But see Angel Letter, at 7 (recommending summary
statistics specific to NMLOs).
---------------------------------------------------------------------------

    The proposed summary report would include a section for NMS stocks
that are included in the S&P 500 Index as of the first day of the month
and a section for other NMS stocks.\464\ Rule 606(a)(1) similarly
separates the required quarterly report on order routing into a section
for securities that are included in the S&P 500 Index and a section for
other NMS stocks.\465\ When adding this provision to Rule 606 in the
2018 Rule 606 Amendments, the Commission stated that the handling of
NMS stocks may vary based on their market capitalization value and
trading volume, and thus customers that place held orders could benefit
from a delineation based on the S&P 500 Index.\466\ The same reasoning
applies to the proposed summary reports pertaining to execution quality
statistics under Rule 605. Moreover, within each section, each symbol
would be equally weighted based on share volume.\467\ Equal weighting
of each symbol would facilitate the comparability of execution quality
statistics among market centers or broker-dealers that receive for
execution different mixes of stocks and prevent the nature of the
stocks traded from making it more difficult to determine how the
reporting entity performed with respect to execution quality for the
particular mix of orders that it received for execution.\468\ Further,
equal weighting by share volume could be calculated using data
collected to produce the Rule 605(a)(1) reports and would not require
the collection of additional data.
---------------------------------------------------------------------------

    \464\ See proposed Rule 605(a)(2).
    \465\ See 17 CFR 242.606(a)(1). The FIF Template also segregates
the reported execution quality statistics based on whether or not
the securities are in the S&P 500 Index, and one commenter stated
that this is a standard metric. See supra note 452.
    \466\ See 2018 Rule 606 Amendments Release, 83 FR 58338 (Nov.
19, 2018) at 58378.
    \467\ See proposed Rule 605(a)(2).
    \468\ For example, without equal weighting, differences in
summary-level execution quality statistics between a market center
that receives more high-priced stocks for execution and market
center that receives more low-priced stocks for execution may be
more attributable to the different mix of stocks, rather than
differences in the behavior of the market center.
---------------------------------------------------------------------------

    Each section of the report would include, for market orders and
marketable limit orders, the following

summary statistics for executed orders: (i) the average order size;
(ii) the percentage of shares executed at the quote or better; (iii)
the percentage of shares that received price improvement; (iv) the
average percentage price improvement per order; (v) the average
percentage effective spread; (vi) the average effective over quoted
spread, expressed as a percentage; and (vii) the average execution
speed, in milliseconds.\469\ Together, the proposed summary-level
statistics are intended to provide an overview of price-based
information and execution speed. The Commission notes that these
categories of statistics are very similar to those used in the FIF
Template, and that both the summary statistics in proposed Rule
605(a)(2) and the statistics reflected in the FIF Template focus on
statistics that are most relevant to evaluating what type of pricing
orders received and how quickly orders were executed.\470\ The proposed
summary report would include average percentage of price improvement
per order, average percentage effective spread, and average E/Q,
expressed as a percentage, whereas the FIF Template includes average
savings per order, expressed in dollars. The three statistics that
would be in the proposed summary report each provide a different view
of the pricing provided to orders, and, if anything, provide a more
robust picture of this pricing than the single metric in the FIF
Template. For example, average effective spread is a comprehensive
statistic that is a useful single measure of the overall liquidity
premium paid by those submitting orders for execution.\471\
---------------------------------------------------------------------------

    \469\ See proposed Rule 605(a)(2)(i)-(vii).
    \470\ See supra note 450 and accompanying text. The categories
in the FIF Template for average order size (shares); shares executed
at current market quote or better (%); price improvement (%); and
average execution speed (seconds) appear to be directly comparable
to the categories in proposed Rule 605(a)(2) for the average order
size, the percentage of shares executed at the quote or better, the
percentage of shares that received price improvement, and the
average execution speed, in milliseconds. Moreover, the proposed use
of milliseconds, rather than seconds, to measure average execution
speed is consistent with proposed changes to the timestamp
conventions, as discussed above. See supra section IV.B.3.
    \471\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75424.
The statistics proposed to be included in the summary report are
also generally consistent with commenters' suggestions that the
summary report either follow the FIF Template or provide similar
metrics. See supra notes 452-454 and accompanying text. One
commenter suggested that the summary report include information
about the NBBO at the time of order receipt and at the time of order
execution to give information about whether delays in routing and
execution affect the execution price. See supra note 454. This
effect would likely also be evident in the average effective spread
and average E/Q.
---------------------------------------------------------------------------

    The Commission is proposing to require that the summary reports
must be made available using the most recent version of the XML schema
and the associated PDF renderer published on the Commission's
website.\472\ The requirement to use the Commission's XML schema is
intended to ensure that the data is provided in a format that is
structured and machine-readable, and this would allow users to more
easily process and analyze the data, as well as provide consistency of
format across reports. Further, the requirement that the same data
should be provided through the use of a PDF renderer is intended to
ensure that the reports are also available in a human-readable format
and consistently presented across reports. A human-readable format
would be a format that can be naturally read by an individual.
Preparing reports in a human-readable format allows users that prefer
only to review individual reports, and not necessarily aggregate or
conduct large-scale data analysis on the data, to access the data
easily. The Commission notes that Rule 606 similarly provides that the
required reports on order routing shall be made available using the
most recent versions of the Commission's XML schema and associated PDF
renderer.\473\ In addition, although the FIF Template is a general
template and does not specify a particular format for the reports,
market participants choose to voluntarily prepare reports using the FIF
Template. The number of reporting entities that would be required to
prepare summary reports under proposed Rule 605(a)(2) would be much
greater than the number of entities that have chosen to produce reports
voluntarily using the FIF Template, and requiring a uniform format
would facilitate users' ability to compare information across reports.
---------------------------------------------------------------------------

    \472\ See proposed Rule 605(a)(2). The Commission's schema would
be a set of custom XML tags and XML restrictions designed by the
Commission to reflect the disclosures in proposed Rule 605(a)(2).
XML enables data to be defined, or ``tagged,'' using standard
definitions. The tags establish a consistent structure of identity
and context. This consistent structure can be automatically
recognized and processed by a variety of software applications, such
as databases, financial reporting systems, and spreadsheets, and
then made immediately available to the end-user to search,
aggregate, compare, and analyze. In addition, the XML schema could
be easily updated to reflect any changes to the open standard. XML
and PDF are ``open standards,'' which is a term that is generally
applied to technological specifications that are widely available to
the public, royalty-free, at no cost.
    \473\ See 17 CFR 242.606(a)(1), (b)(1)(iii), and (b)(3). When
adopting the 2018 Rule 606 Amendments, the Commission stated that
the XML schema was designed to ensure that the data is provided in
an XML format that is structured and machine-readable, so that the
data can be more easily processed and analyzed, and that by
requiring use of the associated PDF renderer, the XML data would be
instantly presentable in a human-readable PDF format and
consistently presented across reports. See 2018 Rule 606 Amendments
Release, 83 FR 58338 (Nov. 19, 2018) at 58364. The Commission shares
the same goals in proposing that the Rule 605(a)(2) reports be
produced according to an XML schema and associated PDF renderer.
---------------------------------------------------------------------------

    Rule 605 requires every national securities exchange on which NMS
stocks are traded and each national securities association to act
jointly in establishing procedures for market centers to make the
reports required by Rule 605(a)(1) available to the public in a
uniform, readily accessible, and usable electronic form.\474\ The
Commission is proposing to amend this provision, which would be
reorganized into proposed Rule 605(a)(3), so that the proposed summary
reports would also be made available in accordance with the procedures
established by the Plan.\475\ Rule 605 also specifies that the detailed
reports required by Rule 605(a)(1) must be 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.\476\ As proposed,
these same requirements would be reorganized into proposed Rule
605(a)(5) and would be extended to the summary reports for the same
reasons expressed when these requirements were adopted for the Rule
605(a)(1) reports and because it would be useful to users of the
reports for the Rule 605(a)(1) reports and proposed

Rule 605(a)(2) reports to be available for the same period of
time.\477\
---------------------------------------------------------------------------

    \474\ See 17 CFR 242.605(a)(2). As discussed above, the
Commission is proposing to expand this requirement, and the other
procedural requirements in proposed Rule 605(a)(2) and (3), to cover
broker-dealers. See supra note 155 and accompanying text.
    \475\ See proposed Rule 605(a)(3). Among other things, the Plan
requires each market center to arrange with a single plan
participant to act as the market center's Designated Participant.
See Plan, at section VIII. Inclusion of proposed Rule 605(a)(2)'s
summary reports within the scope of the Plan would promote
consistent administration of Rule 605 and allow the Designated
Participant for each reporting entity to play a role with respect to
the reports required by Rule 605(a)(1) and proposed Rule 605(a)(2).
The Plan also establishes the formats and fields for the reports
currently required under Rule 605(a)(1). Because proposed Rule
605(a)(2) requires the use of the Commission's XML schema and
associated PDF renderer, the Plan would not establish the formats
and fields for the summary reports. Further, as proposed, the
existing provision that states that, in the event there is no
effective market system plan, market centers shall prepare their
reports in a consistent, usable, and machine-readable electronic
format and make such reports available for downloading from an
internet website that is free and readily accessible to the public
would be reorganized as proposed Rule 605(a)(4) and modified to
explicitly refer to the requirements in Rule 605(a)(1). See proposed
Rule 605(a)(4). As proposed, this provision would not apply to the
summary reports that would be required by proposed Rule 605(a)(2).
The proposed summary reports would not need to be included in
proposed Rule 605(a)(4) because the XML schema and associated PDF
renderer would specify the necessary format for the reports and
proposed Rule 605(a)(5) would contain the requirement for internet
posting.
    \476\ 17 CFR 242.605(a)(2).
    \477\ See proposed Rule 605(a)(5). See also 2018 Rule 606
Amendments Release, 83 FR at 58380 (stating that the requirement to
keep Rule 605(a)(1) reports posted on a website that is free and
readily accessible for three years is appropriate because a three-
year retention period is consistent with the requirement under Rule
17a-4(b) that broker-dealers preserve certain documents for a period
of not less than three years; the reports will be useful and not
lead to misleading analyses because the Commission expects customers
and the public to use historical information to compare information
from the same time period; and the public information will provide a
historical record of a market center's order execution information).
---------------------------------------------------------------------------

    Further, Rule 605 specifies that the detailed reports required by
Rule 605(a)(1) must be made available within one month after the end of
the month addressed in the report.\478\ The Commission is proposing to
renumber this provision as proposed Rule 605(a)(6) and to extend this
requirement to the Rule 605(a)(2) reports.\479\ The Commission believes
that firms could produce the proposed Rule 605(a)(2) report alongside
the Rule 605(a)(1) report, which must be produced monthly, because both
reports are based on the same underlying data. Additionally, it would
be useful for users of the reports to have access to the detailed
reports and summary reports at the same time so that they could review
the aggregated data in the summary reports and then conduct further
analysis using the detailed reports, as needed.
---------------------------------------------------------------------------

    \478\ 17 CFR 242.605(a)(3).
    \479\ See proposed Rule 605(a)(6).
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment generally on the proposed requirement
that market centers and brokers-dealers that are required to produce
detailed execution quality statistics also provide a summary report. In
particular, the Commission solicits comment on the following:
    45. Should a market center or broker-dealer that is subject to Rule
605's reporting requirement be required to also provide a summary
report reflecting aggregated execution quality information? Why or why
not? Do commenters agree that summary reports would make execution
quality information more accessible to individual investors? Please
explain.
    46. Should the summary report be required to be divided into
separate categories according to whether or not securities are included
in the S&P 500 Index? Why or why not? Are there any alternative means
to group securities that have higher market capitalization or trading
volume that should be required to be used to organize the summary
statistics, instead of or in addition to dividing the securities
included in the report according to whether or not they are included in
the S&P 500 Index? Should the summary report include order size
categories? Why or why not? Please explain and provide data, if
available.
    47. Should stocks be required to be equally weighted by symbol
based on share volume within each section? Why or why not? Is there
another method of weighting the stocks that would be preferable (e.g.,
equal weighting by symbol based on dollar volume or applying a common
weighting scheme across securities)? Please explain.
    48. Should the summary report be limited to covered orders that are
market or marketable limit orders? Why or why not? Would it be
preferable to include other specific categories of covered orders
(i.e., marketable IOCs, beyond-the-midpoint limit orders, executable
NMLOs, executable orders with stop prices) or to include all covered
orders? Do commenters agree with the proposed aggregated statistics to
include in the summary report? Are there any aggregated statistics that
commenters would eliminate? Are there any execution quality statistics
that would be required pursuant to proposed Rule 605(a)(1) for which
commenters would add corresponding aggregated statistics to the summary
report? Please explain.
    49. Should the summary reports be required to be made available
using the most recent version of an XML schema and an associated PDF
renderer as published by the Commission? Why or why not? Is there an
alternative, machine-readable and/or human-readable format, that would
be preferable? Would it be preferable for the Plan to establish the
required format, including an associated schema, for the summary
reports?
    50. Should the Commission require that summary Rule 605 reports be
posted in a centralized location? Alternatively, should the Commission
require both summary and detailed reports to be posted in a centralized
location? Why or why not? Do commenters have a view on how centralized
posting could be implemented? Are there other ways the Commission could
improve the accessibility of the reports?

VI. Paperwork Reduction Act

    Certain provisions of the proposed rule amendments contain
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995 (``PRA'').\480\ The Commission is
submitting these collections of information to the Office of Management
and Budget (``OMB'') for review in accordance with 44 U.S.C. 3507(d)
and 5 CFR 1320.11. An agency may not conduct or sponsor, and a person
is not required to respond to, a collection of information unless the
agency displays a currently valid control number. The Commission is
proposing to alter an existing collection of information and apply such
collection of information to new categories of respondents. The title
of such existing collection of information is: Rule 605 of Regulation
NMS (f/k/a Rule 11Ac1-5).\481\
---------------------------------------------------------------------------

    \480\ 44 U.S.C. 3501 et seq.
    \481\ OMB Control Number 3235-0542.
---------------------------------------------------------------------------

A. Summary of Collection of Information

    The proposed amendments create burdens under the PRA by: (1) adding
new categories of respondents to the existing collection of information
and (2) modifying the requirements of such existing collection of
information. The proposed amendments do not create any new collections
of information.
    The categories of new respondents subject to Rule 605, as proposed
to be amended, are larger broker-dealers and new market centers,
consisting of SDPs and entities that would operate proposed qualified
auctions or act as market centers for orders that were previously not
covered by the Rule, e.g., fractional share orders.
    The proposed amendments would modify both the scope of the
standardized monthly reports required under Rule 605 and the required
information. Rule 605, as proposed to be amended: (1) expands the
definition of ``covered order'' to include certain orders submitted
outside of regular trading hours, certain orders submitted with stop
prices, and non-exempt short sale orders; (2) modifies the existing
order size categories to base them on round lots rather than number of
shares and includes additional order size categories for fractional
share, odd-lot, and larger-sized orders; (3) creates a new order type
category for marketable IOCs and replaces three existing categories of
non-marketable order types with three new categories of order types
(beyond-the-midpoint limit orders, executable NMLOs, and executable
orders with stop prices); (4) eliminates current time-to-execution
reporting buckets and requires average time to execution, median time
to execution, and 99th percentile time to execution, each as measured
in increments of a

millisecond or finer; (5) modifies realized spread statistics to
require realized spread to be calculated after 15 seconds and one
minute; and (6) requires new statistical measures of execution quality
including average effective over quoted spread, percentage effective
and realized spread statistics, a size improvement benchmark, and
certain statistical measures that could be used to measure execution
quality of NMLOs. The proposed amendments would require all reporting
entities to make a summary report available that would be formatted in
the most recent versions of the XML schema and the associated PDF
renderer as published on the Commission's website. Finally, as a result
of the proposed amendments to Rule 605, the current Rule 605 NMS Plan
participants would need to amend the NMS Plan to account for the new
proposed data fields.

B. Proposed Use of Information

    The purpose of the information collection is to make information
about order execution practices available to the public and allow
investors, broker-dealers, and market centers (which include exchange
markets, OTC market makers, and ATSs) \482\ to undertake a comparative
analysis of these practices across markets. Broker-dealers may use the
information to make more informed choices in deciding where to route
orders for execution and to evaluate their internal order handling
practices. Investors may use the information to evaluate the order
handling practices of their broker-dealers. Market centers may use the
information to compete on the basis of execution quality.
---------------------------------------------------------------------------

    \482\ See 17 CFR 242.600(b)(46).
---------------------------------------------------------------------------

C. Respondents

    The collection of information obligations of Rule 605 apply to
larger broker-dealers and market centers that receive covered orders in
national market system securities (collectively, ``reporting
entities''). The Commission estimates that there are currently
approximately 236 reporting entities (93 OTC market makers, plus 16
national securities exchanges, 1 national securities association, 94
exchange market makers, and 32 ATSs).\483\ However, under the proposed
amendments, the Commission believes there would be 359 reporting
entities (93 OTC market makers, 85 broker-dealers that introduce or
carry 100,000 or more customer accounts,\484\ 16 national securities
exchanges, 1 national securities association, 94 exchange market
makers, 32 ATSs,\485\ plus 38 new market center respondents \486\) that
would be subject to the collection of information obligations of Rule
605. Each of these respondents would be required to respond to the
collection of information on a monthly basis.
---------------------------------------------------------------------------

    \483\ The current PRA for Rule 605 estimates 319 reporting
entities (153 OTC market makers, plus 24 exchanges, 1 securities
association, 80 exchange market makers, and 61 ATSs). Based on
updated estimates of the number of respondents, the Commission
estimates that there are only 236 current reporting entities.
    \484\ These 85 brokers-dealers include 37 broker-dealers that
act as introducing brokers.
    \485\ As of September 30, 2022, there are 32 NMS Stock ATSs that
have filed an effective Form ATS-N with the Commission.
    \486\ These 38 new market center respondents would consist of 20
market centers that would need to produce reports as a result of
including fractional share orders within the scope of Rule 605, 10
SDPs, and 8 qualified auctions.
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    In addition, the proposed amendments to Rule 605 would require the
existing NMS Plan participants (16 national securities exchanges and 1
national securities association) to prepare and file an amendment to
the existing NMS Plan.

D. Total PRA Burdens

    As proposed, Rule 605 would require broker-dealers and market
centers to make available to the public monthly order execution reports
in electronic form. The Commission believes that broker-dealers and
market centers retain most, if not all, of the underlying raw data
necessary to generate these reports in electronic format or, if they do
not, may obtain this information from publicly available data
sources.\487\ Consequently, the Rule would not require additional data
collection or recordkeeping burdens. Respondents could either program
their systems to generate the statistics and reports, or transfer the
data to a service provider (such as an independent company in the
business of preparing such reports or an SRO) that would generate the
statistics and reports.
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    \487\ National securities exchanges, national securities
associations, and registered brokers and dealers are subject to
existing recordkeeping and retention requirements including Rule
17a-1 (for self-regulatory organizations (``SROs'')); Rules 17a-3
and 17a-4 (for broker-dealers). See 17 CFR 240.17a-1, 17 CFR
240.17a-3, and 17 CFR 240.17a-4. The Commission's estimates include
the Rule's requirement that reporting market centers and broker-
dealers keep Rule 605 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. See
proposed Rule 605(a)(5).
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    The Commission estimates that the initial and ongoing burdens would
be different for those respondents that are currently required to
prepare reports and for new respondents. The Commission estimates that
proposed Rule 605 amendments would result in an initial burden for
current respondents of 50 hours per respondent \488\ for systems
updates to ensure that data responsive to the amended requirements is
correctly collected and formatted. The initial burden estimate
represents the work that would need to be done by existing respondents
to modify their systems to collect data required under the proposed
amendments to Rule 605 and generate the monthly reports. The estimate
includes time required to program and test automated systems to collect
the necessary data, as well as review and approval by compliance
personnel. The Commission does not believe the information required to
be aggregated and included in Rule 605 reports, as proposed to be
amended, would require existing respondents to acquire new hardware or
systems to process the information required in the reports. The
Commission further estimates that the proposed Rule 605 amendments
would result in an ongoing monthly burden of 8 hours per respondent to
collect the necessary data and to prepare the required Rule 605
reports, for a total annual burden of 96 hours per respondent.\489\
This estimate represents the time that would be required to verify
automated processes are functioning as intended and post and prepare
the required reports, or transfer data to a service provider to
generate the reports.\490\ With an

estimated 236 respondents currently subject to Rule 605, the total
initial burden to comply with the Rule 605 amendments is estimated to
be 11,800 hours while the monthly reporting requirement is estimated to
be 22,656 hours per year (236 x 96). The burdens for respondents
currently reporting under Rule 605 are likely to be lower than those of
new reporting entities because currently-reporting entities already
have systems in place to collect the data necessary to generate reports
under the current Rule. These estimates include the impact of preparing
and making summary reports available using the most recent versions of
the XML schema and the associated PDF renderer as published on the
Commission's website.
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    \488\ The Commission believes the monetized initial burden for
this requirement to be $4,368,360. The Commission derived this
estimate based on per hour figure from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for an 1,800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead: [(Sr. Programmer at $368 for 25
hours) + (Sr. Systems Analyst at $316 for 10 hours) + (Compliance
Manager at $344 for 10 hours) + (Director of Compliance at $542 for
5 hours)] = $18,510 per respondent for a total initial monetized
burden of $4,368,360 ($18,510 x 236 respondents).
    \489\ The Commission believes the monetized annual burden for
this requirement to be $8,847,168. The Commission derived this
estimate based on per hour figure from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for an 1,800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead: [((Compliance Attorney at $406 for 6
hours) + (Compliance Manager at $344 for 2 hours)) x 12 reports per
year] = $37,488 per respondent for a total annual monetized burden
of $8,847,168 ($37,488 x 236 respondents).
    \490\ The Commission's currently approved PRA for Rule 605 (OMB
Control Number 3235-0542), last updated in April 2022, estimates
that current respondents each will spend 6 hours per month to
collect the data necessary to generate the reports, or 72 hours per
year. Although the proposed amendments to Rule 605 would require
additional data fields and the generation of summary reports, the
Commission believes the data collection and report generation
process should be an automated process that would not require
substantial additional burden hours after initial set-up.
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    The Commission estimates that proposed Rule 605 amendments would
result in an initial burden for new respondents of 100 hours for each
respondent \491\ for systems updates to ensure that data responsive to
the amended requirements is correctly gathered and formatted. This
burden is higher than the estimated burden for current respondents
because new respondents do not currently have in place the systems to
collect the information required for current Rule 605 reports. These
respondents would likely require additional time to collect the
relevant information. In addition, this estimate includes additional
time for programming and testing automated systems to collect the
necessary data and additional hours for review and approval by
compliance personnel. Once the relevant data is collected, respondents
could either program their systems to generate the reports, or transfer
the data to a service provider that would generate the reports.
Respondents would likely not be required to acquire new hardware or
other technological resources to be able to collect the data required
by the proposed rule given that respondents would already have
computing systems in place to, for example, transmit and process order
information, and such systems could be leveraged to collect the
required data. Further, to the extent a respondent does not have the
technological capabilities or resources to generate the reports in-
house, such respondents would likely utilize a service provider, as
discussed below. The Commission estimates that the proposed Rule 605
amendments would result in an ongoing monthly burden of 8 hours to
collect the necessary data and to prepare the required Rule 605
reports, for a total annual burden of 96 hours per respondent.\492\
With an estimated 123 new respondents subject to Rule 605, the total
initial burden to comply with the Rule 605 amendments is estimated to
be 12,300 hours while the monthly reporting requirement is estimated to
be 11,808 hours per year (123 x 96). These estimates include the impact
of preparing and making summary reports available using the most recent
versions of the XML schema and the associated PDF renderer as published
on the Commission's website.
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    \491\ The Commission believes the monetized initial burden for
this requirement to be $4,553,460. The Commission derived this
estimate based on per hour figure from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for an 1,800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead: [(Sr. Programmer at $368 for 50
hours) + (Sr. Systems Analyst at $316 for 20 hours) + (Compliance
Manager at $344 for 20 hours) + (Director of Compliance at $542 for
10 hours)] = $37,020 per respondent for a total initial monetized
burden of $4,553,460 ($37,020 x 123 respondents).
    \492\ The Commission believes the monetized annual burden for
this requirement to be $4,611,024. The Commission derived this
estimate based on per hour figure from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for an 1,800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead: [((Compliance Attorney at $406 for 6
hours) + (Compliance Manager at $344 for 2 hours)) x 12 reports per
year] = $37,488 per respondent for a total annual monetized burden
of $4,611,024 ($37,488 x 123 respondents).
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BILLING CODE 8011-01-P

Table 2--Respondent Burdens for Producing Rule 605 Reports

[GRAPHIC] [TIFF OMITTED] TP20JA23.001

BILLING CODE 8011-01-C

    The Commission estimates that in lieu \493\ of preparing both
summary and detailed monthly reports in-house, an individual respondent
could retain a service provider to prepare its monthly reports for
between approximately $3,000 and $3,500 per month or approximately
$36,000 to $42,000 per year.\494\ This per-respondent estimate is based
on the rate that a reporting entity could expect to obtain if it
negotiated on an individual basis. Based on the $3,000 to $3,500
estimate, the monthly cost to the 359 respondents to retain service
providers to prepare reports would be between approximately $1,077,000
and $1,256,000 ((359 x $3,000) and (359 x $3,500), respectively), or a
total annual cost of between approximately $12,924,000 and $15,078,000
(($1,077,000 x 12) and ($1,256,000 x 12), respectively).
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    \493\ In the case of annual burdens, the burden per respondent
is the burden hours multiplied by the number of responses per year.
    \494\ The Commission's currently approved PRA for Rule 605
estimates that the retention of a service provider to prepare a
monthly report would cost $2,978 per month, or approximately $35,736
per year. Although the individual line items required by the Rule
605 amendments would be different than the current Rule, the
Commission does not believe that the overall cost of creating the
required reports would differ substantially from these current
estimates.
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    Finally, the 16 national securities exchanges and 1 national
securities association would be required to amend the NMS Plan to
account for the new data fields required to be reported and to include
references to larger broker-dealers in addition to market centers. The
Commission estimates that there would be a one-time (or initial) burden
of 5 hours per respondent \495\ to amend the NMS Plan to account for
the new reporting fields and reporting parties, for a total burden of
85 hours (17 x 5). The Commission does not estimate that there would be
any ongoing annual burden associated with the NMS Plan amendment to
account for the new reporting fields and reporting parties. The
Commission has based its estimate of SRO burden hours to amend the NMS
Plan on the burden hours for existing NMS plans, while also taking into
account the limited nature of the updates to the NMS Plan that would be
required under the proposed amendments to Rule 605.
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    \495\ The Commission believes the monetized initial burden for
this requirement to be $40,222. The Commission derived this estimate
based on per hour figure from SIFMA's Management & Professional
Earnings in the Securities Industry 2013, modified by Commission
staff to account for an 1,800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead: [(Attorney at $462 for 4 hours) + (Assistant
General Counsel at $518 for 1 hour)] = $2,366 per respondent for a
total initial monetized burden of $40,222 ($2,366 x 17 respondents).
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    The Commission estimates that there would be outsourcing of legal
time to develop and draft the NMS Plan amendment in order to account
for additional data fields and reporting parties. The NMS Plan
amendment would be an update to the list of formats and fields to track
the data elements set forth in the Rule and add references to broker-
dealers subject to the Rule, and therefore the Commission estimates the
hours necessary to develop and draft the amendment would be
significantly lower than other recent NMS plan amendments. The
Commission staff estimates that, on average, each exchange and
association would outsource 2 hours of legal time to prepare and file
an amendment to the NMS Plan, at an average hourly rate of $496.\496\
The Commission estimates that the aggregate one-time reporting burden
for preparing and filing an amendment to the NMS Plan would be
approximately $992 in external costs per national securities exchange
or national securities association, for an aggregate external cost of
$16,864 resulting from outsourced legal work [(2 hours @ $496 per hour
= $992) x (16 national securities exchanges and 1 national securities
association)].
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    \496\ The Commission's estimates of the relevant wage rates for
outside legal services takes into account staff experience, a
variety of sources including general information websites, and
adjustments for inflation.
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    The Commission currently estimates a total initial burden of 24,169
hours for all respondents and a total annual burden of 34,368 hours for
all respondents.\497\
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    \497\ (11,800 + 12,300 + 119) = 24,219 initial burden hours.
(22,656 + 11,808) = 34,464 annual burden hours. The Commission
estimates the monetized initial burden for all respondents to be
$8,978,906 ($4,368,360 + $4,553,460 + $57,086) and the monetized
annual burden for all respondents to be $13,458,192 ($8,847,168 +
$4,611,024).
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E. Request for Comment

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to:
    51. Evaluate whether the proposed collection of information is
necessary for the proper performance of the Commission's functions,
including whether the information shall have practical utility;
    52. Evaluate the accuracy of the Commission's estimates of the
burden of the proposed collection of information;
    53. Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected;
    54. Evaluate whether there are ways to minimize the burden of
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology; and
    55. Evaluate whether the proposed amendments would have any effects
on any other collection of information not previously identified in
this section.
    Persons submitting comments on the collection of information
requirements should direct them to the Office of Management and Budget,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also send a copy of their comments to Secretary, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with
reference to File Number S7-29-22. Requests for materials submitted to