customers or handling a relatively small number of institutional
orders) at a competitive disadvantage relative to larger broker-
dealers, as customers might avoid using smaller broker-dealers to avoid
possible disclosure that could be traced back to the customer. However,
because the proposed public aggregated institutional order handling
report would not disclose the specific orders and the historical data
would reflect prior calendar quarters, the Commission preliminarily
believes that the potential risks and costs due to this would be small.
    Proposed Rule 606(c) would require each broker-dealer to post the
public aggregated institutional order handling report for a period of
three years from the initial date of posting on the Internet Web site.
As noted above, the Commission preliminarily believes that, once the
report is posted, maintaining the report on the Web site will not
impose any additional burden on broker-dealers, and thus any additional
costs to maintain the report on the Web site would be negligible.
    The disclosure requirements of proposed Rule 606(c) would impose a
cost, as they would require some reprogramming by broker-dealers that
handle institutional orders. In addition, preparing and disseminating
the data to the public in the form required by proposed Rule 606(c)
would impose costs on such broker-dealers. However, a broker-dealer
could use the infrastructure and processes they put in place for the
customer-specific reports required by proposed Rule 606(b)(3) such that
the additional cost to comply with proposed Rule 606(c) may be low. The
Commission preliminarily estimates that a broker-dealer who handles
institutional orders and formats and creates public aggregated
institutional order handling reports itself will incur an initial
burden of 20 hours resulting in a monetized cost burden of $4,990 to
comply with the quarterly reporting requirement of proposed Rule
606(c).\400\ The Commission preliminarily estimates that a broker-
dealer who uses a third-party service provider to create the public
aggregated institutional order handling reports would incur an initial
burden of 5 hours resulting in a monetized cost burden of $1,415 plus
an additional third-party service provider fee of $2,500.\401\ As noted
above, the Commission preliminarily estimates that 135 broker-dealers
who route institutional orders will create the required reports
themselves while 65 such broker-dealers will use a third-party service
provider to create the required reports. Therefore, the total initial
burden for broker-dealers that route institutional orders to produce
the quarterly report is preliminarily estimated to be 3,025 hours
resulting in a monetized cost burden of $765,625 plus an additional
$162,500 fee to compensate third-party service providers for producing
the reports.\402\
---------------------------------------------------------------------------

    \400\ See supra note 261.
    \401\ See supra notes 262 and 263.
    \402\ See supra note 264.
---------------------------------------------------------------------------

    Further, the Commission preliminarily estimates that each broker-
dealer that routes institutional orders who prepares its own reports
will incur an average burden of 10 hours resulting in a monetized cost
burden of $1,600 \403\ to prepare, disseminate, and keep for a period
of three years a quarterly report required by proposed Rule 606(c), or
a burden of 40 hours resulting in a monetized cost burden of $6,400 per
year.
---------------------------------------------------------------------------

    \403\ See supra note 266.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that each broker-dealer that
routes institutional orders that uses a third-party service provider to
prepare the reports required under proposed Rule 606(c) will incur an
average burden of 2 hours resulting in a monetized cost burden of $443
plus an additional third-party service provider fee of $500 \404\ to
prepare and make publicly available a quarterly report, or a burden of
8 hours resulting in a monetized cost burden of $1,772 plus an
additional third-party service provider fee of $2,000 per year.\405\ As
noted above, the Commission preliminarily estimates that 135 broker-
dealers who route institutional orders will create the required reports
themselves while 65 such broker-dealers will use a third-party service
provider to create the required reports. Therefore, the total burden
per year for all broker-dealers who route institutional orders to
comply with the reporting requirement in proposed Rule 606(c) is
preliminarily estimated to be 5,920 hours resulting in a monetized cost
burden of $979,180 plus an additional third-party service provider fee
of $130,000.\406\
---------------------------------------------------------------------------

    \404\ See supra notes 269 and 270.
    \405\ See supra notes 271 and 272.
    \406\ See supra notes 275 and 276.
---------------------------------------------------------------------------

iii. Request for Comment
    The Commission requests comment on the Commission's analysis of the
costs and benefits of the proposed amendments in Rule 606(c). In
particular, the Commission solicits comment on the following:
    143. Do commenters believe that the assumptions underlying the
Commission's estimates for the costs of implementation and ongoing
costs to comply with the proposal are appropriate? Please provide data
and analysis to support your view.
    144. Do commenters believe there are additional costs or benefits
that could be quantified or otherwise monetized? If so, please identify
these costs and benefits. Please explain and provide specific data and
estimates.
    145. Do commenters believe there are any additional costs or
benefits that may arise from the proposal? Are there costs and benefits
described that would likely not result from the proposed amendments?
Are there any unintended consequences not discussed above that may
result from the proposal?
    146. Do commenters believe that there are methods by which the
Commission could reduce the costs imposed by the proposal, while still
achieving its stated goals? Please explain in detail.
2. Disclosures for Retail Orders
    Rule 606(a) requires each broker-dealer to make publicly available
quarterly reports on its routing of non-directed orders in NMS
securities. The Commission preliminarily believes that the proposed
amendments to Rule 606(a) would increase the level of transparency
about order routing and execution quality for retail orders through the
enhanced disclosure of data regarding order routing and execution. The
proposed amendments to Rule 606(a) require that the public quarterly
reports be broken down by calendar month and differentiate between
marketable and non-marketable limit orders. The proposed amendments
also would remove the requirement that the quarterly reports be divided
into three separate sections for securities that are listed on the
NYSE, Nasdaq, and Amex. The proposed amendments to Rule 606(a)(1)(iii)
also require that the reports include for Specified Venues the net
aggregate amount of any payment for order flow, payment from any
profit-sharing relationship received, transaction fees paid, and
transaction rebates received, both as a total dollar amount and on a
per share basis, for specified types of orders. The proposed amendment
to Rule 606(a)(1)(iv) would add the requirement that broker-dealers
describe any terms of payment for order flow arrangements and profit-
sharing relationships with Specified Venues that may influence their
order routing decisions, including, among other things: (1) Incentives
for equaling or

exceeding an agreed upon order flow volume threshold, such as
additional payments or a higher rate of payment; (2) disincentives for
failing to meet an agreed upon minimum order flow threshold, such as
lower payments or the requirement to pay a fee; (3) volume-based tiered
payment schedules; and (4) agreements regarding the minimum amount of
order flow that the broker-dealer would send to a venue.\407\ In
addition, the proposed amendments to Rule 606(a) would require broker-
dealers to keep their reports posted on an Internet Web site that is
free and readily accessible to the public for a period of three years
from the initial date of posting on the Internet Web site, and would
require such reports to be made available using an XML schema and
associated PDF renderer to be published on the Commission's Web site.
---------------------------------------------------------------------------

    \407\ See proposed Rule 606(a)(1)(iv).
---------------------------------------------------------------------------

    The benefits and costs of each of these proposed amendments are
discussed below. Wherever possible, we quantify cost estimates for a
given amendment. For the remaining amendments concerning retail orders,
we provide total quantitative cost estimates for these amendments in
Section V.C.2.e.
a. Marketable Limit Orders and Non-Marketable Limit Orders
i. Benefits
    The proposed amendments to Rule 606(a), which applies to retail
orders, would require broker-dealers to differentiate between
marketable and non-marketable limit orders. Marketable and non-
marketable limit orders generally are handled differently, i.e., non-
marketable limit orders are typically posted to an order book, which
may result in a different fee or rebate compared to a marketable limit
order that may be immediately executed and not posted to the book.
    The proposed amendments could allow the public, including customers
placing retail orders, to better understand the potential for conflicts
of interest broker-dealers face when routing retail orders. For
example, if a broker-dealer routes all non-marketable limit orders to
the trading centers that pay the highest rebate for orders providing
liquidity, the broker-dealer may be maximizing its revenue potentially
to the detriment of execution quality. Recent academic research has
identified indications of such routing behavior for retail orders.\408\
On examining the order routing of ten broker-dealers, the researchers
find that four of the broker-dealers sell market orders to market
makers and route limit orders to market makers or exchanges offering
the largest liquidity rebates. In addition, their study indicates that
a negative relation exists between take fees and the likelihood that a
limit order fills and the speed and realized spread of the associated
fill.\409\ The disclosure of order routing data broken down by
marketable and non-marketable limit orders could incentivize broker-
dealers to better manage these and other potential conflicts of
interest, which may result in improved order routing decisions and
execution quality for retail orders. The disclosure could also help
customers and others to assess if and how well broker-dealers manage
the potential conflicts of interest they face when routing retail
orders, and would be a way for broker-dealers to show that they are
indeed managing these potential conflicts of interest.
---------------------------------------------------------------------------

    \408\ See Battalio, Corwin, and Jennings Paper, supra note 57.
    \409\ See id.
---------------------------------------------------------------------------

    In addition, if the additional proposed disclosure results in
broker-dealers improving their order routing for retail orders, which,
in turn, may change which trading centers the broker-dealers route
retail orders to, the proposed disclosure could further promote
competition among trading centers. The new information that would be in
the public reports required by proposed Rule 606(a)(1) would allow
trading centers to compare the order routing decisions of broker-
dealers and the trading centers retail orders are routed to, which
could then inform how the trading centers attempt to attract retail
order flow. The quarterly public reports, which would be broken down by
month, would allow trading centers to see effects of any adjustments
they implement in response to broker-dealers changing their order
routing strategies. In addition, this proposed new disclosure may lead
to innovation by existing trading centers and it may attract new
entrants and the formation of new trading centers.\410\
---------------------------------------------------------------------------

    \410\ In particular, a trading center that loses order flow to
venues that offer better execution quality would have the incentive
to innovate to improve its execution quality. Therefore, because the
proposed disclosures may encourage broker-dealers to route for
better execution quality, they may lead to innovation on trading
centers.
---------------------------------------------------------------------------

ii. Costs
    The proposed amendments to Rule 606(a) to require broker-dealers to
differentiate between marketable and non-marketable limit orders would
impose costs on broker-dealers. Preliminary estimates for compliance
costs are contained in the estimates for the costs of producing the
reports discussed in Section V.C.2.e.
iii. Request for Comment
    The Commission requests comment on the Commission's analysis of the
costs and benefits of the proposed amendments in Rule 606(a). In
particular, the Commission solicits comment on the following:
    147. Do commenters believe that the assumptions underlying the
Commission's estimates for the costs of implementation and ongoing
costs to comply with the proposal are appropriate? Please provide data
and analysis to support your view.
    148. Do commenters believe there are additional costs or benefits
that could be quantified or otherwise monetized? If so, please identify
these costs and benefits. Please explain and provide specific data and
estimates.
    149. Do commenters believe there are any additional costs or
benefits that may arise from the proposal? Are there costs and benefits
described that would likely not result from the proposed amendments?
Are there any unintended consequences not discussed above that may
result from the proposal?
    150. Do commenters believe that there are methods by which the
Commission could reduce the costs imposed by the proposal, while still
achieving its stated goals? Please explain in detail.
b. Net Payment for Order Flow and Transaction Fees and Rebates by
Specified Venue
i. Benefits
    Under the proposed amendments to Rule 606(a)(1)(iii), for retail
orders, broker-dealers would be required to publicly report the net
aggregate amount of any payment for order flow, payment from any
profit-sharing relationship received, the transaction fees paid, and
transaction rebates received, both as a total dollar amount and on a
per share basis, for each of the following order types: market orders,
marketable limit orders, non-marketable limit orders, and other orders.
    Similarly to differentiating marketable and non-marketable limit
orders discussed in Section V.C.2.a.i, the information required by
proposed Rule 606(a)(1)(iii) could also allow the public, including
customers placing retail orders, to better understand the potential
conflicts of interest broker-dealers face when routing retail
orders.\411\ The proposed disclosure of information could provide
additional

incentives to broker-dealers to monitor the potential conflicts of
interest, and to review and alter how they route retail orders, which
could result in improved order routing decisions and execution quality
for retail orders. The disclosure could also help the public to assess
better if and how well broker-dealers manage the potential conflicts of
interest they face when routing retail orders.
---------------------------------------------------------------------------

    \411\ See supra Section II.C. for an example of routing
decisions being affected by conflicts of interest.
---------------------------------------------------------------------------

    Under proposed Rule 606(a)(1)(iii), broker-dealers would be
required to disclose on a quarterly basis more detailed information on
net payment for order flow, payment from any profit-sharing
relationship received, transaction fees paid, and transaction rebates
received per share and in total. Customers and the public could use
this information to gauge whether payments for order flow or maker-
taker fees affect the order routing decisions of broker-dealers. For
example, if a customer pays a flat-rate commission to its broker-
dealer, and any rebate received, or any fraction thereof, is retained
by the broker-dealer, then the broker-dealer may have a financial
incentive to route the retail order to the trading center offering the
highest rebate or lowest fee.\412\ Brokerage commissions, which are
known to the customer, may depend on the rebates and take fees
collected or paid by broker-dealers.\413\ For example, broker-dealers
that collect more in rebates may pass this income on to customers by
charging lower commissions. However, routing solely to maximize rebates
or minimize take fees may result in lower execution quality than other
routing strategies. Without the proposed disclosures customers might
take only brokerage commissions into account and might, therefore,
suboptimally choose the lowest commission broker-dealer, without
considering other relevant costs. Such customers could, in fact, end up
paying higher net costs if the lower commission broker-dealers do not
obtain good execution quality for the retail orders. The information
required by proposed Rule 606(a)(1)(iii), together with the proposed
amendments to Rule 606(a) requiring differentiating of marketable and
non-marketable limit orders, would give customers additional
information to make decisions based on more than the brokerage
commissions.
---------------------------------------------------------------------------

    \412\ See, e.g., Battalio, Corwin, and Jennings Paper, supra
note 57.
    \413\ The Commission notes that it does not believe that fees
and rebates are the only determinants of brokerage commissions.
---------------------------------------------------------------------------

    In addition, as discussed in Section V.C.2.a.i, if broker-dealers
improve their order routing for retail orders, which may result in
changes to which trading centers they route retail orders to, it could
promote competition between trading centers. The trading centers could
gauge, like customers, whether payment for order flow or maker-taker
fees affect the order routing decision of broker-dealers. The trading
centers may change their fees or attempt otherwise to attract retail
order flow and the quarterly public reports that are broken down by
calendar month would allow them to see effects of any changes they
implement. In addition, this may lead to innovation by existing trading
centers and it may attract new entrants and the formation of new
trading centers.
ii. Costs
    Proposed Rule 606(a)(1)(iii) would impose initial costs on broker-
dealers in creating a new process to complete the reports and increase
ongoing costs related to incorporating additional information into the
reports. Preliminary estimates for the compliance costs are contained
in the estimates for the costs of producing the reports discussed in
Section V.C.2.e. It is possible that increased transparency about the
net aggregate amount of any payment for order flow, payment from any
profit-sharing relationship, transaction fees paid, and transaction
rebates received, and subsequent scrutiny by retail customers, the
public, academics, regulators, and the financial media, may lead
broker-dealers to decrease the degree to which they internalize orders
and route orders to high rebate or low fee exchanges to avoid the
perception of conflicts of interest. Broker-dealers might do this if
they perceive the potential costs from increased public scrutiny that
would result from the enhanced disclosures to be relatively high
compared to the benefit from sending retail orders to internalizers or
routing retail orders to high rebate and low fee trading centers. If
this were to occur then these retail orders might be more likely to be
routed to trading centers other than internalizers, such as exchanges
or alternative trading systems,\414\ regardless of potential execution
quality differences such as relatively less price improvement, or they
might be more likely to be routed to other lower rebate or higher fee
venues, regardless of the potential execution quality differences. In
addition, if broker-dealers were to reduce the retail order flow sent
to internalizers who pay for it, the broker-dealers would receive less
payment for retail order flow and might pass the lost payments onto
their retail customers by raising brokerage commissions or other fees.
Similarly, if broker-dealers were to route retail orders to trading
centers with lower rebates and higher fees, they might pass the
reduction in rebate revenue and increase in fee costs on to their
retail customers by raising brokerage commissions or other fees.
---------------------------------------------------------------------------

    \414\ See supra note 3.
---------------------------------------------------------------------------

    It is possible that increased transparency about net payment for
order flow and payments from profit-sharing relationships, and
subsequent scrutiny by retail customers, the public, academics,
regulators, and the financial media, might lead broker-dealers to alter
their payment for order flow or profit-sharing relationships or not
enter such relationships. Broker-dealers might do this if they perceive
the potential costs from increased public scrutiny to be relatively
high compared to a broker-dealer's benefit from such relationships.
This could lead to lower payments received from such relationships. The
affected broker-dealers might offset these lower revenues or higher
costs by increasing brokerage commissions or other fees for retail
customers.
iii. Request for Comment
    The Commission requests comment on the Commission's analysis of the
costs and benefits of the proposed amendments in Rule 606(a)(1)(iii).
In particular, the Commission solicits comment on the following:
    151. Do commenters believe that the assumptions underlying the
Commission's estimates for the costs of implementation and ongoing
costs to comply with the proposal are appropriate? Please provide data
and analysis to support your view.
    152. Do commenters believe there are additional costs or benefits
that could be quantified or otherwise monetized? If so, please identify
these costs and benefits. Please explain and provide specific data and
estimates.
    153. Do commenters believe there are any additional costs or
benefits that may arise from the proposal? Are there costs and benefits
described that would likely not result from the proposed amendments?
Are there any unintended consequences not discussed above that may
result from the proposal?
    154. Do commenters believe that there are methods by which the
Commission could reduce the costs imposed by the proposal, while still
achieving its stated goals? Please explain in detail.
c. Discussion of Arrangement Terms With a Specified Venue
i. Benefits
    As discussed in Section III.B.3., the proposed amendment to Rule

606(a)(1)(iv) would require broker-dealers to describe in their
quarterly public report any terms of payment for order flow
arrangements and profit-sharing relationships, whether written or oral,
with a Specified Venue that may influence their order routing
decisions, including, among other things: (1) Incentives for equaling
or exceeding an agreed upon order flow volume threshold, such as
additional payments or a higher rate of payment; (2) disincentives for
failing to meet an agreed upon minimum order flow threshold, such as
lower payments or the requirement to pay a fee; (3) volume-based tiered
payment schedules; and (4) agreements regarding the minimum amount of
order flow that the broker-dealer would send to a venue. The Commission
preliminarily believes that the description provided by proposed Rule
606(a)(1)(iv) would help ensure consistent, accurate, and comprehensive
disclosure of terms of payment for order flow and profit-sharing
relationships that influence broker-dealer order routing decisions.
This would make the public reports required by amended Rule 606(a) more
useful to customers and the public, and the benefits of the description
required by proposed Rule 606(a)(1)(iv) are similar to the benefits of
the disclosures of the net payment for order flow and transaction fees
and rebates by Specified Venue required by proposed Rule 606(a)(1)(iii)
and discussed in Section V.C.2.b.i.
    The disclosures required by proposed Rule 606(a)(1)(iv) could allow
the public, including customers placing retail orders, to better
understand the potential conflicts of interest broker-dealers face when
routing retail orders.\415\ Together with the proposed amendments to
Rule 606(a) concerning differentiating marketable and non-marketable
limit orders and with proposed Rule 606(a)(1)(iii), proposed Rule
606(a)(1)(iv) could give customers placing retail orders useful
information about potential conflicts of interest. The disclosures
required by Rule 606(a)(1)(iv) would give customers access to
information on the terms of payment for order flow arrangements and
profit-sharing relationships between broker-dealers and Specified
Venues. Customers could use that information to gauge whether those
arrangements affect the order routing decisions of broker-dealers. The
proposed disclosures could incentivize broker-dealers to monitor their
potential conflicts of interest, and to review and alter how they route
retail orders, which could result in improved order routing decisions
and execution quality for retail orders. The disclosure could also help
the public to assess if and how well broker-dealers manage the
potential conflicts of interest they face when routing retail orders.
---------------------------------------------------------------------------

    \415\ See supra Section II.C. for an example of routing
decisions being affected by conflicts of interest.
---------------------------------------------------------------------------

    In addition, as discussed in Section V.C.2.a.i, if broker-dealers
improve their order routing for retail orders, which may result in
changes to which trading centers they route retail orders to, it could
promote competition between trading centers. The trading centers could
gauge, like customers, whether payment for order flow arrangements and
profit-sharing relationships between broker-dealers and Specified
Venues affect the order routing decisions of broker-dealers. The
trading centers may change their payment for order flow arrangements
and profit-sharing relationships with broker-dealers or attempt
otherwise to attract retail order flow and the quarterly public reports
that are broken down by calendar month would allow them to see effects
of any changes they implement. In addition, this may lead to innovation
by existing trading centers and it may attract new entrants and the
formation of new trading centers.
ii. Costs
    Given that the proposed changes to Rule 606(a)(1)(iv) constitute an
amendment to an existing disclosure, the Commission preliminarily
estimates the initial paperwork burden for a broker-dealer that handles
retail orders to review and assess its payment for order flow
arrangements and profit-sharing relationships, whether written or oral,
with a Specified Venue that may influence their order routing
decisions, and describe terms of such arrangements to be 10 hours
resulting in a monetized cost burden of $3,155.\416\ With 266 broker-
dealers that route retail orders required to comply with the rule, the
Commission preliminarily estimates the total initial paperwork burden
for complying with proposed Rule 606(a)(1)(iv) to be 2,660 hours
resulting in a cost of $839,230.\417\ The Commission preliminarily
estimates the annual paperwork burden for a broker-dealer that handles
retail orders to describe and update any terms of payment for order
flow arrangements and profit-sharing relationships, whether written or
oral, with a Specified Venue that may influence their order routing
decisions to be 15 hours resulting in a monetized cost burden of
$3,500.\418\ With 266 broker-dealers that route retail orders required
to comply with the rule, the Commission preliminarily estimates the
total annual paperwork burden for complying with proposed Rule
606(a)(1)(iv) to be 3,990 hours resulting in a cost of $931,000.\419\
---------------------------------------------------------------------------

    \416\ See supra note 318.
    \417\ See supra note 319.
    \418\ See supra note 323.
    \419\ See supra note 324.
---------------------------------------------------------------------------

    Increased disclosure about payment for order flow arrangements and
profit-sharing relationships may lead broker-dealers to decrease the
amount of internalization used in the execution of market and
marketable limit orders and to alter such arrangements and
relationships. Section V.C.2.b.ii. discusses this in detail and the
associated costs and other effects.
iii. Request for Comment
    The Commission requests comment on the Commission's analysis of the
costs and benefits of the proposed amendments in Rule 606(a)(1)(iv). In
particular, the Commission solicits comment on the following:
    155. Do commenters believe that the assumptions underlying the
Commission's estimates for the costs of implementation and ongoing
costs to comply with the proposal are appropriate? Please provide data
and analysis to support your view.
    156. Do commenters believe there are additional costs or benefits
that could be quantified or otherwise monetized? If so, please identify
these costs and benefits. Please explain and provide specific data and
estimates.
    157. Do commenters believe there are any additional costs or
benefits that may arise from the proposal? Are there costs and benefits
described that would likely not result from the proposed amendments?
Are there any unintended not discussed above consequences that may
result from the proposal?
    158. Do commenters believe that there are methods by which the
Commission could reduce the costs imposed by the proposal, while still
achieving its stated goals? Please explain in detail.
d. Additional Amendments to Retail Disclosures
    In addition to the amendments discussed above, the Commission is
proposing to amend disclosures for retail orders by aggregating reports
across listing exchanges, requiring quarterly reports to be broken down
by month, and providing reports in a specific format that are available
for a minimum length of time. The benefits and costs of these
additional amendments are discussed below.

i. Aggregated Reporting
(a) Benefits
    The proposed amendment to Rule 606(a)(1) that requires reports on
retail orders be aggregated across all securities may reduce the
ongoing costs of the Rule 606(a) reports. Current Rule 606(a)(1)
requires that NMS stocks be ``divided into three separate sections for
securities that are listed on the New York Stock Exchange, Inc.,
securities that are qualified for inclusion in The Nasdaq Stock Market,
Inc., and securities that are listed on the American Stock Exchange LLC
or any other national securities exchange.'' To satisfy this
requirement, broker-dealers have to determine the primary listing of
all NMS stocks and incur a cost on an ongoing basis in doing so.
Eliminating this requirement would save broker-dealers this cost. In
addition, new broker-dealers currently have to create the initial
report format for the three groups of NMS stocks, which also imposes a
one-time cost.\420\ Under the proposed amendment, new broker-dealers
would not incur that cost.
---------------------------------------------------------------------------

    \420\ NYSE Arca, Inc. (``NYSE Arca'') and Bats BZX are also
listing exchanges but only for exchange traded funds not stocks.
---------------------------------------------------------------------------

(b) Costs
    The Commission's proposal to aggregate reports on retail order
routing across listing exchanges would also impose costs, according to
a staff analysis.\421\ In particular, the staff analysis indicates that
the aggregation across listing exchanges would reduce the value of the
606 reports for monitoring execution quality from broker-dealers
because it would make it harder for retail customers to assess the
execution quality provided by their broker-dealers. This section
describes the staff's analysis.
---------------------------------------------------------------------------

    \421\ In addition, this proposed amendment would impose an
initial cost for broker-dealers who currently capture the data
required by the proposed modification to Rule 606(a) to change the
process for preparing the reports. These costs are reflected in the
cost estimates discussed in Section V.C.2.e.
---------------------------------------------------------------------------

    The staff's analysis focuses on whether customers or others can use
the market-specific routing information to assess the execution quality
they get from their broker-dealers. Specifically, if the order routing
decisions by broker-dealers differ for stocks listed on different
exchanges, e.g., if broker-dealers route orders differently for NYSE-
listed stocks compared to NASDAQ-listed stocks, the proposed aggregated
reports would not provide this information to customers and the
public.\422\ Such information can be useful for customers and the
public as long as order routing decisions determine execution quality
and execution costs. Specifically, Commission staff analyzed execution
costs as measured by effective spreads from Rule 605 reports (``Rule
605 data'') for common stocks with different primary listing exchanges
and on different market centers to determine whether the cost of
executing a market or a marketable limit order for common stock varies
across market centers and primary listing exchange.\423\ The staff's
analysis controls for stock and order characteristics.\424\
Accordingly, the staff's analysis considers whether execution quality
depends on primary listing exchanges, and specifically which market
centers provide better execution, as a means to assess whether the
proposal might reduce the usefulness of the reports.\425\
---------------------------------------------------------------------------

    \422\ The Commission notes that there are differences in order
routing decisions depending on primary listing exchange due to
existing rules, regulations, and practices. For example, the NYSE
does not trade NASDAQ- or NYSE MKT-listed stocks. As a result,
orders for a NYSE-listed stock can be routed to the NYSE, NASDAQ,
and other market centers, whereas orders for NASDAQ-listed stocks
can be routed to NASDAQ and other market centers, but not to the
NYSE. This level of information would be lost in aggregated reports.
    \423\ The Commission purchased the Rule 605 data from CoreOne
Technologies, a provider of financial data. The data used in this
analysis spans the period from January 1, 2012 through December 31,
2014. The CRSP US Stock Database from Wharton Research Data Services
contains daily and monthly market and corporate action data for
securities, and is used to estimate control variables.
    \424\ Specifically, the analysis consists of a regression that
uses dollar volume, market capitalization, and mean variance of
daily returns to control for stock characteristics, and order type
and order size to control for order characteristics.
    \425\ Similarly, if any of the information required to be
disclosed by proposed Rules 606(a)(iii) and (iv) differs for stocks
with different listing exchanges, then the proposed aggregation will
reduce the information content of the reports, provided that
information is valuable to institutions as discussion in Section
II.C. For example, it may be the case that payment for order flow
arrangements are different for stocks with different primary listing
exchanges or an exchange may implement different fees and rebates
for stocks with a different primary listing exchange.
---------------------------------------------------------------------------

    While the staff's analysis is not a direct test of whether order
routing differs for stocks with different primary listing
exchanges,\426\ it does directly measure one important factor in
whether such routing information would be useful--differences in
execution costs. Information on both execution costs and routing allows
customers (or someone acting on behalf of customers) to assess the
extent to which their broker-dealer routes customer orders to the
market centers with the lowest execution costs. If the execution cost
measures show that listing exchange matters for which market centers
offer better execution quality, then aggregating the routing
information across listing exchanges could reduce the ability for
customers to assess one of the components of best execution. Hence, the
staff's analysis provides some indication of whether aggregated
reporting, as required by the proposed amendment, would deprive
customers and the public of useful information regarding the impact of
routing decisions.
---------------------------------------------------------------------------

    \426\ Commission staff was unable to obtain historical quarterly
reports for retail orders required by current Rule 606(a).
Therefore, the Commission staff did not analyze current 606 reports
to see if routing differs by listing exchange of the stock.

   Table 1--Association Between Trading Center and Mean Effective Spread for Common Stocks by Listing Exchange
----------------------------------------------------------------------------------------------------------------
                                                         Mean effective spread (basis points)
                                    ----------------------------------------------------------------------------
                                               (1)                       (2)                       (3)
                                    ----------------------------------------------------------------------------
                                           NYSE-listed              NASDAQ-listed            NYSE MKT-listed
----------------------------------------------------------------------------------------------------------------
Intercept..........................       *** 18.02 (227.48)         *** 92.01 (412.45)      *** 177.29 (122.39)
BATS BYX...........................        ***-4.12 (-48.43)        ***-35.78 (-141.56)       ***-37.58 (-20.35)
BATS BZX...........................        ***-7.04 (-77.28)        ***-40.70 (-161.74)       ***-50.60 (-31.87)
BX.................................        ***-1.31 (-14.26)        ***-29.21 (-107.52)       ***-34.06 (-19.01)
CBSX...............................          *** 1.12 (8.76)         ***-17.02 (-41.94)         *** 14.94 (4.70)
CHX................................        ***-2.27 (-10.93)         ***-37.72 (-43.53)        ***-21.04 (-2.90)
EDGA...............................        ***-4.69 (-55.75)        ***-35.49 (-131.77)       ***-41.53 (-25.03)
EDGX...............................        ***-4.28 (-48.53)         ***-27.64 (-96.80)       ***-29.09 (-15.71)

NASDAQ.............................         *** 1.63 (17.33)  .........................           ** 3.98 (2.53)
NSX................................        ***-2.85 (-28.76)        ***-37.17 (-118.44)       ***-41.72 (-22.17)
NYSE ARCA..........................        ***-5.75 (-70.19)        ***-36.71 (-152.46)       ***-48.49 (-30.82)
NYSE MKT...........................  .......................        ***-57.02 (-113.92)  .......................
Off Exchange.......................        ***-3.08 (-43.57)        ***-31.85 (-168.35)       ***-34.54 (-26.76)
PSX................................        ***-3.10 (-39.77)        ***-57.54 (-256.34)       ***-81.01 (-54.98)
Marketable limit order.............            -0.004 (-.11)           *** 2.90 (28.78)       ***-10.83 (-15.95)
500-1,999 shares...................         *** 0.67 (15.32)          ***-2.32 (-21.67)           *-1.23 (-1.87)
2,000-4,999 shares.................         *** 2.22 (44.37)          ***-3.31 (-26.89)           ** 1.87 (2.37)
>=5,000 shares.....................         *** 3.41 (61.79)          ***-4.23 (-28.66)          *** 2.98 (3.12)
Dollar volume......................    ***-2.86E-08 (-178.5)       *** 2.21E-09 (11.38)        -3.04E-08 (-1.49)
Market capitalization..............     *** 8.03E-12 (12.49)     ***-3.65E-10 (-121.35)    ***-1.96E-08 (-57.69)
Variance of daily return...........       *** 334.54 (21.14)         *** 438.14 (11.66)       *** 877.18 (11.53)
H0: All exchange dummies = 0
    Chi-square.....................               *** 17,580                 *** 75,339                *** 6,346
H0: EDGX = Bats BYX
    Chi-square.....................                  ** 4.13                 *** 806.78                *** 18.70
Observations.......................                9,792,105                 10,764,324                  688,305
Adjusted R\2\......................                    1.02%                      1.18%                    1.98%
Year fixed effects.................                      Yes                        Yes                      Yes
----------------------------------------------------------------------------------------------------------------
Note: Data are SEC Rule 605 data purchased from CoreOne Technologies and CRSP, and include years 2012-2014. The
  mean effective spread is equally-weighted by stock. The variable categories that are dropped are: One trading
  center, market orders (for the regressions involving mean effective spreads), inside-the-quote limit orders
  (for regressions involving mean realized spreads), order size from 100-499 shares, and the 2012 calendar year.
  The Chi-square test is used to test the null hypothesis that all of the exchange coefficients, with the
  exception of the intercept coefficient, are jointly zero. The null hypothesis would imply that all exchanges
  would not be associated with a mean effective spread different from that associated with NYSE-listed stock
  orders executed at NYSE. T-statistics estimated from White standard errors are in parentheses. * indicates
  significance of a 2-tailed test at the 10% level; ** at the 5% level; *** at the 1% level.

    Table 1 presents the results of the staff's analysis of effective
spreads for common stocks listed on the NYSE, NASDAQ, and NYSE MKT.
Columns 1 through 3 report the results for each of these primary
listing exchanges.\427\ The market center rows in the table report the
basis point difference between the average effective spreads on that
market center and the average effective spreads on the primary listing
exchange. In tests of whether effective spreads of each market center
are the same as the listing exchange, the rows with stars indicate that
the market center effective spreads are statistically significantly
different, with more stars indicating stronger confidence in the
significance. For illustration, the intercept in Column 1 indicates
that the average effective spread for market orders for NYSE-listed
stocks that are executed on the NYSE is 18.02 basis points and the -
4.12 estimate for Bats BYX Exchange, Inc. (``Bats BYX'') indicates that
the effective spreads for NYSE-listed stocks on Bats BYX are 4.12 basis
points lower after controlling for differences due to stock and order
characteristics.\428\
---------------------------------------------------------------------------

    \427\ The Rule 605 data and, thus, this analysis weight the
effective spread statistics equally by stock. Therefore, these
effective spreads appear larger than if they were weighted by dollar
volume or by share volume.
    \428\ For perspective, a one penny effective spread on a $40
stock is 2.5 basis points. A 2.5 basis point cost on a 100 share
trade in a $40 stock would be $1.00. An ordinary least squares
estimate is consistent when the explanatory variables are exogenous,
perfect multicollinearity does not exist, and optimal in the class
of linear unbiased estimators when the errors are homoscedastic and
serially uncorrelated. Under these assumptions, the method of
ordinary least squares provides minimum-variance mean-unbiased
estimates when the errors have finite variances. If any one or more
of these assumptions does not hold then the estimate may not be the
best linear unbiased estimator.
---------------------------------------------------------------------------

    Table 1 indicates that the average effective spreads vary
significantly by the market center where the orders were executed.
Table 1 shows that most market center effective spreads are
significantly different than those of the listing exchange. For
example, Column 1 shows that, for NYSE-listed stocks, the average
effective spread on Bats BZX is 7.04 basis points less than on the NYSE
itself, and the average effective spread on NASDAQ is 1.63 basis points
higher than on the NYSE. In addition, some differences in effective
spreads are also economically meaningful. For example, Column 2 reports
that the average effective spread for orders in NASDAQ-listed stocks
that are executed on NASDAQ is 92.01 basis points and the average
effective spread for such orders that are executed on NYSE Arca is
36.71 basis points lower, which corresponds to a 55.3 basis point
difference and represents a reduction of almost 40%.\429\ Differences
of such magnitude may be important to broker-dealers when making order
routing decisions and to customers in monitoring the execution quality
their broker-dealers provide as measured by the current Rule 605
reports.
---------------------------------------------------------------------------

    \429\ 36.71/92.01 = 39.9%.
---------------------------------------------------------------------------

    Table 1 also indicates that the average effective spreads vary
significantly by listing exchange. The staff's analysis suggests that
NASDAQ-listed stocks tend to have higher average effective spreads than
NYSE-listed stocks because the intercept estimates are much larger in
Column 2 compared to Column 1.\430\ Table 1 also shows that NYSE MKT-
listed stocks tend to have even higher average effective spreads

than NASDAQ-listed stocks by comparing the results in Column 3 with
those in Column 2. The Commission notes that neither this result alone
nor this result in conjunction with the results in the previous
paragraph directly measure whether the proposed amendment would reduce
the usefulness of the Rule 606 routing information.
---------------------------------------------------------------------------

    \430\ The Commission recognizes that the staff analysis did not
control for stock and order characteristic differences across the
columns and the staff did not estimate a matched-sample comparison.
These other analysis types would facilitate a more fulsome
comparison of effective spreads in similar stocks by listing
exchange than the staff's analysis in Table 1. However, because the
606 reports do not distinguish individual stocks, the Commission
preliminarily believes that the staff analysis is appropriate for
assessing the costs of the proposed amendments.
---------------------------------------------------------------------------

    However, a deeper analysis of Table 1 can inform on these costs.
Specifically, the results in the table suggest that because the
relative ranking of each market center changes depending on the listing
exchange, the proposed amendment to aggregate routing information
across listing exchanges could reduce the usefulness of Rule 606
reports. Commission staff compared the effective spreads across the
various market centers for stocks listed on each of the primary listing
exchanges, as indicated by Table 1.
    If the ranking of the effective spreads on each market center were
the same across the three primary listing exchanges, where a stock is
listed would have little or no relationship to whether order routing
information informs on execution quality. Such a result would imply
that aggregating the reports across primary listing exchanges would not
reduce the amount of information in the reports. However, upon
examination, Table 1 shows that the ranking of the market centers by
effective spreads is different depending on the primary listing
exchange. For example, the coefficient estimates in Table 1 suggest
that for NYSE-listed stocks, Bats EDGX Exchange, Inc. (``EDGX'') has
lower execution costs than Bats BYX, but for NASDAQ-listed stocks, EDGX
has higher execution costs than Bats BYX. In Column 1 for NYSE-listed
stocks, the differential cost of trading a stock on EDGX versus Bats
BYX is small, 0.17 basis points, but statistically significant.
However, in Column 2 for NASDAQ-listed stocks, the stocks differ in
cost by a statistically significant 8.14 basis points between the same
two exchanges. This indicates that there seem to be differences between
market centers in terms of effective spreads for stocks with different
primary listings that, together with routing information by listing
exchange, may inform customers in assessing the execution quality their
broker-dealers provide. Therefore, the staff's analysis indicates that
aggregating the reports, as in the proposed amendment, could result in
an informational cost to customers and the public.
    As noted above in Section III.B.4., while the Commission recognizes
that eliminating the division of reports by the three distinct listing
markets may potentially cause some reduction in informational content,
as indicated in the analysis above, the Commission preliminarily
believes that any diminution in granular listing market data is
appropriate in light of the proposed requirement to provide retail
customers with pertinent order routing data that reflects today's
multiple trading centers and practices. The Commission solicits comment
on the foregoing.
ii. Other Proposed Amendments to Reporting
    The Commission is also proposing to require that the quarterly
public retail order routing reports required by Rule 606(a)(1) be
broken down by calendar month. Current Rule 606(a)(1) requires broker-
dealers to make retail order routing reports publicly available for
each calendar quarter, and such reports contain aggregate quarterly
information on the routing of retail orders. As noted above, the
Commission understands that trading centers frequently change their fee
structures, including the amount of fees and rebates, in order to
attract order flow, and these changes typically occur at the beginning
of a calendar month. The changes in fee structures at trading centers
likely will affect a broker-dealer's routing decisions. Disclosing
retail order routing information on an aggregated quarterly basis can
mask changes in routing behavior in response to changes in a trading
center's fee structure. The Commission preliminarily believes that
disclosing the information contained in the public retail routing
reports by calendar month would allow customers to better assess
whether their broker-dealers' routing decisions are affected by changes
in fee structures and the extent to which such changes affect execution
quality. This proposed amendment would, however, require an initial
cost to change the process for completing the reports. The Commission
preliminarily believes this cost to be small because broker-dealers
typically process data daily and reporting the data broken down by
month would only be a change in the aggregation of the data, from
quarterly to monthly.
    In addition, the Commission is proposing that the public retail
order routing report required by Rule 606(a)(1) and customer-specific
order routing report required by Rule 606(b)(1) be made available using
an XML schema and associated PDF renderer to be published on the
Commission's Web site. The benefits and costs associated with this
requirement are discussed in Section V.C.4. The Commission
preliminarily believes that requiring both the public and customer-
specific retail order routing reports to be provided in this format
should be useful to customers as it would allow them to more easily
analyze and compare the data provided in both types of reports across
broker-dealers, for the reasons discussed above.\431\ The proposed
amendments to Rule 606(a)(1) and Rule 606(b)(1) would require an
initial cost to change the process for completing the reports.\432\ The
benefits and costs associated with this requirement are discussed in
further detail in Section V.C.4.
---------------------------------------------------------------------------

    \431\ See supra Section III.A.3.
    \432\ The benefits and costs associated with this requirement
more generally are discussed in Section V.C.4.
---------------------------------------------------------------------------

    Finally, the Commission is proposing to amend Rules 605(a)(2) and
606(a)(1) to require market centers and broker-dealers to keep the
reports posted on an Internet Web site that is free of charge and
readily accessible to the public for a period of three years. Requiring
that data be available to customers and the public for three years
could be useful to those seeking to analyze past execution quality by
market center and routing behavior of broker-dealers. Such analysis may
lead to increased transparency with regards to execution quality and
may lead broker-dealers to compete along this dimension through routing
decisions, resulting in a higher probability of execution and improved
execution in terms of costs. Current Rules 605 and 606 do not specify
the minimum length of time that market centers need to publish the
order execution reports and broker-dealers need to publish the retail
order routing reports, respectively. As a result, the public may not be
able to examine the order execution of a market center and the routing
of retail orders by a broker-dealer through time if past reports are
not currently available or they have to rely on third-party vendors to
supply past reports.
    The requirement to make the reports available for three years may
also produce costs. As noted above, however, the Commission
preliminarily believes that, once the report is posted, maintaining the
reports on the Web site will not pose any additional burden on broker-
dealers, and thus any additional costs to maintain the report on the
Web site would be negligible. Any costs of maintaining the report are
included in the Commission's estimates of the costs broker-dealers will
incur to produce the reports, as explained above.\433\ In addition,
third-party vendors that

aggregate the time series of 605 and 606 reports may find that their
data is less useful, particularly for the three years that the reports
are publicly available.
---------------------------------------------------------------------------

    \433\ See infra Section V.C.1.c.ii.
---------------------------------------------------------------------------

iii. Request for Comment
    The Commission requests comment on the Commission's analysis of the
costs and benefits of the proposed amendments in Rule 605(a)(2),
606(a)(1) and 606(b)(1). In particular, the Commission solicits comment
on the following:
    159. Do commenters believe that the assumptions underlying the
Commission's estimates for the costs of implementation and ongoing
costs to comply with the proposal are appropriate? Please provide data
and analysis to support your view.
    160. Do commenters believe there are additional costs or benefits
that could be quantified or otherwise monetized? If so, please identify
these costs and benefits. Please explain and provide specific data and
estimates.
    161. Do commenters believe there are any additional costs or
benefits that may arise from the proposal? Are there costs and benefits
described that would likely not result from the proposed amendments?
Are there any unintended consequences that may result from the
proposal?
    162. Do commenters believe that there are methods by which the
Commission could reduce the costs imposed by the proposal, while still
achieving its stated goals? Please explain in detail.
e. Compliance Costs for Retail Order Routing Reports
    As discussed in more detail in Section IV.D.4., the Commission
preliminarily estimates the costs to comply with the proposed
amendments to Rule 606(a) that require broker-dealers to distinguish
between marketable and non-marketable limit orders and with proposed
Rule 606(a)(1)(iii) that requires disclosure of net payment for order
flow and transaction fees and rebates by Specified Venue as follows.
The Commission preliminarily estimates that most of the 266 broker-
dealers that route retail orders already obtain the information
required by the proposed rule and that 50 broker-dealers do not
currently obtain such information. The Commission preliminarily
estimates that the initial burden for a broker-dealer who routes retail
orders to update its systems to capture the information required by
proposed Rule 606(a) and format that information into a report to
comply with the rule will be 80 hours resulting in a cost of
$22,648.\434\ The Commission preliminarily estimates that 25 broker-
dealers whose systems do not currently capture all of the information
required by proposed Rule 606(a) will engage a third-party service
provider to perform the necessary upgrades. The Commission
preliminarily estimates that the initial burden for a broker-dealer
that routes retail orders to engage a third-party to perform the
necessary system updates to comply with proposed Rule 606(a) will be 20
hours resulting in a monetized cost burden of $5,985 plus an additional
third-party service provider fee of $10,000.\435\ Therefore, the
Commission preliminarily estimates the total initial burden for all 50
broker-dealers who need to update their systems and create a new report
to be 2,500 hours resulting in a monetized cost burden of $715,825 plus
an additional $250,000 fee to the third-party service providers.\436\
---------------------------------------------------------------------------

    \434\ See supra note 299.
    \435\ See supra notes 301 and 302.
    \436\ See supra notes 304 and 305.
---------------------------------------------------------------------------

    For the remaining 216 broker-dealers who the Commission
preliminarily estimates currently capture the data required by the
proposed modifications to Rule 606(a), such broker-dealers would need
only to format their reports to incorporate such data. The Commission
preliminarily estimates for broker-dealers that already capture such
data, 108 would format the reports in-house. The cost to format that
data into its existing reports in-house is preliminarily estimated to
be 20 hours resulting in a monetized cost burden of $4,975.\437\ The
Commission preliminarily estimates that 108 broker-dealers currently
engage a third-party service provider to provide reports pursuant to
existing Rule 606(a) and such broker-dealers would continue to use
third-party service providers to format reports to comply with proposed
Rule 606(a). The Commission preliminarily estimates the initial burden
for a broker-dealer who engages a third-party service provider to
format reports to comply with proposed Rule 606(a) would be 8 hours
resulting in a monetized cost burden of $2,555 plus an additional fee
of $2,000.\438\ As such, the Commission preliminarily estimates that
the total cost for the 216 broker-dealers who the Commission
preliminarily estimates currently capture the data required by proposed
Rule 606(a) to format their reports to incorporate such data to be
3,024 hours resulting in a monetized cost burden of $813,240 plus an
additional $216,000 third-party service provider fee.\439\ Therefore,
the Commission preliminarily estimates that the total initial burden to
comply with Rule 606(a) for all 266 broker-dealers which the Commission
preliminarily estimates route retail orders is 5,524 hours resulting in
a monetized cost burden of $1,529,065 plus an additional fee of
$466,000 to third-party service providers.\440\
---------------------------------------------------------------------------

    \437\ See supra note 306.
    \438\ See supra notes 308 and 309.
    \439\ See supra notes 312 and 313.
    \440\ See supra notes 314 and 315.
---------------------------------------------------------------------------

    The Commission preliminarily believes that once the initial costs,
described above, have been incurred to allow a broker-dealer to obtain
the required information, the cost to produce a quarterly report would
remain the same compared to a quarterly report required under current
Rule 606(a).\441\ However, broker-dealers would need to monitor payment
for order flow or profit-sharing relationships and potential SRO rule
changes that could impact their order routing decisions and incorporate
any new information into their reports. Thus, the Commission
preliminarily estimates the annual burden for a broker-dealer to comply
with the proposed amendments to Rule 606(a)(1)(i)-(iii) to be 10 hours
resulting in a monetized cost burden of $3,155.\442\ With 266 broker-
dealers that route retail orders required to comply with the proposed
amendments, the Commission preliminarily estimates the total annual
burden to be 2,660 hours resulting in a monetized cost burden of
$839,230.\443\
---------------------------------------------------------------------------

    \441\ See supra Section IV.D.4.b.
    \442\ See supra note 321.
    \443\ See supra note 322.
---------------------------------------------------------------------------

i. Request for Comment
    The Commission requests comment on the Commission's discussion of
implementation considerations of the proposed amendments in Rules
606(a)(1) and 606(b)(1). In particular, the Commission solicits comment
on the following:
    163. Do commenters agree with the Commission's estimates of the
costs to comply with the proposed amendments in Rules 606(a)(1) and
606(b)(1) for retail orders? Specifically, do commenters agree with the
Commission's estimates for initial costs and for ongoing costs? Please
be specific in your response and provide data to support your response.
3. Disclosure of Order Execution Information
    The proposed amendment to Rule 605(a)(2) requires market centers to
keep reports required pursuant to Rule

605(a)(1) posted on an Internet Web site that is free of charge and
readily accessible to the public for a period of three years from the
initial date of posting on the Internet Web site.
a. Benefits
    Similar to the analogous requirements proposed in Rules 606(a) and
606(c) described above, the Commission preliminarily believes that
requiring the previous three years of past order execution information
to be available to customers and the public generally should be useful
to those seeking to analyze historical order execution information at
various market centers. Currently, customers and the public who want to
analyze historical order execution information have to either download
the data every quarter or they have to rely on third-party vendors to
get access to such data. The proposed requirement to make the data
readily accessible to the public for three years would allow customers
and the public to access and analyze historical order execution
information more easily by requiring that historical data are kept
posted by the market centers. The public includes other market
participants. For example, the proposed requirement to make the data
readily accessible to the public for three years would benefit broker-
dealers, market centers, and third-party vendors in that it would allow
them to access and analyze historical order execution information more
easily. This would allow broker-dealers to compare different market
centers more easily, market centers to compare themselves to other
market centers more easily, and third-party vendors to provide their
services based on the data more easily.
b. Costs
    The Commission preliminarily believes that the costs to market
centers for making the order execution reports readily accessible to
the public for a period of three years from the date of initial
publication are negligible as it amounts to posting the currently-
required reports for the three-year time period. In addition, some
market centers may already make their reports available to the public
for an extended period of time. The requirement to post and maintain
reports on an Internet Web site that is free of charge and readily
accessible to the public for a period of three years would begin at the
adoption of the proposed amendments to Rule 605(a)(2) and apply going
forward. Affected entities (the market centers) would not be required
to post reports created and posted prior to the proposed Rule's
effectiveness.
    The Commission notes that specifying a minimum length of time for
making the Rule 605 reports available may make the data owned by third-
party vendors aggregating the time series of 605 reports less useful
because, for three years, the data would be publicly available and more
easily accessible.
c. Request for Comment
    The Commission requests comment on the Commission's analysis of the
costs and benefits of the proposed amendments in Rule 605(a)(2). In
particular, the Commission solicits comment on the following:
    164. Do commenters believe that there are benefits to making order
execution reports readily available for three years? If so, please
explain.
    165. Do commenters agree with the Commission's analysis that the
costs are negligible? Why or why not?
4. Structured Format of Reports
    The Commission is proposing to require that the retail order
routing and institutional order handling reports be made available
using the Commission's XML schema and associated PDF renderer. As
discussed earlier, the Commission preliminarily believes that requiring
the reports to be made available in an XML format will facilitate
enhanced search capabilities, and statistical and comparative analyses
across broker-dealers and date ranges.\444\ In addition, the associated
PDF renderer would provide users with an instantly human-readable
format for those who prefer to review manually individual reports,
while still providing a uniform presentation.
---------------------------------------------------------------------------

    \444\ See supra Section III.A.3.
---------------------------------------------------------------------------

    The Commission understands that there are varying costs associated
with varying degrees of structuring. Most, if not all, broker-dealers
already have experience applying the XML format to their data. For
example, all FINRA members must use FINRA's Web EFT system, which
requires that all data be submitted in XML.\445\ For the end users,
with the data in the reports structured in XML, they could immediately
download the information directly into databases and analyze it using
various software. This would enhance their ability to conduct large-
scale analysis and immediate comparison of broker-dealers, and across
date ranges. Moreover, as an open standard, XML is widely available to
the public at no cost.
---------------------------------------------------------------------------

    \445\ See http://www.finra.org/industry/web-crd/web-eft-schema-documentation-and-schema-files.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that if the reports are
provided in a structured format, users could avoid costs associated
with third-party sources who might otherwise extract and structure the
data, and then charge for access to that structured data. Users could
also avoid the additional time it would take for them to manually
review and individually structure the data if they wanted to conduct
large-scale analysis, comparison, or aggregation.
    The XML schema would also incorporate certain validations to help
ensure consistent formatting among all reports, in other words, to help
ensure data quality. Validations are restrictions placed on the
formatting for each data element so that comparable data is presented
comparably. However, these validations would not be designed to ensure
the underlying accuracy of the data. Any reports made available by
broker-dealers pursuant to the proposal would have to comply with
validations that are incorporated within the XML schema, otherwise the
reports would not be considered to have been made available using the
most recent version of the Commission's XML schema.
    XML is an open standard that is maintained by an organization other
than the Commission and undergoes constant review. As updates to XML or
industry practice develop, the Commission's XML schema may also have to
be updated to reflect the updates in technology. In those cases, the
supported version of the XML schema would be made available on the
Commission's Web site and the outdated version of the schema would be
removed in order to maintain data quality and consistency with the
standard.
    The Commission considered alternative formats to XML, such as
comma-separated values (``CSV'') and XBRL. The Commission does not
believe the CSV format is suitable because it does not lend itself to
validations. As a result, the data quality of the reports would likely
be diminished as compared to XML, impairing comparability, aggregation,
and large-scale analysis. While the XBRL format enables users to
capture the rich complexity of financial information presented in
accordance with U.S. Generally Accepted Accounting Principles, XBRL is
not necessary to accurately capture the information for the proposed
reports. The Commission preliminarily believes the simpler
characteristics of the information in the required reports are better
suited for XML.
a. Request for Comment
    The Commission requests comment on the Commission's analysis of the
proposed structured format for the

proposed reports. In particular, the Commission solicits comment on the
following:
    166. Should the Commission require a structured format other than
XML? If so, please identify the other format; identify how the other
format could be used for aggregation, comparison, and large-scale
analysis; and identify how the Commission can similarly ensure data
quality.
    167. As proposed, the public reports will be made available on each
broker-dealers' Web site. Are there any benefits to the public or to
broker-dealers if the reports were also submitted to the Commission's
EDGAR system? If so, please identify those benefits and any associated
costs.
    168. How and in what format do broker-dealers currently provide
their reports for retail orders required by Rule 606(a)(2)?
    169. Broker-dealers currently provide reports about order routing
and execution quality to institutional customers upon request on a
voluntary basis. How and in what format do broker-dealers currently
provide those ad-hoc reports?
    170. Market centers publish current Rule 605(a) reports in a pipe-
delimited ASCII format. Should the Commission require a different
structured format for the reports required by Rule 605(a)? Why or why
not? If yes, should the Commission require that the reports required by
Rule 605(a) be made available using an XML schema and associated PDF
renderer published on the Commission's Web site? Why or why not? Please
be specific in your response. If commenters believe another format
would be more appropriate, please identify the other format and
identify how the other format can also be used for aggregation,
comparison, and large-scale analysis; and identify how the Commission
can similarly ensure data quality. Please identify any benefits and
associated costs.
5. Other Definitions in Proposed Amendments to Rule 600
a. Definition of Non-Marketable Limit Order in Proposed Rule 600(b)(51)
    Proposed Rule 600(b)(51) defines a non-marketable limit order to
mean any limit order other than a marketable limit order. The
Commission preliminarily believes that proposed Rule 600(b)(51) would
ensure consistent and correct interpretation and application of the
proposed amendments to Rule 606(a)(1) for retail orders. The Commission
also preliminarily believes that there are no costs associated with
proposed Rule 600(b)(51) because it is a definition that is widely used
by market participants.
b. Definitions of ``Orders Providing Liquidity'' and ``Orders Removing
Liquidity'' in Proposed Rule 600(b)(55) and (56)
    Proposed Rule 600(b)(55) defines ``orders providing liquidity'' to
mean orders that were executed against after resting at a trading
center. Proposed Rule 600(b)(56) defines ``orders removing liquidity''
to mean orders that were executed against resting trading interest at a
trading center. The Commission preliminarily believes that proposed
Rules 600(b)(55) and (56) would ensure consistent and correct
interpretation and application of proposed Rule 606(b)(3) for
institutional orders. The Commission also preliminarily believes that
there are no costs associated with proposed Rules 600(b)(55) and (56)
because the Commission understands that the two definitions are widely
used by market participants.
c. Request for Comment
    The Commission requests comment on the Commission's analysis of the
proposed definitions. In particular, the Commission solicits comment on
the following:
    171. Do commenters agree with the definitions? If not, please
provide alternative definitions and describe the benefits and costs of
those alternatives as compared to the proposed definitions. Please be
specific.
    172. Do commenters agree with benefits and costs of the proposed
definitions as described by the Commission? Please be specific.
    173. Do commenters believe that the proposed definitions are widely
used and accepted by market participants? Please be specific.

D. Alternatives Considered

1. Definition of Institutional Order in Proposed Rule 606(b)(31)
    The Commission considered one alternative to the proposed
definition of institutional order in Rule 600(b)(31) that would specify
different thresholds for NMS stocks based on trading volume. This
alternative would more finely tailor the definition for different types
of NMS stocks, as described in Section V.C.1.a.ii. However, this
alternative approach would add complexity to the proposed definition,
and analysis of data on orders from institutions does not indicate any
natural breakpoints.\446\ The absence of natural breakpoints makes it
more difficult to draw definitive conclusions about what thresholds, if
any, would be appropriate in a definition.
---------------------------------------------------------------------------

    \446\ See Section V.C.1.a.ii. for a discussion of Commission
staff analysis of a set of orders from institutional customers.
---------------------------------------------------------------------------

    In addition to the concern that the threshold of a market value of
at least $200,000 may not capture large (measured by shares) orders in
illiquid NMS stocks, Section V.C.1.a.ii. also discusses the incentives
that market participants may have to change their behavior as stock
prices may change over time, which may affect the proportion of orders
that fall under the proposed definition of institutional order.
    The Commission considered another alternative to the definition in
proposed Rule 600(b)(31) that would address both concerns. The
alternative would be to have customers identify their orders as
institutional orders subject to Rule 606. This alternative approach
would address the issue of having the same thresholds for all NMS
stocks, independent of the trading volume of the stocks. Since this
approach would require each customer to identify institutional orders,
there would be a risk that customers may apply different criteria in
identifying institutional orders. To the extent broker-dealers receive
institutional orders that take different approaches, the usefulness of
the reports for the purpose of comparing broker-dealers would be lower
than with a consistently applied definition. However, the Commission
notes that the alternative of allowing institutions to identify their
orders as institutional orders would not reduce the usefulness of the
information if the public reports contained specified thresholds as in
the proposal. This alternative may not be significantly more costly for
broker-dealers to implement than the proposal. After identifying the
orders to be included in the calculations, all calculations would be
the same for the alternative as for the proposal. On the other hand, if
the alternative requires a specified threshold for disclosure on public
reports, the public reports would require separate processing because
they would involve calculations on different underlying orders. In this
case, the alternative would be more costly than the proposal.
2. Limited or No Public Disclosure of Institutional Order Routing and
Execution Quality (Proposed Rule 606(c))
    The Commission considered requiring broker-dealers to make publicly
available only a subset of the information on institutional order
handling required by proposed Rule 606(c). For instance, order routing
and execution could be disclosed, but not

information on orders providing liquidity or orders removing liquidity.
Although this alternative would enhance the quality of the disclosure
provided by broker-dealers relative to the disclosure under current
Rule 606, which does not apply to institutional orders, it would shed
less light on how order routing affects execution quality and, thus,
provide less information on the potential for conflicts of interest
relative to proposed Rule 606(c). As such, the benefits that would be
achieved by this alternative are smaller relative to the benefits
proposed Rule 606(c) would offer. Additionally, the Commission
preliminarily believes that the costs to broker-dealers of this
alternative would only be marginally less expensive in than proposed
Rule 606(c), because a process would still be required to create the
report.
    The Commission also considered not requiring broker-dealers to make
publicly available any of the information required by proposed Rule
606(c) (but still proposing to require disclosure pursuant to the
amendments to Rule 606(b)(3) regarding customer requests for
institutional order handling information). As for limited public
disclosure just discussed, this alternative would improve the quality
of the disclosure provided by broker-dealers relative to the disclosure
under current Rule 606, but it would shed even less light on how order
routing affects execution quality and thus provide even less
information on the potential for conflicts of interest relative to
proposed Rule 606(c). As such, the benefits that would be achieved by
this alternative would not only be smaller relative to the benefits
proposed Rule 606(c) would offer, but also smaller relative to the
benefits of the alternative of limited public disclosure. The
alternative of no public disclosure would result in cost savings
compared to proposed Rule 606(c) because the process to create the
public report would not be required under this alternative.
3. More Frequent Public Disclosure of Institutional Order Routing and
Execution Information (Proposed Rule 606(c))
    The Commission considered requiring broker-dealers to make the
aggregated public disclosure of their institutional order routing and
execution information available on a more frequent basis than in
proposed Rule 606(c) (i.e., monthly rather than quarterly). This
alternative would increase the frequency of order routing and execution
disclosure, but at an additional cost to broker-dealers relative to
proposed Rule 606(c). Specifically, additional costs would accrue from
creating and disseminating the reports more frequently than quarterly.
Monthly public reports as compared to quarterly public reports would
result in having to run the production process to create and
disseminate the reports twelve rather than four times per year.
    The Commission preliminarily estimates that each broker-dealer that
routes institutional orders will incur an average burden of 10 hours
resulting in a cost of $1,600 \447\ to prepare and disseminate a
quarterly report required by proposed Rule 606(c).\448\ The Commission
preliminarily believes that the costs for a monthly report would be
similar to the costs of a quarterly report. Hence, the Commission
preliminarily estimates that each broker-dealer that routes
institutional orders would incur an average burden of 120 hours
resulting in a cost of $19,200 per year to prepare and disseminate
monthly reports. This compares to a burden of 40 hours resulting in a
cost of $6,400 per year for quarterly reports as required by proposed
Rule 606(c), that is, the costs for each broker-dealer that routes
institutional orders would be three times higher. The Commission
preliminarily estimates the costs to produce a report would remain the
same each month, as the cost of the report is more related to the act
of producing the report, as opposed to how much data the report
contains (one month vs. three months). The difference in costs for each
broker-dealer to provide monthly reports as compared to quarterly
reports as required by proposed Rule 606(c) is preliminarily estimated
to be $12,800 per year.\449\ With an estimated 200 broker-dealers that
route institutional orders, the total additional burden per year to
comply with a monthly reporting requirement as compared to a quarterly
reporting requirement as in proposed Rule 606(c) is preliminarily
estimated to be 16,000 hours resulting in a cost of $2,560,000.\450\
---------------------------------------------------------------------------

    \447\ See supra note 266.
    \448\ See supra Section IV.D.2.d.
    \449\ $19,200 annually per broker-dealer for monthly reports--
$6,400 annually per broker-dealer for quarterly reports = $12,800
annually per broker-dealer.
    \450\ 80 hours more annually per broker-dealer that routes
institutional orders x 200 broker-dealers that route institutional
orders = 16,000 hours. The Commission preliminarily estimates the
total monetized burden for this requirement to be $2,560,000
($12,800 more annually per broker-dealer that routes institutional
orders x 200 broker-dealers that route institutional orders =
$2,560,000).
---------------------------------------------------------------------------

    More frequent reports compared to the proposed quarterly frequency,
although broken down by month, would have the benefit of providing the
public with information that is more timely. However, the Commission
preliminarily believes that the value of having monthly rather than
quarterly reports is small because the Commission understands that
analysis of order handling data generally is based on data comprising
more than one month. While this may be, at least partially, due to the
fact that current Rule 606 requires quarterly reports, staff experience
suggests that the analysis of order handling data would be based on
more than one month of data even if data were available at a higher
frequency. This is because order handling data are inherently noisy and
a large sample size is necessary to ensure a robust analysis. To that
extent, from staff experience, the Commission understands that data
spanning several months or even years are used in the analysis of order
handling data. The Commission notes that using data spanning several
months or even years does not preclude analyzing the data for trends,
especially recent trends.\451\
---------------------------------------------------------------------------

    \451\ One way to analyze the data for trends would be to look at
subsamples within the full sample. For example, one could consider
quarters within a full calendar year of data. Another way would be
to employ a rolling window. For example, one could use a twelve-
month rolling window, that is, the analysis would use data
comprising twelve months of data and then replace the oldest data
with more recent data one month at a time.
---------------------------------------------------------------------------

    In addition, more frequent disclosure could allow sensitive trading
information to be disclosed. For example, as discussed earlier, if a
customer placing large institutional orders primarily engages one
broker-dealer and that broker-dealer has few, if any, other customers
placing significantly sized institutional orders, then other market
participants may be able to decipher the customer's trading interest,
particularly if the customer is building up or selling off a large
position over a longer period of time. The risk of such disclosure of
sensitive trading information is greater for monthly reporting
frequency compared to the proposed quarterly frequency because, by
construction, quarterly reporting provides the data for the first two
months in the quarter with a delay compared to if the data for those
two months were to be released monthly. As a result, it is less likely
that data for those two months contain information about a customer's
current and ongoing trading interests.
4. Automatic Provision of Customer-Specific Institutional Order
Handling Report (Proposed Rule 606(b)(3))
    The Commission considered an alternative to proposed Rule 606(b)(3)

that would not require that customers request customer-specific
standardized reports on institutional order handling, but would instead
require broker-dealers to provide them to customers automatically,
either by sending the reports out or by providing a portal where
customers can view or download the reports. The alternative could
reduce the cost to customers, compared to both the baseline and the
proposal, of acquiring the institutional order handling reports,
because customers would not need to request the reports. At the same
time, it is difficult to determine whether there is any additional
benefit to customers compared to the proposal. It is possible that not
all customers would use the reports provided to them, and under the
proposal, those customers that see enough value in the reports would
incur the cost of requesting them.
    With respect to the costs to broker-dealers, the alternative would
impose additional initial costs compared to the baseline, as the
broker-dealers would be required to automatically provide reports to
all customers, not just those that request reports, and would have to
build infrastructure to generate these reports. The Commission
preliminarily believes, however, that the alternative would involve
slight modifications to the systems that produce the institutional
order handling reports and thus preliminarily believes that these
initial costs likely would be minimal.
    The effect of this alternative on the costs to broker-dealers,
compared to the proposal, is unclear. On the one hand, the Commission
preliminarily believes the alternative could impose additional, albeit
minimal, initial costs associated with developing systems to
automatically generate the reports compared to the proposal as well as
to the baseline, as described above. On the other hand, the Commission
preliminarily believes the alternative could avoid the initial costs
associated with the proposed rule for those broker-dealers who do not
currently have systems in place to receive and respond to requests
because they would not have to develop and deploy such systems under
this alternative, as they would under the proposal. Any related initial
or ongoing cost savings compared to the proposal may be minimal, as, in
either case, such broker-dealers would need to develop systems to
generate customer-specific reports and broker-dealers could add the
customer requests to a list for individual report generation under the
proposal just as they add customers to a list for automated reports
under the alternative. The alternative may reduce ongoing personnel
costs compared to the proposal because under the proposal, broker-
dealers would have to answer emails, phone calls, or other forms of
requests for ad-hoc reports. However, the brokerage industry is a
relationship business and the Commission understands that broker-
dealers communicate frequently with their customers, especially their
larger customers. Further, the alternative may also result in
additional ongoing personnel costs compared to the proposal if
customers who would not have requested reports contact the broker-
dealers to discuss reports they would receive automatically under the
alternative. In addition, the Commission notes that, even under the
proposal, broker-dealers could choose to provide reports automatically
to their customers if this is more cost effective for them.
5. Submission of Institutional Order Handling Reports (Proposed Rules
606(b)(3) and 606(c))
    The Commission considered an alternative to proposed Rules
606(b)(3) and 606(c) that would require the customer-specific
institutional order handling reports and the public aggregated
institutional order handling reports to be submitted to the Commission.
While Commission staff may be able to replicate much of the information
in the reports were the proposed Consolidated Audit Trail to be
approved,\452\ the reports would contain some information not included
as data in the Consolidated Audit Trail (``CAT Data''), such as
information on the use of aggressive and passive order routing
strategies. In addition, the institutional order handling reports would
be already assembled, making access to the reports more efficient than
assembling the analogous information from CAT Data. With direct access
to the reports under this alternative, Commission staff could
potentially use the reports, for example, to investigate best execution
concerns, assist in risk-based examination decisions, and/or conduct
market analyses on order handling to promote data-driven rulemaking.
These activities could, in turn, benefit investors and the market in
the form of enhanced investor protection and better informed
rulemaking. The alternative would also establish a central location for
all reports and could reduce the burden for Commission staff to seek
out and obtain the reports. Notably, under the proposal, the Commission
could acquire the public aggregated institutional order handling
reports as described in Rule 606(c), though not the customer-specific
institutional order handling reports as described in Rule 606(b)(3),
from broker-dealer Web sites. The proposal thus does not preclude the
Commission from obtaining the public aggregated institutional order
handling reports to achieve some of the benefits of this alternative.
---------------------------------------------------------------------------

    \452\ See Securities Exchange Act Release No. 77724 (April 27,
2016), 81 FR 30614 (May 17, 2016) (File No. 4-698) (Joint Industry
Plan; Notice of Filing of the National Market System Plan Governing
the Consolidated Audit Trail), available at https://www.sec.gov/rules/sro/nms/2016/34-77724.pdf.
---------------------------------------------------------------------------

    While providing some benefits, this alternative would also impose
additional costs to broker-dealers to submit their reports to the
Commission. For example, under this alternative, broker-dealers would
incur additional costs to transmit the reports directly to the
Commission including any initial costs of setting up the connection to
the Commission's repository, though the Commission preliminarily
believes that these costs will not be significant. Further, the
Commission preliminarily believes that acquiring the reports from each
broker-dealer may impose burdens on Commission resources,\453\ though
the magnitude of those burdens is unknown. Receiving customer-specific
institutional order handling reports, which include sensitive
information, e.g., PII or sensitive proprietary information, could
impose further costs to the Commission as the Commission would need to
take steps to safeguard this information, though the Commission may be
able to leverage its experience dealing with the receipt of sensitive
information in other contexts to minimize those costs.
---------------------------------------------------------------------------

    \453\ The Commission recognizes that third party vendors could
collect and sell the broker-dealer reports at a price that could
reduce the burdens on Commission resources compared to the burdens
of Commission staff directly collecting the reports from broker-
dealers.
---------------------------------------------------------------------------

6. Disaggregate Categories of NMS Stocks for Rule 606(a)
    The Commission considered an alternative to current Rule 606(a)
that would not require reports for retail orders be aggregated across
all NMS stocks, but rather would require that those reports be divided
into categories, e.g., into Exchange-Traded Products (``ETPs'') and all
other NMS stocks, or into groups of stocks with different trading
volume. The Commission considered this alternative in addition to or
instead of the requirement of current Rule 606(a) to divide the reports
by listing markets. This would increase the costs of producing the
reports relative to the proposal, but it also would provide more
information.
    For example, one such alternative could require that broker-dealers

separately report the routing of ETPs and the routing of non-ETP NMS
stocks. The costs of producing the reports under this alternative would
be higher than the costs of the proposal because such an alternative
would require broker-dealers to classify NMS stocks into categories,
e.g., into ETPs and non-ETP stocks. There would be an initial cost for
the classification of all stocks and an ongoing cost to maintain the
classification.
    Because some ETPs trade differently than non-ETP NMS stocks,
broker-dealers may route them differently. To the extent that broker-
dealers vary their order routing decisions for ETP and non-ETP stocks,
broker-dealer customers may benefit from the more targeted information
that would be provided for each type of stock under this alternative
compared to the proposed amendments to Rule 606(a). Specifically, the
additional information concerning each type of stock contained in the
divided reports would allow customers, broker-dealers, trading centers,
and the public more generally to better evaluate and compare the order
routing of retail orders for each type stock, whereas under the
proposed rule information on order routing is provided for both ETPs
and non-ETPs in the aggregate. While the consumers of such reports
would benefit from the reports being more informative with respect to
the order routing for each type of stock, broker-dealers would incur
higher costs in processing the additional information provided by the
reports. To use the additional information, customers, broker-dealers,
trading centers, and the public more generally would have to process
the additional information and incorporate it in their analyses and
models when evaluating and comparing the order routing of retail
orders, which could result in higher costs compared to the proposed
amended Rule 606(a).
7. Disclosure of Additional Information About Institutional Order
Routing and Execution
    The Commission considered requiring additional information to be
disclosed to customers and the public relating to institutional order
routing and execution quality. The Commission considered requiring
additional measures to be included in proposed Rule 606(b)(3) and
proposed Rule 606(c) reports for institutional orders. For example, the
Commission considered requiring that proposed Rule 606(b)(3) and
proposed Rule 606(c) reports contain time to execution, or
implementation shortfall, which are dimensions of execution quality. In
addition, the Commission considered making the reports more detailed by
requiring segmentation of the data along additional dimensions, not
only on order routing strategy.
    In general, transaction costs of institutional orders depend on,
among other factors, stock characteristics, order characteristics, and
market conditions at the time of order arrival and during order
execution. The reports could be segmented by any of these factors.
Examples of stock characteristics are liquidity or volatility of a
stock.\454\ Examples of order characteristics are order size, usually
measured as relative order size in relation to average daily
volume,\455\ or whether an order is generated by a momentum strategy,
where an customer buys a stock while the stock is increasing in price
and sells a stock while the stock is falling in price. Examples of
market conditions are the current liquidity in a stock, e.g., measured
by the most recent volume or bid-ask spread compared to historical
values and the current volatility in a stock, e.g., compared to
historical values. Requiring any of this additional information in
proposed Rule 606(b)(3) and proposed Rule 606(c) reports would increase
the costs of producing the reports as well as the costs of using the
reports relative to proposed Rules 606(b)(3) and 606(c), but it would
also increase the information content and the usefulness of the reports
relative to proposed Rules 606(b)(3) and 606(c).\456\
---------------------------------------------------------------------------

    \454\ See, e.g., Zhuo Zhong, The Risk Sharing Benefit versus the
Collateral Cost: The Formation of the Inter-Dealer Network in Over-
the-Counter Trading, Working Paper (2014). Zhong argues that broker-
dealers at the center of a dealer network are better able to work
off the inventory risk earned from executing orders containing
volatile stocks, which in turn will determine which broker-dealers
receive orders in volatile stocks. Id.
    \455\ Zhong suggests that broker-dealers at the center of the
dealer network are better able to work off the inventory earned from
executing large orders, which in turn will determine which broker-
dealers receive large orders. See id.
    \456\ The costs of this alternative would be higher than the
proposed amendments because it would require that broker-dealers
compute additional data items. For purposes of the PRA, the
Commission estimated the costs associated with the rule as proposed.
See supra Sections IV.D.1. and 2. The Commission does not currently
have information on how extensive the programming would be for
broker-dealers to adapt their systems to combine data that they may
not yet combine to calculate these statistics.
---------------------------------------------------------------------------

    For some data items, the computation costs would be larger than for
others. For example, computing the implementation shortfall for an
order is more involved than computing the time to execution and thus
would result in larger computational costs. Further, unlike the
proposed amendments, implementation shortfall and time to execution
could involve running calculations on data received on other systems
and from others who handle orders later in their lifecycle. This may
make these fields more computationally costly than those proposed.
However, with the addition of other relevant information, the reports
under this alternative might be more useful than the proposed reports.
    In addition, determining categories by metrics such as trading
volume or volatility would add complex definitions to the reports and
the Commission is not aware of any natural breakpoints that would
simplify the identification of appropriate thresholds to classify
stocks into groups of varying trading volume or volatility. Setting
thresholds at levels that do not meaningfully distinguish routing
activity or execution quality would be more costly than the proposed
amendments without providing greater benefits.
    The Commission could later evaluate data that would be disclosed
pursuant to proposed Rules 606(b)(3) and 606(c), if adopted, to inform
any decision as to whether additional data items or other changes might
be appropriate.
8. Institutional Order Handling Reports at the Stock Level (Proposed
Rule 606(b)(3))
    The Commission also considered requiring the institutional order
handling information required by proposed Rule 606(b)(3) to be reported
at the individual stock level rather than aggregated across stocks.
This alternative would enhance transparency to customers relative to
proposed Rule 606(b)(3) because the reports would be more detailed.
Specifically, order handling information calculated at the stock level
may be more informative than aggregated data because trading centers
may not charge the same maker-taker fee for all stocks. It is possible
for a given trading center to use inverted and non-inverted fees for
different stocks at the same time. If this is the case, the reports as
proposed by Rule 606(b)(3) could potentially mask conflicts of interest
because routing decisions may be different for different stocks on the
same trading center due to differing maker-taker fees across the
stocks, particularly if some stocks have inverted and other stocks have
non-inverted fees on the same trading center.
    Because the reports would be more detailed, however, this
alternative would increase the costs of producing the reports as well
as the costs of using the reports relative to proposed Rule 606(b)(3).
The Commission preliminarily believes that any potential

increase in costs of producing the reports would be negligible because
broker-dealers already process the data order-by-order and to aggregate
orders by stock and venue, rather than only by venue, should not
increase significantly programming costs and processing time. While the
Commission preliminarily believes that the production of these
voluminous reports itself may not result in significantly higher costs
than for the proposed reports, the size of the reports may result in
higher costs to deliver the reports to customers. For example, the
report could be hundreds of pages in hard copy, which would result in
costs to print and deliver the report; likewise, a broker-dealer could
incur higher costs to send a report electronically, depending on the
size of the file that has to be sent to customers.\457\ Moreover, given
the thousands of securities in existence, requiring reporting metrics
be broken down at the stock level would produce voluminous reports that
would be difficult and costly to process for all but the most
sophisticated customers. For these reasons, the Commission is proposing
to have the reports broken down by venue and aggregated across stocks.
---------------------------------------------------------------------------

    \457\ For example, there typically are limitation to the size of
files that can be sent through email.
---------------------------------------------------------------------------

9. Alternative to Three-Year Posting Period (Proposed Amendments to
Rules 605(a)(2) and 606(a)(1), and Proposed Rule 606(c))
    The Commission considered requiring broker-dealers and market
centers to make both institutional and retail reports available for a
minimum length of time less than three years or more than three years.
If public reports are available for less than three years, then
historical data may not be as readily available to customers and the
public who are seeking to analyze past routing behavior of broker-
dealers or past execution quality of market centers as it would be
under the proposal of a three-year posting period. Customers and the
public would either have to download the data more often or have to
rely on third-party vendors who download and aggregate the data. For
example, if a broker-dealer or market center posted the reports for
only one quarter, customers and the public would have to download the
data every quarter if they wanted access to data that is older than
three months. Third-party vendors also would have to download the data
with sufficient frequency to capture historical data without gaps. This
would have the effect of reducing the transparency of broker-dealer
routing decisions for customers placing both retail and institutional
orders and of the execution quality of market centers compared to the
proposal of a three-year posting period. The benefit of a shorter
minimum length of time would be that any costs broker-dealers incurred
associated with posting reports would be less than under the proposal
of a three-year posting period. However, as discussed above, the
Commission preliminarily believes these incremental costs to be small
and that the cost savings associated with a shorter minimum length of
time would not justify the costs of historical data potentially being
less readily available to customers and the public.
    If public reports are available for more than three years, the
historical data would be even more readily available to customers and
the public who are seeking to analyze past routing behavior of broker-
dealers or past execution quality of market centers as it would be
under the proposal of a three-year posting period. Customers and the
public would have to download the data less frequently to have access
to historical data that is older than the minimum length of time
required. However, the Commission preliminarily believes that the
additional benefit of a minimum length of time of more than three years
would be small because three years is a meaningful time period
considering the rapid changes in financial markets and customers and
the public would only need to download data every three years to be
able to access historical data older than three years. The Commission
understands that maintaining public reports for more than three years
may represent a burden and result in an additional cost to broker-
dealers. However, as discussed above, the Commission preliminarily
believes the additional cost to be small. Nevertheless, the Commission
preliminarily believes that a minimum length of time of three years is
appropriate.
10. Request for Comment
    The Commission requests comment on the Commission's analysis of
potential alternatives as described above and the costs and benefits
associated with such alternatives. In particular, the Commission
solicits comment on the following:
    174. Do commenters believe that the alternatives that the
Commission considered are appropriate? Do commenters believe that the
analysis of the associated costs and benefits of the alternatives is
accurate? If not, please provide alternative costs and benefits,
including any data or statistics that supports those costs and
benefits.
    175. Are there other alternatives that the Commission should
consider? If so, please provide additional alternatives and how their
costs and benefits would compare to the proposal.
    176. Do commenters believe the reports for retail orders should
contain information required by proposed Rule 606(b)(3) for
institutional orders that is not currently required by Rules 606(a)(1)
and 606(b)(1) for retail orders? Why or why not? If yes, what
additional information should be required? Please be specific in your
response.
    177. Do commenters believe the Commission should require that the
reports for institutional orders required by proposed Rule 606(b)(3)
include information about payment for order flow and payment from
profit-sharing relationships as would be required by proposed Rule
606(a)(1)(iii) for retail orders? Why or why not? Similarly, do
commenters believe the Commission should require that the reports for
institutional orders required by proposed Rule 606(b)(3) include a
discussion of the material aspects of the broker-dealer's relationship
with each venue as would be required by amended Rule 606(a)(1)(iv) for
retail orders? Why or why not? Please be specific in your response.
    178. Do commenters have information on the costs and benefits of
any of these alternatives? If so, please provide any data or statistics
to support the estimates.

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

    Section 23(a)(2) of the Exchange Act requires the Commission, when
making rules under the Exchange Act, to consider the anti-competitive
effects of any rules it adopts.\458\ Specifically, Exchange Act Section
23(a)(2) prohibits the Commission from adopting any rule that would
impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act.\459\ Furthermore,
Section 3(f) of the Exchange Act requires the Commission, whenever it
engages in rulemaking where it is required to consider or determine
whether an action is necessary or appropriate in the public interest,
to consider, in addition to the protection of investors, whether the
action will promote efficiency, competition, and capital
formation.\460\ We consider these effects below.
---------------------------------------------------------------------------

    \458\ 15 U.S.C. 78c(f).
    \459\ Id.
    \460\ 15 U.S.C. 78w(a)(2).

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1. Effects of Proposed Amendments on Efficiency and Competition
a. Proposed Amendments to Disclosures for Retail Orders
    As a result of the proposed amendments to Rule 606(a)(1), broker-
dealers that route retail orders would be required to make public
enhanced aggregated reports detailing retail order routing practices
and information regarding marketable and non-marketable limit orders in
addition to information on payment for order flow arrangements, payment
from any profit-sharing relationship received, and transaction fees
paid and rebates received per share and in aggregate for such orders.
In addition, the proposed amendments would require those reports to be
made available using an XML schema and associated PDF renderer on the
Commission's Web site and to be maintained on an Internet Web site that
is free and readily accessible to the public for a period of three
years.\461\ As explained in detail below, the Commission preliminarily
believes that these enhanced disclosures, which require broker-dealers
to describe any terms of payment for order flow arrangements and
profit-sharing relationships with Specified Venues that may influence
their order routing decisions for retail orders, should promote
competition and enhance efficiency.
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    \461\ Consistent with the proposed amendments to Rule 606, the
Commission is proposing to amend Rule 605(a)(2) to require market
centers to keep public execution reports required by the rule posted
on an Internet Web site that is free of charge and readily
accessible to the public for a period of three years from the
initial date of posting. The Commission preliminarily believes that
making past order execution information available to customers and
the public generally will be useful to those seeking to analyze
historical order execution information from different market
centers. The proposed requirement to keep public execution reports
required by Rule 605 for a period of three years is expected to make
it easier, and thus more efficient, for the public to collect
historical data for analysis. The Commission preliminarily believes
the proposed requirement could enhance efficiency in the data
collection process of those seeking to retrieve and analyze
historical order execution information from different market
centers.
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    First, per the discussion above, the additional information
required by the amendments relative to the information required by
current Rule 606(a)(1) would allow customers to better assess the order
routing and execution quality provided by their broker-dealers,\462\
which, in turn, would enable the customers to more efficiently evaluate
and select broker-dealers.\463\ The proposed amendments to Rule 606(a)
would require broker-dealers, for retail orders, to differentiate
between marketable and non-marketable limit orders and to publicly
report the net aggregate amount of any payment for order flow, payment
from any profit-sharing relationship received, the transaction fees
paid, and transaction rebates received, both as a total dollar amount
and on a per share basis, for each of the following order types: market
orders, marketable limit order, non-marketable limit orders, and other
orders. As discussed in Sections V.C.2.a. and V.C.2.b., the Commission
preliminarily believes that this would allow customers and the public
to better understand the potential conflicts of interest broker-dealers
may face when routing retail orders and to assess if and how well
broker-dealers manage these potential conflicts of interest. This would
enable customers to make a more informed decision as to which broker-
dealers to use for retail orders. The Commission preliminarily believes
that this would enhance the competition for retail order flow between
broker-dealers, which might result in better execution quality for
customers. In addition, if broker-dealers change their routing behavior
in response to the public reports required by proposed Rule 606(a)(1),
the Commission preliminarily believes that competition between trading
centers might be enhanced as trading centers could better compete for
retail order flow, which might result in better execution quality for
retail orders and innovation by existing or new trading centers. As
discussed in Section V.C.1.c.i, one way a trading center can attract
order flow is through innovation thereby differentiating itself from
other trading centers.
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    \462\ See supra Section V.C.2.
    \463\ The proposed amendments to Rule 606(a)(1) which would no
longer require reports be divided into separate sections for stocks
listed on different exchanges may be an exception to this. As
discussed below, to the extent that order routing decisions may
differ for stocks that are listed on different exchanges, the
reports that aggregate the data as required by the proposed
amendments to Rule 606(a)(1) may provide less information to retail
customers and the public and therefore may reduce the efficiency
with which customers and the public are able to evaluate and select
broker-dealers based on the order routing and execution quality they
provide.
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    Further, to the extent that the proposed amendments to Rule 606(a)
lead to better execution quality provided by broker-dealers and trading
centers, the Commission preliminarily believes that the proposed
amendments would lead to lower transaction costs for customers. Because
transaction costs can be viewed as a measure for efficiency in the
trading process, lower transaction costs would indicate enhanced
efficiency in the trading process. In addition, to the extent that the
proposed amendments to Rule 606(a) make the trading process more
efficient by lowering trading costs, the Commission preliminarily
believes the proposed amendments would reduce market friction and
therefore have a positive effect on the efficiency of prices.
    As discussed above, however, the proposed amendments to Rule
606(a)(1) could result in costs that may have an effect on efficiency
and competition. For example, the proposed amendments would impose
certain costs on broker-dealers who currently route retail orders, as
well as on broker-dealers who would like to start routing retail orders
and will also have to comply with the proposed amendments to Rule
606(a)(1). To the extent that the costs for a broker-dealer entering
the market for retail orders are higher under the proposed amended Rule
606(a)(1) than under the current Rule 606(a)(1), these higher costs
could lead to a higher barrier to entry and thereby reduce competition.
However, the Commission preliminarily believes that any difference in
costs under the proposed amended Rule 606(a)(1) and the current Rule
606(a)(1) to be relatively small as to not alone deter broker-dealers
from entering the market for retail brokerage.
    Under the proposed amendments to Rule 606, the broker-dealer may be
concerned about the perception of acting on a conflict of interest. As
a result, a broker-dealer may be incentivized to route fewer non-
marketable limit orders to the trading center offering the highest
rebate, even if this affects execution quality, in an effort to ensure
that a customer does not misconstrue the intent behind the broker-
dealer's routing decisions. Such a potential outcome could reduce to
some degree the intensity of competition between broker-dealers on the
dimension of execution quality. However, the Commission preliminarily
believes that such a scenario is not likely as customers are likely to
review the 606 reports in conjunction with execution quality statistics
currently required pursuant to Rule 605 and can discuss with their
broker-dealers the order routing and execution quality the broker-
dealer provides.
b. Proposed Rules for Disclosures for Institutional Orders
    For institutional orders, proposed Rules 606(b)(3) and (c) would
require broker-dealers that route institutional orders to provide
detailed reports to customers who submit such orders upon the request
of the customer, and to make public on a quarterly basis broken down by
calendar month, a report that

aggregates the information. In addition, these proposed rules would
require reports on institutional orders to be made available using an
XML schema and associated PDF renderer to be published on the
Commission's Web site and to be maintained for a period of three years.
As discussed below, the Commission preliminarily believes that these
disclosures of order routing decisions by broker-dealers for
institutional orders could promote competition and enhance efficiency.
    First, the disclosures required by the proposal, both on an
individualized and aggregated basis, would inform customers as to the
institutional order routing practices of and the execution quality
provided by a particular broker-dealer, as described in further detail
above. As a result, customers would be able to use that information to
compare the institutional order routing and execution quality of their
broker-dealers based on the institutional orders submitted to those
broker-dealers as reported in the customer-specific reports required by
proposed Rule 606(b)(3). In addition, a customer placing institutional
orders would be able to compare the order routing practices and
execution quality of each broker-dealer based on the public aggregated
institutional order handling reports required under proposed Rule
606(c), independent of whether the customer submits orders to a
specific broker-dealer. Further, a customer would be able to compare
the order routing and execution quality of its institutional orders
submitted to a specific broker-dealer as reflected in the customer-
specific reports required by proposed Rule 606(b)(3) to the order
routing and execution quality of all orders that the broker-dealer
handled contained in the public aggregated institutional order handling
reports required by proposed Rule 606(c).
    These enhanced disclosures would better enable customers to analyze
institutional order routing and execution quality provided by broker-
dealers, which would allow customers to more efficiently monitor,
evaluate, and select broker-dealers. In addition, customers and broker-
dealers would be able to evaluate execution quality of institutional
orders on different trading centers more efficiently.\464\ Customers
also would be better informed as to the institutional order routing and
execution quality they received from a particular broker-dealer. If a
customer feels it received poor order routing and execution quality
from a particular broker-dealer, the customer could initiate a dialogue
with the broker-dealer for an explanation, which may lead to better
order routing decisions and execution quality by the broker-dealer. The
customer may also decide to use different broker-dealers in order to
seek better order routing and execution quality. This could enhance
competition between broker-dealers.
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    \464\ See supra Section V.C.1.
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    Further, the Commission preliminarily believes that proposed Rules
606(b)(3) and (c) might enhance competition between trading centers.
First, if broker-dealers change their routing decisions in response to
the reports required by proposed Rules 606(b)(3) and (c), trading
centers would have an additional incentive to compete for institutional
order flow. Second, the reports required by proposed Rules 606(b)(3)
and (c) are structured by trading center, so that the execution quality
at each trading center would be clearly visible. This may lead broker-
dealers to change their routing behavior, but also, more directly,
trading centers could compare the execution quality of all trading
centers, which may again lead to enhanced competition among trading
centers. The Commission preliminarily believes that the enhanced
competition between trading centers could lead to innovation by
existing and new trading centers, resulting in better execution quality
for customers placing institutional orders. As discussed in Section
V.D.1.a if a trading center were to lose order flow to other trading
centers due to lower execution quality it would have the incentive to
innovate to improve its execution quality.
    To the extent that proposed Rules 606(b)(3) and (c) lead to better
execution quality being provided by broker-dealers and trading centers,
the Commission preliminarily believes that the proposed amendments
might lead to lower transaction costs for institutional orders. As
discussed above, lower transaction costs indicate enhanced efficiency
in the trading process and the Commission preliminarily believes as a
result, the proposed rules would reduce market friction and therefore
have a positive effect on the efficiency of prices.
    In addition, the Commission preliminarily believes that the
requirement of standardized customer-specific and standardized public
aggregated institutional order handling reports in proposed Rules
606(b)(3) and (c) would enhance efficiency for customers and the public
in processing the information contained in the reports, as compared to
the ad-hoc reports customers may currently receive from their broker-
dealers.\465\ Because the data will be presented in a standardized
format, customers and the public would be able to more efficiently
aggregate, compare, and analyze the data, as opposed to reconciling
dissimilar formats, which may not always be possible, before trying to
aggregate, compare, and analyze the data.
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    \465\ See supra Section V.B.1. for a discussion of the ad-hoc
reports and supra Section V.C.4. for a discussion of the
standardization and format for the reports required by proposed
Rules 606(b)(3) and (c).
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    In addition, as discussed above, the Commission understands that
many broker-dealers that handle institutional orders currently
voluntarily provide reports to institutional customers upon request.
However, the Commission understands that how willing a broker-dealer is
to provide such reports and how detailed the reports are might depend
on the size of an institutional customer. To that extent, larger
institutional customers have an advantage over smaller institutional
customers. Proposed Rules 606(b)(3) and (c) would provide access to
reports on institutional order handling to all institutional customers,
regardless of their size.
    The Commission notes that, even without the proposed rule
amendments, institutional customers can still request customized
reports from their broker-dealers and broker-dealers would have an
incentive to provide such reports in order to attract institutional
order flow. As is currently the case, broker-dealers might be more
willing to provide such customized reports to larger institutional
customers and the customized reports might provide more detailed
information for larger institutional customers. While the Commission
preliminarily believes that proposed Rules 606(b)(3) and (c) mitigate
the advantage of larger institutional customers in that respect, the
Commission preliminarily believes that larger institutional customers
are likely to continue to have an advantage over smaller institutional
customers to the extent that they are able to obtain customized reports
more easily and that those customized reports contain information not
contained in the reports required by proposed Rules 606(b)(3) and (c).
The Commission preliminarily believes that by reducing the
informational advantage of larger institutional customers over smaller
institutional customers, proposed Rules 606(b)(3) and (c) would improve
fairness between institutional customers. Smaller institutional
customers would be able to evaluate and

select their broker-dealers with efficiency more similar to larger
institutional customers, thereby increasing the efficiency of their
investment process. The Commission preliminarily believes that this