Enhanced Disclosures Proposed for Order Execution Information

The U.S. Securities and Exchange Commission (SEC) proposed amendments to update the disclosures required under Rule 605 of Regulation NMS for order executions in exchange-listed stocks on December 14, 2022. The proposed amendments would expand the scope of entities subject to Rule 605, modify the information required to be reported under the rule, and change how orders are categorized for the purposes of the rule.  

Specifically, the proposal expands the scope of the following: 

• The entities required to produce monthly execution quality reports to include broker-dealers with a large number of customers 
• The definition of a “covered order” to include certain orders submitted outside of regular trading hours and orders submitted with stop prices 
• The required statistical measures of execution quality (i.e., average effected over quoted spread) and a size improvement benchmark 

The public comment period for these proposed amendments will remain open until March 31, 2023, or until 60 days after the date of publication of the proposing release in the Federal Register, whichever is later. 

Why has the SEC proposed these changes? 

The SEC indicated that it wished to improve the usefulness of execution quality statistics, promote fair competition, and enhance transparency by providing investors with information they could use to compare the execution quality provided by customer-facing broker-dealers. 

What changes does the SEC propose regarding monthly execution quality reports? 

Currently, Rule 605 of Regulation NMS requires market centers, such as national securities exchanges, over-the-counter market makers, and alternative trading systems to produce publicly available execution quality reports each month. Under the current scheme, broker-dealers are exempt from producing these reports unless they act as a market center and, if reporting, are required only to identify the venues to which they route customer orders for execution. The proposal aims to expand the scope of entities required to produce execution quality reports to include larger broker-dealers that have a “customer-facing line of business.” The SEC has proposed setting a size threshold of at least 100,000 customers for the monthly report requirement.  

What changes does the SEC propose for expanding the “covered orders” category? 

The SEC proposal modifies the order size and order types considered to be “covered orders.” The proposal also includes changes to the information required for all order types, including marketable limit types and nonmarketable types. Under the proposal, several previously excluded orders and order types would be subject to the reporting requirements.  

What changes does the SEC propose for order size categories? 

Under the current scheme governing Rule 605 reports, the largest size category is limited to orders larger than 5,000 shares and smaller than 10,000 shares. The SEC’s proposal would divide orders into the following size categories: 

• Fewer than 1 share 
• Odd lot 
• 1 round lot to fewer than 5 round lots 
• 5 round lots to fewer than 20 round lots 
• 20 rounds lots to fewer than 50 round lots 
• 50 round lots to fewer than 100 round lots 
• 100 round lots or more 

The SEC has proposed using round lots rather than the number of shares because a stock’s share price can have a significant impact on execution quality statistics. The proposed change would bring categorization by order size closer to an objective size.  

What changes does the SEC propose for order-type categories? 

The SEC proposes to divide orders into the following categories: 

• Market orders 
• Marketable limit orders (excluding immediate-or-cancel orders) 
• Marketable immediate-or-cancel orders 
• Beyond-the-midpoint limit orders 
• Executable non-marketable limit orders (excluding beyond-the-midpoint limit orders and orders submitted with stop prices) 
• Executable orders submitted with stop prices 

What changes does the SEC propose for timestamp conventions? 

The SEC’s proposal would change these conventions to require timestamps used for the time of order receipt and time of order execution to be measured “in increments of a millisecond or finer.”  

What changes does the SEC propose for time-to-execution buckets? 

The SEC proposes to eliminate the current time-to-execution buckets. In the SEC’s opinion, the speed with which most orders are executed has rendered these buckets obsolete. Instead, the SEC proposes requiring average time to execution for all order types. Non-marketable order types would have their average time to execution measured from the point in time they become executable. 

What requirements does the SEC propose for summary execution reports? 

For summary execution reports, the SEC proposes to require all market centers and broker-dealers subject to Rule 605’s reporting obligations to produce summary execution quality statistics, in addition to the more detailed reports required by Rule 605(a)(1). 

Proposed Rule 605(a)(2) would require every market center, broker, or dealer to make publicly available for each calendar month a report providing summary statistics on all executions of covered orders that are market and marketable limit orders that it received for execution from any person. 

Summary reports would include a section for NMS stocks that are included in the S&P 500 Index as of the first day of the month and a section for other NMS stocks. 

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