Dec. 14, 2022
Thank you, Chair Gensler. Today, the Commission proposes to update the Rule 605 disclosure requirements for order executions in national market system stocks. Technology and market structure have evolved rapidly since the year 2000, when the Commission last addressed the substance of these disclosures. Speed is now of the essence. As the proposal notes, “[o]rders may be matched, routed, or cancelled in microseconds and market information is transmitted nearly instantaneously.” Markets are now characterized by multiple venues, various types of orders, and the mix has changed over time. Today’s proposal attempts to address these changes. Among other things, the proposal would require time-based metrics to be recorded at a more granular level, scope in more order types and sizes, and expand the scope of reporting entities.
Pertinent, timely, and reliable public information on the quality of order executions is fundamental to the trading venue competition that drives innovation and serves investors so well. This outcome occurs when competitive market forces are unleashed. In 2000, the Commission emphasized this point: “[b]y increasing the visibility of order execution and routing practices, the rules adopted today are intended to empower market forces with the means to achieve a more competitive and efficient national market system for public investors.” Today’s proposal continues that successful trajectory.
When first contemplated, it was thought that investors using a particular broker-dealer could employ Rule 606 reports to identify the market centers to which their broker-dealer routed trades, and then they could employ Rule 605 to see the execution quality that those market centers provided, thereby receiving a better understanding of execution quality. In operation, however, there have been challenges to fulfilling that vision. For example, the execution quality that particular market centers provide may differ with respect to different broker-dealers, yet because market center data is commingled in the reporting, the specific execution quality that a particular broker-dealer is receiving cannot be readily observed by that broker-dealer’s customers.
As the proposing release indicates, extending Rule 605 reporting obligations directly to larger broker-dealers “would increase transparency into the differences in execution quality achieved by broker-dealers when they route customer orders to execution venues, and thereby would make the execution quality statistics more useful to market participants and other interested parties.” This revision could enhance competition among venues as well as among broker-dealers that accept customer orders. This enhanced competition could result in “faster executions, better price improvement, and a shift in order flow to those broker-dealers offering the best execution quality for their customers.” If so, this rule proposal could be an example of a regulatory improvement that can increase competition among market intermediaries and thereby better serve investors.
However, this proposal is not being made in a vacuum. It is being proposed in conjunction with three other proposals that directly impact equity market structure. Analyzing its “expected economic effects” presents some challenges. What if this proposal is adopted at the same time as these three other rule proposals impacting the equity markets? In that context, the combined expected economic effects should be considered for all four new proposals as well as potential combinations and permutations among them. The costs and benefits of each proposal may be substantially altered by the adoption of one or more of the other three. But these effects have not been considered nor analyzed. Query whether this constitutes an appropriate analysis of expected economic effects, when it ignores major changes that are anticipated to occur alongside this proposal. It is one thing to separate a set of highly related contemporaneous proposals that overlap, for purposes of consideration; it is another altogether to ignore their cumulative impact when engaging in the economic analysis.
While I do not necessarily agree with all parts of the proposal, it will commence a healthy process of public comment necessary to appropriately improve order execution information disclosure. I am particularly interested in hearing from interested persons on any alternative ways to update these metrics and requirements. Therefore, I will support the proposal. I thank the staff in the Divisions of Trading and Markets and Economic and Risk Analysis as well as the Office of General Counsel for their efforts.
 Proposing Release at 48.