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From Securities Regulation Daily, November 5, 2018

SEC amends order handling and routing disclosure rules

By Anne Sherry, J.D.

Eighteen years after adopting order handling and routing disclosure rules for broker-dealers, the SEC amended those rules to bring them in line with modern routing and execution practices. Under amended Rule 606 of Regulation NMS, a brokerage customer who places a not-held order may request individualized disclosures concerning the firm’s handling of the customer’s orders. The rulemaking also adds to brokers’ quarterly public reporting obligations (Release No. 34-84528, November 2, 2018).

Not-held order handling. Upon the request of a customer, a broker-dealer must provide a report on the handling of the customer’s NMS stock orders submitted on a not-held basis for the prior six months, divided into separate sections for directed and non-directed orders. The report will include the number of shares sent to the broker-dealer, shares executed by the broker-dealer as principal for its own account, and not-held orders exposed by the broker-dealer through actionable indications of interest. It will also include the venue(s) to which orders were exposed, as long as the identity of the venue may be anonymized if the venue is a customer of the broker-dealer.

The report will also include certain information for each venue to which the broker-dealer routed not-held orders for the customer. Broker-dealers are to provide aggregate information on order routing, order execution, orders that provided liquidity, and orders that removed liquidity.

Two de minimis exceptions apply. At the firm level, a broker-dealer is not obligated to provide a report if not-held NMS stock orders constitute less than 5 percent of the total shares of NMS stock orders that the broker-dealer receives from its customers over the prior six months. The first time a broker-dealer meets this threshold, there is a three-month grace period before it becomes subject to the rule. At the customer level, a broker-dealer is not obligated to provide a report to any customer whose monthly trades through the broker-dealer average below $1 million of notional value of not-held orders in NMS stock, again taking that average over the prior six months.

Held order disclosures. The rule amendments also add new disclosures to broker-dealers’ public quarterly reports. Reports must cover NMS stock orders of any size that are submitted on a held basis and any order, held or not held, for an NMS security that is an option contract with a market value under $50,000. Broker-dealers will now be required to:

  • Report routing information separately for marketable and non-marketable limit orders;
  • Report routing information by calendar month and discontinue the practice of categorizing NMS stocks by listing market;
  • Group routing information for NMS stock orders according to whether the stock was included in the S&P 500 index as of the first day of the quarter;
  • Include certain information for the 10 venues to which the largest number of total non-directed orders were routed, as well as any venue to which at least 5 percent of non-directed orders were routed; and
  • Describe the terms of any payment for order flow and any profit-sharing arrangements that may affect the routing decision.

Format and availability of reports. The order-handling and routing reports must be available using an XML schema and associated PDF renderer published on the SEC’s website. The public quarterly reports must be posted on a free, publicly available website and maintained there for three years.

Important dates. The amendments, which will also be published on the SEC’s website, will become effective 60 days from the date of publication in the Federal Register. The compliance date will be 180 days from the date of publication in the Federal Register.

SEC statements. SEC Chairman Jay Clayton said that the rulemaking "will make it easier for investors to evaluate how their brokers handle their orders and ultimately make more informed choices about the brokers with whom they do business."

Brett Redfearn, director of the Division of Trading and Markets, issued a statement lauding the rule revisions. Redfearn noted that in 2000, a large proportion of stock orders were routed to a few trading centers. Today, trading is spread among 13 stock exchanges, 47 active equity alternative trading systems, and 200 over-the-counter market makers and involves trading algorithms, smart order routers, and complex order management systems.

The rule amendments provide investors with relevant data based upon the level of discretion they give a broker in handling their orders, Redfearn said. In particular, customers who submit significant numbers of not-held orders can use the new, detailed reports to compare the same information across multiple brokers. The more detailed public reports on held orders will also provide information "organized in a way that makes more sense for the way investors view the markets today," the director added, such as by listing S&P 500 stocks separately.

The release is No. 34-84528.

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