Order Execution Reform Dynamic Amendments to Increase Disclosure: SEC
The Securities and Exchange Commission (SEC) has today proposed amendments that would bring the disclosure requirements for order executions in national market system stocks, which are stocks that are listed on a national securities exchange, up to date.
These disclosure requirements are mandated by Rule 605 of Regulation NMS. Rule 605 was established in the year 2000 and makes it possible to view information regarding the quality of the execution at various market centers. Since it was first implemented, there has been no significant change to it.
Gary Gensler, the chair of the Securities and Exchange Commission, stated that “in the 22 years since Rule 605 was adopted, our equity markets have been transformed by ever-changing technologies and business models.” The current disclosures under Rule 605 have not kept up with our markets, and as a result, they present investors with an incomplete picture of the quality of execution.
As a result, I am happy that the proposal presented today would bring Rule 605 up to date in a number of different ways. If this proposal were to be approved, it would make the investing process more transparent for investors and make it easier for them to compare different brokers. That contributes to our markets becoming more competitive, efficient, and equitable.
The proposed changes would broaden the scope of the entities that are required to comply with Rule 605, modify the information that is required to be reported in accordance with the rule, and alter the way that orders are categorized for the purposes of the rule. The proposal would, among other things, expand the scope of entities that are required to produce monthly execution quality reports to include broker-dealers with a larger number of customers.
Currently, only certain entities are required to produce these reports. In addition, the proposal would change the definition of “covered order” so that it includes certain orders that are placed outside of normal trading hours as well as certain orders that are placed with stop prices.
The proposed changes would require statistics to be reported from the point in time when such orders become “executable,” which would result in the collection of more pertinent execution quality information for them in question.
The reporting of execution quality information would have to be done in the case of fractional share orders, odd-lot orders, and larger-sized orders if the proposed changes to the way orders are categorized are implemented. In addition, the proposal would stipulate that the time of order receipt and time of order execution must be measured in increments of one millisecond or finer, and that realized spread must be calculated at both 15 seconds and one minute intervals.
New statistical measures of execution quality would also be required by the proposal, such as an average effective over quoted spread (a percentage-based metric that represents how much price improvement orders received) and a size improvement benchmark.
Both of these metrics represent how much price improvement orders received. Last but not least, the idea would make it easier for people to get their hands on the required reports by mandating that all organizations that fall under the rule should make a summary report available to the general public.
The proposing release has been posted on SEC.gov, and it is going to be posted in the Federal Register as well. The public comment period will remain open until the later of March 31, 2023, or until the date that is sixty days after the date that the proposing release was published in the Federal Register, whichever date comes later.
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