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SEC Proposes Rules to Enhance Order Handling Information Available to Investors

(HedgeCo.Net) The Securities and Exchange Commission today voted to propose rules that for the first time would require broker-dealers to disclose the handling of institutional orders to customers. The proposed rules also would expand the information included in existing retail order disclosures.

“These proposed rules are intended to bring order handling disclosure in line with modern technology and market practice, providing valuable information to retail and institutional investors about how their orders are treated,” said SEC Chair Mary Jo White. “This information should provide investors more transparency and a powerful new tool to more effectively monitor broker-dealer routing decisions, especially when combined with the additional disclosures from alternative trading systems proposed by the Commission late last year.”

Institutional Order Disclosures

The proposed rules would require a broker-dealer to provide a customer, upon request, a report on its handling of that customer’s institutional orders (orders in exchange-listed stocks with an original market value of at least $200,000), containing specified monthly data for the previous six months. The customer-specific report also would require detailed order handling information for each venue to which the broker-dealer routed institutional orders for the customer and would be presented in the aggregate and broken down by passive, neutral, and aggressive order routing strategies.

Separately, the proposed amendments would require broker-dealers to make public on a quarterly basis aggregated reports of their handling of all institutional orders.

Retail Order Disclosures

The proposed rules also would enhance current retail order disclosures by requiring:

More detailed information about the payments received by broker-dealers from execution venues or paid to such venues.
Reporting by calendar month rather than by quarter.
Separate reporting information for marketable and non-marketable limit orders.
The Commission is seeking public comment on the proposal for 60 days following its publication in the Federal Register.

Disclosure of Order Handling Information

The Securities and Exchange Commission will consider whether to propose rules that for the first time would require broker-dealers to disclose specific data related to the routing and execution of institutional orders and enhance existing disclosure requirements related to the routing of retail orders. The proposed amendments would assist customers in assessing the services of their broker-dealers and comparing the services of multiple broker-dealers.

Highlights

Institutional Orders Disclosures

The proposed rules would require broker-dealers to provide customers with standardized information about their institutional order handling and execution quality and to disclose publicly the same information on an aggregated basis across all customers. The customer-specific disclosures would help customers assess their broker-dealers’ services, including the handling of potential conflicts of interest, risks of information leakage, and best execution. The public disclosures would assist market participants in assessing and comparing the institutional order handling services provided by broker-dealers.

Customer-specific report on institutional order handling

The proposed rules would require a broker-dealer to provide a customer, upon request, a report on the broker-dealer’s handling of the customer’s institutional orders (orders in National Market System (NMS) or exchange-listed stocks with an original market value of at least $200,000) that contains specified monthly data for the previous six months. The report would include the number of:

Shares sent to the broker-dealer

Shares executed by the broker-dealer as principal
Institutional orders exposed by the broker-dealer through actionable indications of interest, and the venues to which they were exposed. The report also would include the following information for each venue to which the broker-dealer routed institutional orders for the customer, in the aggregate and broken down by passive, neutral, and aggressive order routing strategies as determined and assigned by the broker-dealer:

Information on Order Routing

Total shares routed
Total shares routed marked immediate or cancel
Total shares routed that were further routable
Average order size routed

Information on Order Execution

Total shares executed
Fill rate (shares executed divided by the shares routed)
Average fill size
Average net execution fee or rebate (cents per 100 shares, specified to four decimal places)
Total number of shares executed at the midpoint
Percentage of shares executed at the midpoint
Total number of shares executed that were priced on the side of the spread more favorable to the institutional order
Percentage of total shares executed that were priced at the side of the spread more favorable to the institutional order
Total number of shares executed that were priced on the side of the spread less favorable to the institutional order
Percentage of total shares executed that were priced on the side of the spread less favorable to the institutional order

Information on Orders that Provided Liquidity

Total number of shares executed of orders providing liquidity
Percentage of shares executed of orders providing liquidity
Average time between order entry and execution or cancellation, for orders providing liquidity (in milliseconds)
Average net execution rebate or fee for shares of orders providing liquidity (cents per 100 shares, specified to four decimal places)

Information on Orders that Removed Liquidity

Total number of shares executed of orders removing liquidity
Percentage of shares executed of orders removing liquidity
Average net execution fee or rebate for shares of orders removing liquidity (cents per 100 shares, specified to four decimal places).

Public aggregated report on institutional order handling

The proposed rules would require broker-dealers to make aggregated reports of their handling of institutional orders publicly available on a quarterly basis. Broker-dealers would be required to post the aggregated report on a free, publicly-accessible Internet website for three years.

Format of Reports

All reports on institutional and retail order handling and routing would be provided using XML and PDF formats as published on the Commission’s website, so that the data in the report would be in a consistent, structured format that would facilitate search capabilities and statistical and comparative analyses across broker-dealers and date ranges.

Disclosure of Order Execution Information

Similar to the proposed requirement for the public order handling reports, the proposed rules would require market centers to make order execution reports publicly available for three years.

Background

Currently, Rule 606 requires broker-dealers to disclose publicly, on a quarterly basis, certain aggregated order routing information for customer orders in NMS securities, and to disclose separately, to a customer upon request, certain customer-specific order routing information for the past six months. The term “customer order” is defined as an order that is not for the account of a broker-dealer, and is less than $200,000 for NMS stocks and less than $50,000 for options.

Rule 606 currently does not require disclosure of order routing information for institutional-sized orders. At the time Rule 606 was adopted, institutional-sized orders were excluded because they were handled by broker-dealers in a manual, individual manner. As such, generalized order handling information was not practical.

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