On March 6, 2024, the Securities and Exchange Commission (“SEC” or “Commission”) adopted amendments to the disclosure requirements of Rule 605 of Regulation NMS for order executions of stocks listed on a national securities exchange.[1]  The final rule amendments expand the scope of entities that must comply with, and order types and sizes that must be reported under, Rule 605, and requires time-based metrics to be reported at a more granular level.  This is the first substantive update of Rule 605 since it was adopted in 2000. 

Rule 605 requires market centers that execute customer orders to make monthly disclosures of basic information concerning their quality of executions (“Rule 605 reports”).  The amended rule expands the scope of entities that must produce Rule 605 reports to include “larger broker-dealers”, defined in the amended rule as broker-dealers that introduce or carry 100,000 or more customer accounts through which transactions are effected for the purchase or sale of NMS stocks.  Moreover, Rule 605 will require broker-dealers operating a single-dealer platform (or an NMS ATS) to calculate and display statistics for orders entered into the platform or routed to the ATS separately from other orders.

Additionally, the amended rule modifies the definition of “covered order.”  Prior to the amendments, Rule 605 required reporting of only orders received during regular trading hours at a time when the national best bid and offer (“NBBO”) is being disseminated.  The amended rule requires reporting to include certain non-marketable limit order (“NMLOs”) submitted outside of regular trading hours, if they become executable after the opening or reopening of trading during regular trading hours. 

The amendment modifies the information required to be included in Rule 605 reports, including changing how orders are categorized by size as well as by order type.  The new categories required by Rule 605 include marketable immediate-or-cancel orders, market orders submitted with stop prices, marketable limit orders submitted with stop prices, and non-marketable limit orders submitted with stop prices.  Three existing categories of non-marketable order types are replaced with midpoint-or-better limit orders, midpoint-or-better immediate-or-cancel orders, non-marketable limit orders, and non-marketable immediate-or-cancel orders.

The amended rule also changes the content required in Rule 605 reports.  First, the new rule captures execution quality information for fractional share orders, odd-lot orders, and larger-sized orders with 10,000 shares or greater, for which the SEC had previously granted exemptive relief. Realized spread statistics will be required to be calculated using time horizons ranging from less than 100 microseconds to 5 minutes after the time or order receipt. 

Further, new statistical measures of execution quality are required.  These include:

  • Average effective divided by average quoted spread (a percentage-based metric that represents how much price improvement an order received, commonly known as E/Q);
  • Percentage-based effective and realized spread statistics that complement certain dollar-based statistics;
  • A size improvement benchmark that could be used to calculate whether orders received an execution of more than the displayed size at the quote;
  • A size improvement statistic that indicates the amount of size improvement in those instances in which an order could have received size improvement;
  • Certain statistical measures that could be used to measure execution quality of non-marketable orders such as beyond-the-midpoint limit orders and the time such orders first become executable; and
  • Additional price improvement statistics, such as average effective spread divided by average quoted spread, for market and marketable orders showing price improvement relative to the best available displayed price in the market, which could be a displayed odd-lot price.

The amended rule also requires all reporting entities to make a summary report, which will be publicly available on the SEC’s website in CSV and PDF formats. The SEC revised the requirements of the summary report in response to comments, and while acknowledging that the changes “will add some complexity” to the summary report, the SEC concluded that the additional features would better allow investors to compare information related to order flow and execution quality statistics across broker-dealers. In general, the summary report must include sections for NMS stocks in the S&P 500 Index and for all other NMS stocks and, within each section, divide market and marketable limit orders into eight notional order size categories with an aggregated category for orders with a notional value of under $200,000.

The amendments to Rule 605 will become effective 60 days after publication in the Federal Register, and have a compliance date of 18 months after the effective date.

The amended rule is the first proposal to be approved of four proposals relating to market structure which the SEC proposed on December 14, 2022.  The other proposals were (i) the proposed “Order Competition Rule”[2], (ii) the proposed “Regulation Best Execution”[3], and (iii) proposed rules to amend minimum pricing increments and access fee caps (the “Tick Sizes” proposal).[4]  Following the proposals, many commenters urged the Commission to adopt amendments to Rule 605 before moving forward with any of the other three proposals, and to use the data obtained from the new Rule 605 reports to confirm the necessity for, and better tailor, the other proposals.[5]  Commissioner Uyeda echoed this view in his comments when the SEC approved the amendments to Rule 605, urging the Commission to be “patient” regarding taking steps to adopt the three other proposals and to wait until the amendments to Rule 605 were fully implemented.[6]  While the Commission acknowledged this suggestion from commenters in the adopting release,[7] the adopting release does not make any statement one way or the other on whether the Commission plans to consider the new Rule 605 data, which will first become available in late 2025, before moving forward with the other proposals.   

[1] Disclosure of Order Execution Information, Release No. 34-99679 (Mar. 6, 2024), https://www.sec.gov/files/rules/final/2024/34-99679.pdf (“Adopting Release”).

[2] 88 Fed. Reg. 128 (Jan. 1, 2023).

[3]88 Fed. Reg. 5440 (Jan. 27, 2023).

[4] 87 Fed. Reg. 80266 (Dec. 29, 2022).

[5] See, e.g., letter from William C. Thum, Managing Director and Assistant General Counsel, SIFMA AMG (Mar. 31, 2023); letter from James Toes, President & CEO, STA (April 3, 2023).

[6] Commissioner Mark T. Uyeda, Statement on Rule Amendments Regarding Disclosure of Order Execution Information (Mar. 6, 2024), https://www.sec.gov/news/statement/uyeda-statement-order-execution-quality-030624. ]

[7] Adopting Release at 283.