Statement on Proposed Amendments Regarding Order Execution Quality
Dec. 14, 2022
Today, the Commission will consider a proposal to enhance disclosure requirements for order execution quality. I am pleased to support this proposal because, if adopted, it would improve transparency on execution quality and facilitate investors’ ability to compare brokers, thereby enhancing competition in our markets.
Rule 605, which the Commission first adopted in 2000, requires monthly disclosures on execution quality from market participants known as market centers. These market centers—such as exchanges, dark pools, and wholesalers—represent important hubs in the capital markets.
In the 22 years since Rule 605 was adopted, though, our equity markets have been transformed by ever-changing technologies and business models. If the “E*Trade baby” were born when this rule was adopted, he now would be old enough legally to have a beer. Twenty-two years is a long time. Current Rule 605 disclosures have not kept up with our markets and provide investors with an incomplete picture of execution quality.
Thus, I am pleased that today’s proposal would modernize Rule 605 in a number of ways.
First, today’s proposal would make it easier for investors to evaluate key metrics related to execution quality. In current Rule 605 disclosures, reporting entities disclose metrics related to price improvement. These metrics, however, lack key context for investors, such as price improvement calculated as the percentage of the bid-ask spread.
Industry professionals often use percentage-based metrics such as the effective over quoted (E/Q) spread to evaluate execution quality. I think that everyday investors should have easy access to E/Q spread and other similar metrics that industry professionals use. These percentage-based metrics would help investors make apples-to-apples comparisons when evaluating brokers’ execution quality. Further, the proposal would update this 22-year old rule to reflect trade speed in a market that moves by the millisecond. These changes, taken together, would better convey execution quality.
Second, today’s proposal would require that broker-dealers—in addition to market centers—make disclosures on execution quality. The proposal is tailored to cover larger broker-dealers (those with more than 100,000 customers). With such tailoring, the Rule 605 requirements would apply to broker-dealers that combined handle nearly 99 percent of customer accounts and two out of three transactions from broker-dealer customers.
This is crucial. Every day, investors turn to broker-dealers, often through brokerage apps, to build a better financial future. I think investors should have easy access to information that details just how good of a job their brokers are doing. Thus, today’s proposal would require larger brokers to disclose this critical information about the execution quality they achieve for their customers. I think that this disclosure also would foster greater competition among brokers, creating additional incentives for brokers to improve execution quality to earn customers’ business and trust.
Third, I am pleased that the proposed disclosure of execution quality would apply to a wider range of order sizes: from odd-lots (including fractional shares) to large trades (over 100 round lots), both currently left out of current requirements. Further, the proposal refines the order type categories to be reported. These changes would improve execution quality disclosures through capturing a larger range of relevant data.
Finally, today’s amendments would require market centers and broker-dealers to produce summary reports on execution quality that everyday investors can read. Under current rules, Rule 605 disclosures look like the opening credits from “The Matrix.” Not all of us can be Keanu Reeves. The reports are published in machine-readable form, literally a series of dashes, numbers, and symbols, which do not exactly spread holiday cheer—or easy-to-read disclosure information. The proposed summary reports would make these reports user friendly. In other words, this change would help “welcome” these reports into “the real world,” where everyday investors actually can use them.
This proposal, if adopted, would increase transparency for investors and facilitate their ability to compare brokers. That helps make our markets more efficient, competitive, and fair.
I’d like to thank members of the SEC staff who worked on this rule, including:
- Kathleen Gross, Lauren Yates, Haoxiang Zhu, David Saltiel, Andrea Orr, Roni Bergoffen, Marilyn Parker, David Shillman, Eric Juzenas, Christopher Chow, David Michehl, Yue Ding, Jennifer Colihan, Will Miller, Roman Ivanchenko, Mark Donohue, and Arun Manoharan in the Division of Trading and Markets;
- Julia Reynolds, Jessica Wachter, Oliver Richard, Lauren Moore, Amy Edwards, Charles Woodworth, Jill Henderson, Ariel Lohr, John Ritter, Robert Girouard, Paul Hughes, Qiyu Liu, Patti Vegella, PJ Hamidi, Greg Scopino, and Brandon Lacey in the Division of Economic and Risk Analysis;
- Dan Berkowitz, Megan Barbero, Meridith Mitchell, Malou Huth, Robert Teply, Janice Mitnick, Cynthia Ginsberg, Ronesha Butler, Tracey Hardin, Brooke Wagner, and Daniel Staroselsky in the Office of the General Counsel;
- Sarah ten Siethoff, Thoreau Bartmann, and Marc Mehrespand in the Division of Investment Management;
- Katherine Monahan, and Carrie O’Brien in the Division of Examinations; and
- Mandy Sturmfelz in the Division of Enforcement.
 See “Disclosure of Order Execution and Routing Practices” (Nov. 17, 2000), available at https://www.sec.gov/rules/final/34-43590.htm. Originally adopted as Rule 11Ac1-5, which was later re-designated as Rule 605.
 See the release at Table 12.
 To provide a hypothetical example, a typical Rule 605 disclosure might look like the following: