Statement on Rule Amendments Regarding Disclosure of Order Execution Information

Thank you, Chair Gensler. Today, the Commission considers amending the disclosure requirements for order executions in national market system (NMS) stocks.[1] These amendments to Rule 605 will expand the scope of reporting entities to include “larger” broker-dealers and modify the definition of a “covered” order. The Commission’s work reflects a careful consideration of the constructive comments received. These updates can enhance competition among service providers by giving investors better information regarding order execution.

NMS stocks are traded simultaneously at different venues, including securities exchanges, alternative trading systems, single-dealer platforms and market-makers.[2] The Rule 605 amendments under consideration today should enhance that multi-venue competition intended by Congress.[3] When Rules 605 and 606 were first adopted in 2000,[4] publicly available information to compare and evaluate execution quality among market centers was sparse. Rule 605 would require standardized monthly reports of statistical information concerning covered orders for NMS stocks regarding execution.

The existing rules have provided an improved awareness about “how broker-dealers responded to trade-offs between price and other factors, such as speed or reliability, and establish a baseline level of disclosure in order to facilitate cross-market comparisons of execution quality.”[5] The intent was to promote “competitive forces” that “could then be brought to bear on broker-dealers both with respect to the explicit trading costs associated with brokerage commissions and the implicit trading costs associated with execution quality.”[6] As Commissioners Cynthia Glassman and Paul Atkins observed during the adoption of Regulation NMS in 2005, the disclosure framework that “required market centers to publish execution quality statistics” had an effect where “[c]ompetition among market makers increased significantly.”[7] Furthermore, “overall execution quality for retail customers improved as competition among executing broker-dealers on the basis of execution quality became a means of attracting order flow.”[8]

Twenty-five years ago, Commissioner Laura Unger oversaw a report recommending that the Commission consider requiring market centers to disclose information on best execution factors.[9] The report also recommended requiring broker-dealers to disclose information about the execution quality available at different market centers, order handling practices, and receipt of inducements for order flow.[10] Those recommendations remain valid. However, the Adopting Release recognizes that “equity market conditions have changed due in part to many technological advancements that have altered the speed and nature of trading,” including the increased participation of individual investors in the equity markets.[11] Today’s action amends Rule 605 to address these developments.

These amendments were proposed along with three other rules impacting equity market structure, but with little regard as to their interaction with each other. The other proposals were: (1) the Order Competition Rule;[12] (2) Regulation Best Execution;[13] and (3) amendments to Regulation NMS on minimum pricing increments, access fees, and transparency of better priced orders.[14]

It makes logical sense to approve the Rule 605 amendments first. Given the significant information on execution quality that the Commission will receive from the updated disclosure requirements, I would have significant concerns moving forward with the Order Competition Rule and Regulation Best Execution without analysis of the new data. The Commission cannot properly assess the balance of benefits and costs for those two proposals without observing the baseline impact on execution quality and cost implied by the improved disclosure mandated by today’s rule adoption. Perhaps if we were in a DeLorean with a 1.21 gigawatt flux capacitor, we could travel to the future[15] and observe the impacts on execution quality and cost attributable to the Commission’s actions taken today, but neither the Commission nor its staff have access to such a vehicle. But if we did, I hope the use of plutonium as fuel would minimize our scope 1 and 2 emissions. In the absence of such technology, a prudent regulator should exercise patience so that the effects of these amendments can properly be analyzed before further turning any further regulatory dials.

The Commission’s regulatory regime has historically best served investors by creating a competitive environment, including for the use of execution services. Today’s rule adoption—updating order execution quality and cost statistics—stands firmly within that tradition and should benefit investors and their trading needs.

I thank the staff in the Divisions of Trading and Markets and Economic and Risk Analysis as well as the Office of General Counsel for their efforts.