Before Rule 605 was adopted,[1] there was little publicly available information that investors could use to compare and evaluate execution quality among different market centers.[2] Retail investors were not in a position to make informed decisions based on important measures of execution quality such as effective spreads and price improvements. Instead, these investors were left to choose among broker-dealers that ostensibly offered the lowest commission and “fast” executions. However, there was no straightforward way for investors to compare execution quality across broker-dealers or market centers when evaluating these claims. As a result, neither market centers[3] such as exchanges and certain market makers, nor broker-dealers had a strong incentive to compete on their ability to obtain the best prices for investor orders.

Rule 605 was designed to empower market forces to achieve a more competitive and efficient national market system for investors by increasing the visibility of order execution and routing practices. The idea is that the rule’s disclosure requirements provide investors with a clearer picture of overall routing practices of different broker-dealers, which then facilitates greater investor involvement and choice in order routing decisions, ultimately resulting in improved execution practices. Indeed, a study on the impact of Rule 605 concluded that, in fact, the rule was effective. Overall, the goal of improving execution quality through more transparent markets was achieved.[4]

Although the rule worked and 605 has provided significant insight into execution quality, the content of the required disclosures has not been substantively updated since the year 2000, despite changes in the speed and nature of trading.[5] As a result, Rule 605 reports have become less informative than they were when the rule was adopted. Today’s amendments will increase the relevance and use of information contained in the rule’s reports by expanding the scope of reporting entities, modernizing the content of the reports, and broadening the reports’ accessibility.[6] For the first time, the amendments would allow customers of larger broker-dealers, as well as other market participants, to have access to direct information about the aggregate execution quality achieved by their broker-dealers.[7] Just like the disclosure regime for public companies, our disclosure regime for this information should be updated as markets innovate and change.

Customers can use this information to compare execution quality across broker-dealers and select broker-dealers offering better execution quality. This increase in market participants’ ability to compare such information should increase the degree to which broker-dealers compete on the basis of execution quality when making their order routing decisions, for example by adjusting their routing practices to increase the extent to which they route orders to the market centers offering better execution quality, and limiting the extent to which they route orders for other potential reasons.[8] The amendments will also enable investors to make better apples-to-apples comparisons across reporting entities with potentially different order flow by expanding and modernizing order size and order type categories. In addition, the amendments will improve market participants’ ability to compare time-to-execution across reporting entities by increasing the relevance of time-to-execution information in Rule 605 reports. This is expected to lead to improved execution times, benefiting investors that value fast executions by helping them to identify and route orders to reporting entities offering faster execution speeds.

Finally, execution quality is also expected to increase as a result of the amendments requiring reporting entities to prepare human-readable summary reports, in addition to the more detailed machine-readable reports required under pre-existing Rule 605. The summary report will provide an abbreviated overview of the more detailed Rule 605 report for interested parties to assess, and is expected to help independent analysts, consultants, broker-dealers, the financial press, and market centers in analyzing the disclosures and producing even more digestible information using data from the summary report. This is important so that the broader public, including those that may not read the summary report, can benefit.[9]

I’d like to thank the staff of the Division of Trading and Markets, the Division of Economic and Risk Analysis, and the Office of the General Counsel for all their hard work on this release. I’m pleased to support today’s rule. Thank you.