On December 14, 2022, the Securities and Exchange Commission ("SEC" or "Commission") released four sweeping rulemaking proposals that would change market structure as we currently know it and introduce a new federal standard for a broker-dealer's duty of best execution.1

We have summarized the key provisions of the proposals and provide some of the Commissioners' initial reactions, including particularly divergent views with respect to the proposed Order Competition Rule and Regulation Best Execution. Given their length and breadth, we are continuing to review the proposals—please stay tuned for additional updates with our key takeaways. The comment period for each of the proposals ends on the later of March 31, 2023, or 60 days after publication in the Federal Register.

1. Disclosure of Order Execution Information: Expansion of Rule 605 under Regulation NMS

Rule 605 of Regulation NMS currently requires "market centers" to make available standardized, monthly reports of statistical information concerning the executions of "covered orders" in NMS stocks that the market center received for execution from any person. The SEC proposes to expand the scope of Rule 605 reporting to new entities and new order information and require the publication of monthly summary order execution data reports.

Key Provisions

  • Expanded Scope of Rule 605.
    • Expanded In-Scope Entities. Today, Rule 605 applies to "market centers," defined as "any exchange market maker, OTC market maker, alternative trading system, national securities exchange, or national securities association." The proposal would expand the reporting requirement of Rule 605 to include: (1) broker-dealers that introduce or carry 100,000 or more customer accounts trading NMS stocks; (2) single-dealer platforms and alternative trading systems (separate from the broker-dealer operator's other activities); and (3) entities that would operate "qualified auctions" under the proposed Order Competition Rule (discussed below).
    • New Order Categories.

      • The proposal would expand the definition of "covered order" under Regulation NMS to include certain orders submitted outside of regular trading hours, certain orders submitted with stop prices, and non-exempt short sale orders.
      • The proposal would modify order size categories to base them on "round lots" instead of specific share quantities and establish new order size categories for fractional share, odd-lot, and block orders.
      • The proposal would create a new order type category for marketable immediateor-cancel orders and replace three existing categories of non-marketable order types with three new categories of order types (beyond-the-midpoint limit orders, executable non-marketable limit orders, and executable orders with stop prices).
    • Additional Reported Data and Execution Quality Statistics. The proposal would require Rule 605 reporters to provide more granular statistics regarding execution quality, including enhanced statistics regarding speed of execution and effective over quoted, percentage effective and realized spread. The proposal also would introduce new reportable statistics regarding price and size improvement.
  • Summary Reports. In addition to standard Rule 605 reports, the proposal would require Rule 605 reporters to publish in a "human-readable" format monthly summary statistics on executions of certain covered orders.

Initial Commissioner Reactions2

The Commission unanimously approved this proposal. No Commissioners seemed to take major exception to the content of this proposal; they generally agreed that updates were "long overdue" for Rule 605, which was adopted in 2000. However, Commissioners Peirce and Uyeda expressed concerns regarding the proposal's costs in light of the many other recent proposals and rules applicable to broker-dealers and market centers. Commissioners Crenshaw and Peirce also raised questions regarding the utility and presentation of Rule 605 data to investors and whether the proposal captured the appropriate scope of entities.

2. Amendments to Certain Rules under Regulation NMS: Minimum Pricing Increments ("Tick Sizes"), Access Fees, and Transparency of Better Priced Orders

This proposal would amend three aspects of Regulation NMS by: (1) establishing new pricing increment (or tick size) requirements for quoting and trading NMS stocks; (2) changing permissible exchange access fees and rebates; and (3) outlining an odd-lot market data framework, which would accelerate implementation of certain parts of the SEC's Market Data Infrastructure ("MDI") Rules. 3

Key Provisions

  • Variable Minimum Tick Size Requirements. Rule 612 under Regulation NMS currently requires quotations in NMS stocks priced equal to or greater than $1.00 to have a minimum tick size of $0.01. The proposal would prescribe variable pricing increments between $0.01 and $0.001 that would apply uniformly to quoting and trading, whether on exchanges, alternative trading systems, or over the counter, depending on the stock's time weighted average quoted spread over a specified historical evaluation period. These determinations would be conducted on a quarterly basis for each NMS stock priced equal to or greater than $1.00.
  • Lower Exchange Access Fee Caps and Fee Transparency. The proposal also would reduce Rule 610's cap on exchange access fees from 30 mils to 10 mils or 5 mils per share, depending on a stock's price and minimum pricing increment. Additionally, the proposal would prohibit a national securities exchange from charging fees or providing rebates or other remuneration unless such amounts can be determined at the time of execution. This could change the pricing or rebate structures of exchanges that offer, for example, tiered pricing or rebates based on volume of order flow over time.
  • Implementation of Odd-Lot Market Data. The proposal would accelerate the compliance period for the MDI Rules regarding odd-lot orders, implementing the MDI Rules' definitions for odd lots and round lots and requiring exchanges to provide odd-lot market data to securities information processors for collection, consolidation, and dissemination rather than only for round-lot market data. The proposal also would amend "odd-lot information" to include a new data element to identify an "odd-lot NBBO."

Initial Commissioner Reactions4

The Commission unanimously approved this proposal. While Chair Gensler and Commissioners Lizarraga and Crenshaw praised the increased efficiency, transparency, and competition that they believed could be realized by this proposal, Commissioners Peirce and Uyeda expressed concerns regarding the proposal's potential "unintended consequences," including how this proposal could interact with the other proposals released as part of this rulemaking package. Commissioners Peirce and Uyeda also questioned the validity of the "enhanced competitive effect" envisioned by the proposal and praised by other Commissioners. Commissioner Peirce was critical of the access fee caps, stating her preference that "the Commission get out of the rate-setting business." She also questioned whether it was reasonable to accelerate implementation of the MDI Rules

3. New Order Competition Rule: Proposed Rule 615

The proposed Order Competition Rule would establish a new requirement that, subject to certain exceptions, retail order flow must "be exposed to competition in fair and open auctions, before such orders could be executed internally by trading centers that restrict order-by-order competition."

Footnotes

1 Disclosure of Order Execution Information, available at https://www.sec.gov/rules/proposed/2022/34- 96493.pdf; Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders, available at https://www.sec.gov/rules/proposed/2022/34-96494.pdf; Order Competition Rule, available at https://www.sec.gov/rules/proposed/2022/34-96495.pdf; Regulation Best Execution, available at https://www.sec.gov/rules/proposed/2022/34-96496.pdf.

2 Chair Gary Gensler, Statement on Proposed Amendments Regarding Order Execution Quality (Dec. 14, 2022), https://www.sec.gov/news/statement/gensler-order-execution-quality-20221214; Comm'r Hester M. Peirce, Statement on Disclosure of Order Execution Information (Dec. 14, 2022), https://www.sec.gov/news/statement/peirce-order-execution-20221214; Comm'r Caroline A. Crenshaw, Statement on Proposals Related to Equity Market Structure (Dec. 14, 2022) ("Crenshaw Statement"), https://www.sec.gov/news/statement/crenshaw-insider-trading-20221214-0; Comm'r Mark T. Uyeda, Statement on Proposed Rule Regarding Disclosures of Order Execution Information (Dec. 14, 2022), https://www.sec.gov/news/statement/uyeda-order-execution-20221214; Comm'r Jaime Lizarraga, Increasing Competition and Improving Transparency in U.S. Equity Markets (Dec. 14, 2022), https://www.sec.gov/news/statement/lizarraga-rule-605-20221214 ("Lizarraga Statement").

3 Market Data Infrastructure, 86 Fed. Reg. 18596 (Apr. 9, 2021) (among other things, defining round lot and odd lot information).

4 Chair Gary Gensler, Statement on Minimum Price Increments, Access Fee Caps, Round Lots, and Odd-Lots (Dec. 14, 2022), https://www.sec.gov/news/statement/gensler-tick-size-20221214; Comm'r Hester M. Peirce, Statement on Proposal to Amend Rules Governing Access Fees and Tick Sizes and to Accelerate Certain Market Data Changes (Dec. 14, 2022), https://www.sec.gov/news/statement/peirce-tick-size-20221214; Crenshaw Statement; Comm'r Mark T. Uyeda, Statement on Proposed Rule Regarding Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders (Dec. 14, 2022), https://www.sec.gov/news/statement/uyeda-tick-size-20221214; Lizarraga Statement

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