Order Sizes Complicate Rule 606 Reform
Outdated definitions of institutional and retail orders might cost brokerages if the U.S. Securities and Exchange Commission leaves the definitions unchanged in the next version of its Rule 606, which pertains to disclosure of order routing information.
Under the proposed changes that the Commission voted to put forth during its July 13 meeting, the regulator would define orders less than $200,000 as retail orders and all others as institutional orders.
“It’s important to understand that the difference between retail and institutional is not the same as it was 20 or 30 years ago,” said David Weisberger, managing director and global head of trading analytics products at IHS Markit while presenting on a conference call hosted by The STA Foundation.
The rise of the independent registered investment advisor and wealth management firms show that retail isn’t just self-directed investors anymore.
IHS Markit sampled a random month’s worth of orders from retail firms and found that more than 20% of the orders it evaluated were for over $200,000.
“That is a pretty sizable percentage that would be classified as institutional, which means almost every retail firm out there would suddenly have significantly more reporting requirements than they should,” said Weisberger. “The new rule says if you have these orders you need to be able to make on-demand to your customer a very sophisticated routing report. Some of these firms have millions of clients and to be able to do that would be a problem.”
On the other side of the coin, IHS Markit also found that 65% of institutional orders sent by the buy side were less than $200,000 after sampling the orders of 100 buy-side firms during a random month.
“Right away you know that if you are trying to use dollar value, there is no way to pick a dollar value,” he added.
Instead, Weisberger suggested that the Commission rely on the level of order protection that is accorded to the orders themselves.
“There are rules manning limit order displays and other things that are only applied to held orders, where a broker has more obligations,” he explained. “We also believe that it is reasonable to have more aggregated reporting for these types of orders because of the obligations of the routing brokers and the market centers that receive these orders.”
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