Responses to these frequently asked questions represent the views of staff of the Division of Trading and Markets (“Staff”). They are not a rule, regulation, or statement of the Commission. Furthermore, the Commission has neither approved nor disapproved their content. These responses, like all staff guidance, have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person. The responses below depend on the particular facts and circumstances described in the question and response. Furthermore, the options reflected in the responses are not intended to be exhaustive. Additional information on Rule 606 can be found in the Commission’s adopting release, available at: https://www.sec.gov/rules/final/2018/34-84528.pdf.

The staff may update these questions and answers periodically. In each update, the questions added after publication of the last version will be marked with “MODIFIED” or “NEW.”

For further information contact: Theodore S. Venuti, Assistant Director, at (202) 551-5658, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-7010.

BACKGROUND

In November 2018, the Commission adopted amendments to Rule 606 of Regulation NMS to require broker-dealers to provide enhanced disclosure of information regarding the handling of their customers’ orders. Rule 606, as amended, requires more meaningful disclosures relevant to today’s marketplace that encourage broker-dealers to provide more effective and competitive order handling and routing services and that also improve the ability of their customers to determine the quality of such broker-dealer services.

In the amendments to Rule 606, the Commission referenced “not held orders” and “held orders.” Typically, not held orders are customer orders in NMS stock that provide a broker-dealer with price and time discretion in the handling of such orders. Held orders typically are customer orders in NMS stock that a broker-dealer must attempt to execute immediately. The adopted amendments to Rule 606 provide for different broker-dealer disclosure obligations depending on whether the order being handled is a not held order or a held order.

Specifically, the Commission adopted new Rule 606(b)(3) to require a broker-dealer, upon request of a customer that places not held orders, to provide specific disclosures, for the prior six months, regarding routing and execution of such orders. These new disclosure requirements are subject to two de minimis exceptions – one pursuant to new Rule 606(b)(4) that applies based on the broker-dealer’s NMS stock order flow and another pursuant to new Rule 606(b)(5) that applies based on the customer’s NMS stock order flow.

In addition, the Commission amended Rule 606(a) to enhance the aggregated order routing disclosures that broker-dealers must make publicly available on a quarterly basis for held orders. The Commission made specific enhancements to these public disclosures to require limit order information to be split into marketable and non-marketable categories; require more detailed disclosure of payments received from or paid to certain trading centers; require broker-dealers to describe any terms of payment for order flow arrangements and profit-sharing relationships; and require that broker-dealers keep the order routing reports posted on a website that is free and readily accessible to the public for a period of three years. The Commission also replaced the pre-existing requirement to group order routing information for NMS stocks by listing market with a requirement to group such information by (i) stocks included in the S&P 500 Index as of the first day of the quarter and (ii) other NMS stocks.

RESPONSES TO FREQUENTLY ASKED QUESTIONS

Section 1: Not Held NMS Stock Order Reports Under Rule 606(b)(3)

Issue 1: Order Handling and Routing Arrangements (including cases involving the use of another broker-dealer’s execution services including “white labeling” arrangements)

Broker-dealers handle not held customer orders using various order handling and routing arrangements, including by using the services of another broker-dealer. In determining how to comply with the disclosure obligations of Rule 606(b)(3), a broker-dealer using another broker-dealer’s services must determine whether it has exercised “discretion” over the routing of not held customer orders. In the Adopting Release, the Commission stated that, “[i]f the broker-dealer exercises discretion with regard to how an order is routed and ultimately executed, such as (but not limited to) by determining particular venue destinations for an order, choosing among different trading algorithms, adjusting or customizing algorithm parameters, or performing other similar tasks involving its own judgment as to how and where to route and execute orders, the broker-dealer must provide its customer the information required by Rule 606(b)(3)[].”[1]

A broker-dealer exercises discretion over how an order is routed and ultimately executed through its decision making and its participation in choices related to the use and configuration of algorithms, smart order routers, and other trading strategies (collectively, “execution services”). For example, with respect to the use of another broker-dealer’s smart order routers, a broker-dealer exercises discretion when a broker-dealer using another broker’s execution services, at any point prior to the routing of an order, participates in venue selection and prioritization for an order (including exclusions) and/or chooses among different pre-set routing configurations that affect routing decisions. As another example, a broker-dealer exercises discretion if it negotiates economic terms for execution services that, depending upon differential pricing and/or other terms of the arrangement, have a material effect on the routing choices being made. And, a broker-dealer exercises discretion at the time an order routing decision is made if it selects from among multiple order routing strategies provided by another broker that engage market liquidity in meaningfully different ways, e.g., actively vs. passively.

With respect to the use of another broker-dealer’s algorithms, a broker-dealer exercises discretion when, upon routing an order, it chooses among different algorithmic trading strategies (e.g., volume-weighted average price, percentage of volume, implementation shortfall, etc.) or different levels of urgency (e.g., passive vs. aggressive). A broker-dealer also exercises discretion when, at any time prior to the routing of an order, it participates in adjusting or customizing other algorithm parameters that could be material as to how, when and/or where to route and execute orders. As with the case of smart order routers, a broker-dealer also exercises discretion where there is an economic arrangement between two broker-dealers that affects the order routing or execution strategies utilized in the handling of not held customer orders. In all cases where it exercises discretion, the customer-facing broker-dealer must report the Rule 606(b)(3) information relative to any venues to which the other broker-dealer further routes the customer’s not held order.

The following FAQs are intended to provide Staff guidance regarding particular scenarios when a customer-facing broker-dealer, using the services of another broker-dealer, exercises discretion over how an order is routed and ultimately executed, thus becoming subject to the requirement to report to the customer information relative to any venues to which other broker-dealers further route the customer’s not held order.

Question 1.01: Broker-Dealer A has a “white-labeling” arrangement with Broker-Dealer B, in which Broker-Dealer A routes and executes orders that it receives from its customers using execution services that it licenses or outsources from Broker-Dealer B. Is Broker-Dealer A required to provide the Rule 606(b)(3) report with regard to venues to which it routed orders using the execution services that it white-labeled from Broker-Dealer B ?

Answer: Yes. When relying on third-party execution services, such as in a white-labeling arrangement, customer-facing broker-dealers such as Broker-Dealer A will need to ensure that they can provide the information required by Rule 606(b)(3), should it be requested by a customer. If Broker-Dealer A relies on third-party execution services, such as in a white-labeling arrangement, and utilizes the execution services to handle and route its customer’s order (and child orders thereof), Broker-Dealer A has exercised discretion with regard to how its customer’s order is routed and is responsible for disclosing to its customer the report required under Rule 606(b)(3), including the information for the venues to which orders were routed using the white-labeled execution service. A broker-dealer exercises discretion with the use of any white-labeling arrangement, whether that be with the use of a smart order router, execution algorithm, or other trading strategy.

Question 1.02: Broker-Dealer A receives orders from its customer and those orders are routed to Broker-Dealer C using an execution service from Broker-Dealer B over which Broker-Dealer A exercises discretion. Broker-Dealer C then further routes to other venues child orders derived from the orders it received from Broker-Dealer A. Is Broker-Dealer A required to provide the Rule 606(b)(3) report with regard to the other venues to which Broker-Dealer C routed child orders?

Answer: No. Broker-Dealer A’s exercise of discretion ended after the customer’s orders were routed using the execution services of Broker-Dealer B (the execution services over which Broker-Dealer A was exercising discretion) to the first destination. Broker-Dealer A’s exercise of discretion in utilizing the execution services of Broker-Dealer B does not extend to how Broker-Dealer C routes the orders because Broker-Dealer A does not perform any tasks involving its own judgment as to how and where to route and execute such orders. Therefore there is no obligation for Broker-Dealer A to report the Rule 606(b)(3) information relative to any venues to which Broker-Dealer C routes orders.

Likewise, if Broker-Dealer A’s customer’s orders were routed to Exchange D using an execution service from Broker-Dealer B, and Exchange D then further routes to other venues child orders derived from the orders it received from Broker-Dealer A, Broker-Dealer A’s exercise of discretion in utilizing the execution services of Broker-Dealer B does not extend to how Exchange D routes the orders because Broker-Dealer A does not perform any tasks involving its own judgment as to how and where to route and execute such orders. Therefore, there is no obligation for Broker-Dealer A to report the Rule 606(b)(3) information relative to any venues to which Exchange D routes orders.

Question 1.03: Broker-Dealer A routes its customer’s orders to Broker-Dealer B, subject to an arrangement where Broker-Dealer A has chosen a cost-plus fee structure and specified a desire to route orders in a manner that may maximize rebates and minimize transaction fees to the extent practicable. Is Broker-Dealer A required to provide the Rule 606(b)(3) report with regard to venues to which Broker-Dealer B routed orders?

Answer: Yes. As described in the question, Broker-Dealer A has an economic arrangement with Broker-Dealer B that affects the order routing strategy that Broker-Dealer B uses on Broker-Dealer A’s behalf. Specifically, under the terms of the arrangement, Broker-Dealer B must choose or configure a routing and execution strategy that includes as preferred execution venues those venues that meet economic criteria consistent with maximizing rebates or incurring the lowest fees. Thus, through this arrangement, Broker-Dealer A has exercised discretion over how Broker-Dealer B routes, and Broker-Dealer A is required to report to its customer the information required by Rule 606(b)(3) with regard to any venue to which Broker-Dealer B routes orders. This would be the case regardless of whether Broker-Dealer A is white-labeling the execution services of Broker-Dealer B or routing orders for further order handling by Broker-Dealer B.

Question 1.04: Broker-Dealer A and Broker-Dealer B have a generally established course of dealing where Broker-Dealer A expects Broker-Dealer B to modify or utilize a certain pre-set configuration in its routing strategy in terms of urgency (e.g., passive vs. aggressive) when taking liquidity, or expects Broker-Dealer B never to route a child order to a particular venue. Broker-Dealer A routes its customer’s orders to Broker-Dealer B with general instructions to use Broker-Dealer B’s execution services but no further explicit qualifications, parameters, or instructions are provided at the time the orders are routed. Is Broker-Dealer A required to provide the Rule 606(b)(3) report with regard to venues to which Broker-Dealer B routed orders?

Answer: Yes. If Broker-Dealer A and Broker-Dealer B have a generally established course of dealing such that Broker-Dealer B implicitly knows to calibrate its routing strategy in a particular manner on behalf of Broker-Dealer A, Broker-Dealer A has exercised discretion with regard to how and where Broker-Dealer B routes and executes the orders. Therefore Broker-Dealer A must report to its customer the Rule 606(b)(3) information relative to the venues to which Broker-Dealer B routes orders.

Question 1.05: Broker-Dealer A receives orders from its customer and routes those orders to Broker-Dealer B using Broker-Dealer B’s execution services for further handling. When Broker-Dealer A routes orders to Broker-Dealer B, Broker-Dealer A instructs Broker-Dealer B to handle them with a certain level of urgency (e.g. passively or aggressively) but otherwise leaves the order handling and routing decisions to Broker-Dealer B. Is Broker-Dealer A required to provide the Rule 606(b)(3) report with regard to venues to which Broker-Dealer B routed orders?

Answer: Yes. In instructing Broker-Dealer B to pursue a certain level of routing aggressiveness, Broker-Dealer A is exercising discretion by instructing Broker-Dealer B as to how to handle the level of urgency. Therefore, Broker-Dealer A’s instruction affects the routing or execution strategies utilized by Broker-Dealer B and the venues to which Broker-Dealer B routes orders.

Question 1.06: Broker-Dealer A routes its customer’s orders to Broker-Dealer B for further handling and instructs Broker-Dealer B to interact only with “lit” venues when handling the orders. Is Broker-Dealer A required to provide the Rule 606(b)(3) report with regard to venues to which Broker-Dealer B routed orders?

Answer: Yes. In instructing Broker-Dealer B to interact only with certain types of venues, such as “lit” venues, when handling the orders, Broker-Dealer A has exercised discretion with regard to how and where Broker-Dealer B routes and executes the orders.

Question 1.07: Broker-Dealer A receives a large order from its customer. As part of its handling of the customer’s order, Broker-Dealer A routes a directed order to Broker-Dealer B and relies on Broker-Dealer B to determine the timing and whether Broker-Dealer B will break the large order into child orders (as well as the size of any child orders) to be routed to the specified venue. Is Broker-Dealer A required to provide the Rule 606(b)(3) report with regard to the venue to which Broker-Dealer B routed?

Answer: Yes. In sending a directed order to Broker-Dealer B, Broker-Dealer A has exercised discretion with regard to how and where Broker-Dealer B routes and executes the order.

Issue 2: Venues

Question 2.01: Is there a difference between a “venue” for purposes of the customer-specific reports required by Rule 606(b)(3) for not held orders versus a “venue” for purposes of the public quarterly reports required by Rule 606(a) for held orders and options orders?

Answer: Yes. The customer-specific reports for not held orders must include information for each venue to which orders were routed while the public quarterly reports for held orders and options orders must include information for venues to which orders were routed for execution. In the NMS stock context, because Rule 606(b)(3) does not include the phrase “for execution,” the term venue includes a broader scope of entities than Rule 606(a), such as when the routing broker-dealer routes to another broker-dealer that further routes orders but does not execute orders.

Accordingly, in a scenario in which Broker-Dealer A routes its customer’s order to Broker-Dealer B for further handling, Broker-Dealer B would be a venue for purposes of Broker-Dealer A’s Rule 606(b)(3) report to its customer. Moreover, if Broker-Dealer B both executes internally a portion of the order received from Broker-Dealer A and further routes another portion of the order, then Broker-Dealer B should be reported in both capacities in Broker-Dealer A’s report – Broker-Dealer B should be reported once for its role as a routing broker and, separately, for its role as an execution venue, with any internal executions at an affiliated alternative trading system (“ATS”) reported separately from internal executions that occur elsewhere within the broker-dealer entity (see infraFAQs 2.02 – 2.04).

Each venue name in the venue column of the report should be followed by a parenthetical that labels the venue as either a primary routing venue (“PRV”) or execution venue/secondary routing venue (“EV/SRV”). PRV indicates that the identified venue received orders from the customer-facing broker-dealer and further routed them, and that the information in the corresponding row of the report pertains to those further routes. EV/SRV identifies venues where orders were executed or that further routed orders. In the scenario presented above for example, the venue column of Broker-Dealer A’s report should contain one row for “Broker-Dealer B (PRV)” that contains the Rule 606(b)(3) information relative to Broker-Dealer B’s role as a routing venue, and a separate row for “Broker-Dealer B (EV/SRV)” that contains the Rule 606(b)(3) information relative to Broker-Dealer B as an execution venue.

Question 2.02: What can be a venue for Rule 606(b)(3) reporting purposes?

Answer: Any destination where a broker-dealer routes or executes a customer’s order is a venue for purposes of the Rule 606(b)(3) report. This includes any exchange, broker-dealer, or ATS. Each such venue with a distinct market participant identifier (MPID) or market identifier code (MIC) must be reported separately in the report. A broker-dealer may represent multiple execution venues depending on the different routing and execution destinations operated by the broker-dealer. For example, a broker-dealer may operate an ATS, which has a MPID that is separate from the broker-dealer-operator’s MPID. If the broker-dealer executes orders in its ATS and also executes orders elsewhere internally, such as (but not limited to) in a single dealer execution platform or an internal execution desk for crossing customer orders, the ATS must be reported as an execution venue for the executions that occur therein and the broker-dealer entity must be reported separately as an execution venue for the executions that occur internally at the broker-dealer but not in the ATS.

Question 2.03: Can the customer-facing broker-dealer be a venue for Rule 606(b)(3) reporting purposes if it executes some or all of its customer’s order internally?

Answer: Yes. If, for example, Broker-Dealer A executes some portion of its customer’s order internally, Broker-Dealer A must report the Rule 606(b)(3) information relative to its internal executions regardless of whether Broker-Dealer A acts as principal in executing against its customer’s order or as agent in crossing its customer’s order against other orders.

Executions that occur within an ATS operated by Broker-Dealer A must be reported separately from internal executions that occur elsewhere within Broker-Dealer A. For example, if Broker-Dealer A operates an ATS as well as a separate internal execution desk for crossing customer orders, and Broker-Dealer A executes a portion of its customer’s order at each of those internal destinations, Broker-Dealer A and its ATS must appear in separate rows in the PDF renderer version of the report and the relevant columns of Rule 606(b)(3)(i)-(iv) information must be populated for Broker-Dealer A’s executions in its ATS and, separately, for internal executions at Broker-Dealer A that do not occur in its ATS. Broker-Dealer A would report the information regarding total shares executed required by Rule 606(b)(3)(ii)(A) for its ATS and, separately, for other internal executions, and that field in the PDF renderer would include, in the aggregate, the total shares from the customer’s order that Broker-Dealer A executed internally in its ATS and, in the separate Broker-Dealer A row, the total shares from the customer’s order that Broker-Dealer A executed internally but not in its ATS. Below is a depiction of the venue column in the PDF renderer version of the Rule 606(b)(3) report for the scenario presented here:

Venue
Broker-Dealer A ATS (EV/SRV) (MPID)
Broker-Dealer A (EV/SRV) (MPID)

Question 2.04: A customer submits orders to Broker-Dealer A, which then routes the orders to Broker-Dealers B, C, and D. Broker-Dealer A exercises discretion regarding how Broker-Dealers B, C, and D further route the orders. Broker-Dealers B, C, and D further route to Exchanges X and Y child orders derived from the orders that they received from Broker-Dealer A, and Broker-Dealers B and C (but not Broker-Dealer D) also execute internally some portion of the orders that Broker-Dealer A routed to them. Broker-Dealer B’s internal executions occur in an ATS that it operates and Broker-Dealer C’s internal executions occur in a single-dealer execution platform that it operates. What venues should be included in Broker-Dealer A’s Rule 606(b)(3) report to its customer?

Answer: Broker-Dealers B, C, and D should be included as venues for each capacity in which they handled orders received from Broker-Dealer A, i.e., all three should be included as routing venues, Broker-Dealer B’s ATS should be included separately as an execution venue, and Broker-Dealer C should be included separately for the internal executions in its single-dealer platform. Even though Broker-Dealer D did not execute internally any portion of the orders it received from Broker-Dealer A, it is still a venue for Rule 606(b)(3) reporting purposes because it is a destination to which Broker-Dealer A routed orders. In addition, Exchanges X and Y must be included as venues in Broker-Dealer A’s report since Broker-Dealer A exercised discretion over how Broker-Dealers B, C, and D route. Moreover, the Rule 606(b)(3) information must be reported separately for each venue.

Accordingly, in the PDF renderer version for the Rule 606(b)(3) report for the scenario presented here, Broker-Dealers B, C, and D should each be reflected in a separate row in the report as venues to which Broker-Dealer A routed the customer’s orders; Broker-Dealer B’s ATS and Broker-Dealer C also should be reflected in additional, separate rows as execution venues; and, lastly, Exchanges X and Y to which Broker-Dealers B, C, and D routed child orders also should be reflected as execution venues in separate rows. For each venue in each row of the report, the relevant columns of Rule 606(b)(3)(i)-(iv) information must be reported. Below is a depiction of the venue column in the PDF renderer version of the Rule 606(b)(3) report for the scenario presented here:

Venue
Broker-Dealer B (PRV) (MPID)
Broker-Dealer C (PRV) (MPID)
Broker-Dealer D (PRV) (MPID)
Broker-Dealer B ATS (EV/SRV) (MPID)
Broker-Dealer C (EV/SRV) (MPID)
Exchange X (EV/SRV) (MIC)
Exchange Y (EV/SRV) (MIC)

Question 2.05: Broker-Dealer A has an arrangement with Broker-Dealer B, in which Broker-Dealer A routes and executes orders that it receives from its customers using execution services that it licenses or outsources from Broker-Dealer B. A customer submits several large orders to Broker-Dealer A and, using the execution services that it licenses or outsources from Broker-Dealer B, Broker-Dealer A routes and executes the order in discrete portions across the following range of venues: (i) an ATS operated by Broker-Dealer B, (ii) an internal execution desk at Broker-Dealer C, and (iii) Exchange D. What venues should be included in Broker-Dealer A’s Rule 606(b)(3) report to its customer?

Answer: Consistent with FAQ 2.04 above, Broker-Dealer B should be included in Broker-Dealer A’s report as a routing venue because of its role as the provider of execution services pursuant to its arrangement with Broker-Dealer A, and Broker-Dealer B’s ATS also should be reported separately as an execution venue. Broker-Dealer C, for the executions in its non-ATS internal execution desk, and Exchange D also should be included in the report, separately, as execution venues. Below is a depiction of the venue column in the PDF renderer version of the Rule 606(b)(3) report for the scenario presented here:

Venue
Broker-Dealer B (PRV) (MPID)
Broker-Dealer B’s ATS (EV/SRV) (MPID)
Broker-Dealer C(EV/SRV) (MPID)
Exchange D (EV/SRV) (MIC)

Issue 3: Average Time Between Order Entry and Execution or Cancellation for Orders Providing Liquidity

Question 3.01: Does the Rule 606(b)(3)(iii)(C) requirement that broker-dealers disclose the average time between order entry and execution or cancellation for orders providing liquidity (in milliseconds) apply only to orders that are joining or improving the NBBO at time of entry?

Answer: No. The Rule 606(b)(3)(iii)(C) requirement applies to “orders providing liquidity,” and does not differentiate such liquidity-providing orders from those that may join or improve the NBBO at the time of entry, including those that provide depth by resting at prices away from NBBO. Rule 600(b) defines “orders providing liquidity” as “orders that were executed against after resting at a trading center.” While an order that rests at prices away from the NBBO is perhaps less likely to be executed and therefore less likely to qualify as an “order providing liquidity,” if such an order is executed against (including partially), it is still an order providing liquidity under the Rule and the Rule 606(b)(3)(iii)(C) information must be provided regardless of the price point at which the order rested.

Question 3.02: How should a broker-dealer measure the average time between order entry and execution or cancellation when an order is partially filled and the remainder is subsequently cancelled?

Answer: If an order is partially filled and the remainder is subsequently cancelled, one option would be for a broker-dealer to measure the average time between order entry and execution or cancellation starting at the time the order enters the venue and ending at the time of the cancellation of the unexecuted portion of the order.

Question 3.03: How should a broker-dealer report the average time between order entry and execution when an order is fully filled by multiple executions?

Answer: If it takes more than one execution to fully fill a customer order at a venue, one option would be for a broker-dealer to measure the average time between order entry and execution starting at the time the order enters the venue and ending at the time of the final execution of the order at that venue.

Issue 4: Information on Orders that Provided or Removed Liquidity

Question 4.01: Under Rule 606(b)(3)(iii)-(iv), a broker-dealer must disclose information on its customer’s orders that provided or removed liquidity. Do all orders either provide or remove liquidity when executed?

Answer: Rule 600(b)(54) defines “orders providing liquidity” as “orders that were executed against after resting at a trading center” and Rule 600(b)(55) defines “orders removing liquidity” as “orders that executed against resting trading interest at a trading center.” Generally, orders submitted to exchanges will either provide or remove liquidity, and exchanges will pass back execution reports with exchange-determined liquidity codes to its members. Customer-facing broker-dealers with reporting responsibility could procure such reports from exchange members and use the liquidity codes for purposes of producing the Rule 606(b)(3) reports.

However, in certain instances in which exchange-determined liquidity codes cannot be relied upon, some orders may neither provide nor remove liquidity, and some orders that execute against each other may both provide liquidity. In these instances, the categorization of an order as providing or removing liquidity will depend on how the order is handled by a trading center and the execution mechanisms used. For example, in the over-the-counter market, if a broker-dealer executes a customer’s order internally by matching the order with another customer’s order, neither one of the orders would meet the definition of orders providing liquidity or orders removing liquidity as defined in Rules 600(b)(54) and (55), respectively, because neither of the orders were resting at a trading center. Likewise, if an introducing broker sends a customer’s order to an executing broker which then executes the order against its own inventory, the customer’s order neither provided liquidity because it did not rest at the trading center nor removed liquidity because there was not resting trading interest at the trading center. In addition, certain execution mechanisms offered by trading centers, such as auction mechanisms or midpoint crossing mechanisms, may result in the execution of orders that neither provide nor remove liquidity because neither of the orders in the execution were resting at a trading center. Further, if an order rests at a trading center but is cancelled in full without being executed against, the order would not be an order providing liquidity. By contrast, if two contra-side orders are resting at a trading center and market conditions change such that the two orders execute against each other, both orders would be orders providing liquidity because both orders were executed against after resting at the trading center and would be included in the disclosures covering orders providing liquidity.

Thus, an order that is required to be included in the disclosures under Rule 606(b)(3) but neither provided nor removed liquidity would be included in the disclosures covering order routing and order execution but would not be included in the disclosures covering orders that provided liquidity or removed liquidity.

Issue 5: Fees and Rebates

Question 5.01: How should a broker-dealer comply with the requirement under Rule 606(b)(3) to report to its customer average net execution fee or rebate information when the fee or rebate information is not known at the time of the customer request (e.g., delay in receipt of fee or rebate information due to volume threshold pricing tiers)?

Answer: The broker-dealer must report to its customer the average net execution fee or rebate information as determined by the actual fees charged or rebates provided by the execution venue. Thus, if the fees or rebates may vary depending on the tier reached at the end of the month, the broker-dealer should report to its customer, upon request and as available, the actual fees charged or rebates provided. In instances where a customer requests a Rule 606(b)(3) report but the broker-dealer has not received monthly-volume-adjusted fee or rebate information from one or more execution venues for the immediately preceding calendar month within 7 business days after the customer’s request, the broker-dealer may satisfy the customer’s request by providing the fee and rebate information (and other Rule 606(b)(3) information) for the preceding six calendar months for which it has full information.

Question 5.02: How should an average net execution fee be distinguished from an average net execution rebate in the Rule 606(b)(3) report?

Answer: An average net execution fee should be reported as a negative number and an average net execution rebate should be reported as a positive number.

Question 5.03: In a scenario in which Broker-Dealer A routes its customer’s orders to Broker-Dealer B for further handling, and Broker-Dealer B does not execute internally any portion of the orders received from Broker-Dealer A but routes the orders to Exchanges X and Y for execution, how should any payments between Broker-Dealers A and B be reported on Broker-Dealer A’s Rule 606(b)(3) report to its customer, assuming that Broker-Dealer A exercised discretion over Broker-Dealer B’s routing?

Answer: In this scenario, Broker-Dealer B should be disclosed on Broker-Dealer A’s Rule 606(b)(3) report as a routing venue and Exchanges X and Y should be disclosed as execution venues (seeFAQ 2.04). Payments between Broker-Dealers A and B related to executions that occur on Exchanges X and Y should be disclosed as part of the average net execution fee or rebate information required by Rule 606(b)(3)(ii)(D), and included in the row in the report that pertains to Broker-Dealer’s B role as a routing venue even if Broker-Dealer B does not execute internally orders received from Broker-Dealer A. For example, if Broker-Dealers A and B have a cost-plus arrangement where Broker-Dealer B passes back to Broker-Dealer A any execution fee charged or rebate provided by Exchanges X or Y plus an additional fee, that additional fee should be included in the average net execution fee or rebate information in the row of the report pertaining to Broker-Dealer B’s role as a routing venue. The execution fee charged or rebate provided to Broker-Dealer B by Exchanges X or Y must be reported separately as part of the average net execution or rebate information in the respective rows in the report that pertain to Exchanges X and Y.

Issue 6: Average Price Accounts and Aggregated Orders

Question 6.01: How could broker-dealers disclose the information required by Rule 606(b)(3) in a scenario where an introducing broker aggregates various customers’ orders into one large order that is routed to an executing broker for further order handling (e.g., using an average price account)?

Answer: One option would be for the introducing broker to report to each customer the Rule 606(b)(3) information that pertains to the executing broker’s handling of the aggregated order (assuming the introducing broker exercised discretion) by allocating to each customer on a pro-rata basis the information relative to the aggregated order.

For example, five customers each submit a 100,000 share order to buy the same NMS stock to an introducing broker, and the introducing broker aggregates those orders into one order for 500,000 shares which the introducing broker then routes to an executing broker using an average price account. From that 500,000 share aggregated order, the executing broker creates 100 child orders of 5,000 shares each and routes the child orders to various venues where they receive executions at various prices, and the executing broker then provides an average price back to the introducing broker for the 500,000 share aggregated order. In this scenario, one option would be for the introducing broker to report the Rule 606(b)(3) information relative to the executing broker’s routes by allocating to each customer 1,000 (one-fifth) of the shares of each 5,000 share child order routed by the executing broker and reporting the Rule 606(b)(3) information accordingly.

Issue 7: Orders That Are Further Routable

Question 7.01: For the purposes of Rule 606(b)(3), how could broker-dealers determine whether an order is further routable?

Answer: Orders are further routable if the order type, or order type setting utilized, does not prohibit the ability of the venue receiving the order from routing the order to another venue.

Issue 8: Actionable Indications of Interest (“IOIs”)

Question 8.01: Broker-Dealer A sends an IOI to Broker-Dealer B, an external liquidity provider, in which Broker-Dealer A specifies that it would like to purchase 10,000 shares of a particular NMS stock, but does not specify a limit price. Through a generally established course of dealing, Broker-Dealer B knows that Broker-Dealer A is willing to cross the spread when purchasing NMS stock. Is the IOI an actionable IOI and thus subject to reporting under Rule 606(b)(3)?

Answer: Yes. Actionable IOIs, as defined in Rule 600(b)(1), are the functional equivalent of orders or quotations, i.e., firm trading interest, and are subject to reporting under Rule 606(b)(3). Rule 600(b)(1) defines an actionable IOI as any IOI “that explicitly or implicitly conveys all of the following information with respect to any order available at the venue sending the [IOI]: (i) Symbol; (ii) Side (buy or sell); (iii) A price that is equal to or better than the national best bid for buy orders and the national best offer for sell orders; and (iv) A size that is at least equal to one round lot” (emphasis added). Because these IOI terms may be implicitly conveyed, a course of dealing between the IOI sender and the recipient through which the recipient can assume a term of the IOI would sufficiently convey that term for purposes of the definition. In the scenario here, Broker-Dealer B’s knowledge that Broker-Dealer A is willing to cross the spread is implicit conveyance of the price term of the IOI such that Broker-Dealer A’s IOI is an actionable IOI under the definition. Even though the price term is implicitly conveyed, Broker-Dealer A’s IOI acts as the functional equivalent of a quote because Broker-Dealer B can execute against the trading interest represented by the IOI without further agreement by Broker-Dealer A.

Issue 9: Riskless Principal Transactions

Question 9.01: Rule 606(b)(3) requires a broker-dealer to report, among other things, the total number of shares of a customer’s order flow that the broker-dealer executed as principal for its own account. Should the broker-dealer include riskless principal transactions in the customer’s report pursuant to this requirement?

Answer: No. For orders that a broker-dealer receives from a customer and handles on a riskless principal basis, one method for reporting could be for the broker-dealer to treat such orders like agency orders in the Rule 606(b)(3) report. The broker-dealer must report the Rule 606(b)(3) information as it relates to the order flow received from the customer, the broker-dealer’s routing of that order flow to away venues, and any executions of that order flow on those away venues. For example, in a riskless principal transaction where a broker-dealer receives an order from a customer, creates principal child orders that are derived from the customer’s order and routes them to away venues where they are executed, and then fills the customer’s order in a riskless principal capacity, the broker-dealer would not report its riskless principal fill of the customer’s order but would report the Rule 606(b)(3) information as it relates to the customer’s order and the child orders that the broker-dealer routed to away venues.

Issue 10: De Minimis Exceptions

Question 10.01: May a broker-dealer avail itself of the Rule 606(b)(4) de minimis exception from providing customer-specific disclosures under Rule 606(b)(3) for a particular branch of the broker-dealer if the branch does not handle any not held order flow?

Answer: The de minimis exception is assessed at the broker-dealer level and is determined using the entire amount of order flow that the broker-dealer receives from customers. If a broker-dealer has multiple branches or business units or other types of internal divisions, the broker-dealer must assess its aggregate not held order flow across all of its branches or business units or divisions to determine whether it can avail itself of the Rule 606(b)(4) de minimis exception. A broker-dealer cannot avail itself of the Rule 606(b)(4) de minimis exception if its aggregate order flow across all of its branches, business units or divisions exceeds the de minimis threshold.

Section 2: NMS Stock Held Order and Options Order Reports Under Rule 606(a)

Issue 11: Limit Orders – Marketable vs. Non-marketable

Question 11.01: For purposes of complying with the requirements of Rule 606(a), may a broker-dealer determine whether a limit order is marketable or non-marketable at the time the broker-dealer routes the order to a venue for execution?

Answer: Yes. A broker-dealer could determine whether a limit order is marketable or non-marketable at the time the broker-dealer routes the order to a venue for execution.

Question 11.02: For purposes of Rule 606(a)(1)’s requirement that broker-dealers differentiate non-directed orders that are marketable limit orders from non-directed orders that are non-marketable limit orders, is marketability assessed at the parent order level or the child order level?

Answer: Whether a limit order is marketable or non-marketable for purposes of Rule 606(a)(1) must be determined with respect to each order that a broker-dealer routes to a venue for potential execution. If a broker-dealer receives an order from a customer and then routes that order in its entirety to one venue for execution, marketability must be assessed with respect to that order. If, however, a broker-dealer receives a parent order from a customer, divides the parent order into smaller child orders, and then routes the child orders to one or more venues for execution, marketability must be assessed with respect to each child order routed by the broker-dealer, not the larger parent order received from the customer.

Question 11.03: How could marketability be determined for orders placed outside of regular market hours?

Answer: Marketability could be determined based on the best bid and best offer for such security that are calculated and disseminated on a current and continuous basis by a plan processor pursuant to an effective national market system plan. To the extent no such best bid or offer is calculated and disseminated, broker-dealers could adopt and follow reasonable procedures to determine the best bid or offer available in a security at the time marketability needs to be determined for such order.

Issue 12: Fees and Rebates

Question 12.01: A customer sends a NMS stock order to Broker-Dealer A, which then routes the order to Broker-Dealer B, a routing broker-dealer that does not execute orders but provides execution services. Broker-Dealer B routes child orders to and receives executions from multiple venues with associated fees/rebates. For purposes of quarterly reporting under Rule 606(a)(1), how could Broker-Dealer A report fees or rebates between Broker-Dealer B and the execution venues and report fees or rebates between Broker-Dealer A and Broker-Dealer B?

Answer: Rule 606(a)(1) reports must include information for venues to which orders were “routed for execution.” In the NMS stock context, a broker-dealer can internally execute orders without sending them to an exchange. Thus, for Rule 606(a)(1) reporting purposes in the NMS stock context, a broker-dealer to which the customer-facing broker routes orders can be a “venue to which [] orders were routed for execution” if that broker-dealer executes orders. When this occurs, the customer-facing broker would report the Rule 606(a)(1) information relevant to the executing broker-dealer as though the executing broker-dealer is the venue.

If, however, the broker-dealer to which the orders were routed does not execute orders, as is posited by the question here with respect to Broker-Dealer B, that broker-dealer would not be a venue to which orders were routed for execution. Rather, the venues to which Broker-Dealer B routes child orders for execution would be the relevant venues for Rule 606(a)(1) reporting purposes. While the reporting responsibility under the Rule remains with Broker-Dealer A in this scenario, Broker-Dealer A may contract with Broker-Dealer B for assistance in meeting its reporting responsibilities under the rule.

For example, assuming Broker-Dealer B makes the routing decisions concerning the NMS stock orders routed to it by Broker-Dealer A, Broker-Dealer B may be in the best position to prepare a quarterly report that reflects its routing practices on behalf of Broker-Dealer A. To comply with the rule, Broker-Dealer A could disclose its relationship with Broker-Dealer B and adopt by reference Broker-Dealer B’s report, provided that Broker-Dealer A has examined the report and does not have reason to believe it materially misrepresents the order routing practices. Under this approach, Broker-Dealer A’s disclosure of its relationship with Broker-Dealer B could include the information required by Rule 606(a)(1) that is relevant to that relationship such as, among other information required by the Rule, any payment for order flow received from, payment from any profit-sharing relationship received from, transaction fees paid to, and transaction rebates received from Broker-Dealer B. Broker-Dealer B’s report, which would be adopted by reference by Broker-Dealer A, would report the information required by Rule 606(a)(1) from Broker-Dealer B’s standpoint. This would include, among other things, the net aggregate amounts of any payment for order flow, payment from profit-sharing, and transaction fees or rebates relative to the relationship between Broker-Dealer B and the venues to which it routed child orders.

Question 12.02: Many execution venues offer tiered pricing arrangements where the volume or type of order flow sent to the venue by a broker-dealer determines the applicable pricing. For example, some venues may offer incrementally higher rebates or lower fees to broker-dealers for additional order flow volume. Or, as another example, venues may offer different pricing tiers for marketable order flow versus non-marketable order flow. How should such tiered pricing arrangements be disclosed under Rule 606(a)(1)?

Answer: A venue may establish a tiered pricing arrangement for the purpose of incentivizing broker-dealers to send more order flow to the venue or dis-incentivizing them from sending less order flow, or to incentivize certain types of order flow over other types. These incentives or disincentives may influence a broker-dealer’s routing choices. Rule 606(a)(1)(iv) requires a broker-dealer to provide a discussion of the material aspects of its relationship with each venue identified pursuant to paragraph (a)(1)(ii) of Rule 606, including, among other things, incentives for equaling or exceeding, or disincentives for failing to meet, an agreed upon order flow volume threshold; volume-based tiered payment schedules; and minimum order flow agreements. Under Rule 606(a)(1)(iv), when a broker-dealer routes to a venue that provides a tiered pricing schedule, the material aspects of the broker-dealer’s relationship with that venue that are required to be disclosed to the customer include a description of all of the pricing tiers offered by the venue, the pricing for each tier, and the tier that applied to the broker-dealer.

These tiered pricing arrangements may be most prevalent with an exchange’s volume-based tiers, but similar arrangements may also exist when, for example, a customer-facing broker-dealer, Broker-Dealer A, routes the customer’s order to Broker-Dealer B, which then executes and/or further routes the customer’s order. Broker-Dealer B may offer Broker-Dealer A volume-based tiered pricing, or may offer different pricing for different types of order flow. These pricing arrangements constitute material terms of the relationship between Broker-Dealers A and B, and so, pursuant to Rule 606(a)(1)(iv), the available tiers and pricing for each, as well as the pricing tier applied to Broker-Dealer A, are required to be disclosed.

Issue 13: Options Orders Report

Question 13.01: When a retail options broker routes customer options orders to a consolidator which then sends those orders to an options exchange for execution, does the retail options broker have a reporting responsibility under Rule 606(a) and, if so, what is it?

Answer: The retail options broker has the reporting responsibility under Rule 606(a) as it is the broker to which the customer transmitted the options orders. If a retail options broker routes all of its customer options orders to one or more consolidators, and the consolidator in fact makes the routing decisions concerning those customer orders, including to exchanges where the consolidator or its affiliate acts a liquidity provider to those orders, the consolidator could be effectively acting as the venue for execution for purposes of the rule. Given the market structure for listed options that are NMS securities, where orders for such options must be executed on an exchange, the consolidator will route to exchanges the customer options orders received from retail brokers. To comply with the rule, therefore, a retail options broker could disclose each of its consolidator relationships and, for each such relationship, provide the applicable information required by Rule 606(a)(1).

For example, the broker would disclose the percentage of total options orders that were non-directed orders pursuant to Rule 606(a)(1)(i), and the identity of the consolidators required to be identified pursuant to Rule 606(a)(1)(ii) to which non-directed options orders were routed and the percentage of non-directed options orders routed to each such consolidator. For each consolidator required to be identified pursuant to Rule 606(a)(1)(ii), the broker would disclose the Rule 606(a)(1)(iii) information regarding net aggregate amount of any payment for order flow received from, payment from any profit-sharing relationship received from, transaction fees paid to, and transaction rebates received from the consolidator. In addition, because of the view that the venue in this scenario is the consolidator, the marketability of a limit order for purposes of categorizing it as marketable or non-marketable as required by Rule 606(a)(1)(i)-(iii) could be determined at the time the customer-facing broker routes the order to the consolidator. Pursuant to Rule 606(a)(1)(iv), the broker also is required to provide a discussion of the material aspects of its relationship with each consolidator, including a description of any arrangement for payment for order flow and any profit-sharing relationship and a description of any terms of such arrangements, written or oral, that may influence the consolidator’s order routing decision.

Question 13.02: How are complex options orders disclosed under Rule 606(a)?

Answer: Rule 606(a) requires the disclosure of certain information related to the routing of non-directed options orders having a market value less than $50,000. Such disclosures must be broken down by market orders, marketable limit orders, non-marketable limit orders, and other orders. Complex options orders should be categorized as “other orders,” as they are orders for which the customer requests special handling by the broker-dealer.

Question 13.03: Rule 606(a)(1)(iii) requires any broker-dealer to disclose the “net aggregate amount of any payment for order flow received” for its customers’ options orders. The XML schema that Rule 606(a)(1) requires for the disclosure format describes the unit of measurement for this data as “Net Cents Per Hundred Shares.” How would this unit apply to the disclosure of options orders?

Answer: Given that 100 shares is the number of shares in one standard options contract, this disclosure should provide the net aggregate amount of any payment for order flow received in net cents per options contract. Thus, for options orders, this requirement can be interpreted as “Net Cents Per Option Contract for One Hundred Shares.”