Tags: Rule 606

Trading Views Podcast

In Episode 1, we sat down with Joe Wald, Managing Director of Clearpool Group , to discuss issues around transparency and conflicts of interest involved with order routing decisions.

Concerns about conflicts of interest come up all the time in financial markets. The worry is that investors will be harmed if those who owe investors a duty or obligation are conflicted and end up looking out for themselves instead. Given the SEC’s investor protection mandate, it should come as no surprise that a lot of regulation is aimed at conflicts. In particular, those which exist with broker dealers in their order routing decisions of customer orders, the topic of this podcast.

On June 15th, U.S. Court of Appeals for the District of Columbia Circuit thwarted an SEC proposed pilot that would study how exchanges’ pricing creates conflicts of interest for broker dealers that may harm investors. The Courts action was well covered not just because of its ruling on a controversial issue, but also for the language it used in its decision and how it may affect the SEC’s behavior going forward. We recently caught up with Joe Wald, to get his perspective on the DC Circuit decision and how it effects initiatives by the SEC, which seek to increase transparency into order routing with the goals of identifying conflicts of interest and understanding their influence. Joe, is the former chief executive and co-founder of the electronic trading software provider, Clearpool Group, and since being acquired by BMO Capital Markets in January 2020,  is currently a Managing Director, responsible for the execution of Clearpool’s vision and strategic direction.

Open Call – Implementation of Rule 606

Open Call

STA Open Call – February 26, 2020

Rule 606 Implementation

Chris Bok, FIF & Jim Toes, STA

Reference Material[1]

STA Comment Letter on Rule 15c2-11

STA commends the Commission for proposing amendments to modernize Rule 15c2-11 STA offers the following comments about certain aspects of the Proposal, including: (1) the increased burden that may be imposed on market makers; and (2) potential consequences for retail investors when securities are no longer eligible for public quoting. Full letter here

SEC Proposed Order for New Consolidated Market Data Plan

On Jan 8th the SEC announced it will seek public comments on a proposed order that will modernize the governance of National Market System (NMS) plans that consolidate and disseminate core market data from trading venues by among other things, unifying the three existing plans into one. Comment letters are available here. 

FINRA Regulatory Notice 20-05; Requesting Comment on Recommendations to Enhance Continuing Education for Securities Industry Professionals Link

While registered persons of broker-dealers are subject to continuing education, they are unable to extend that continuing education in order to maintain their qualification following the termination of any of their registrations. To address this issue, the CE Council recommends that FINRA, and the other SROs participating in the CE program, consider rule changes that would enable previously registered individuals to maintain their qualification for their terminated registration categories by participating in an annual continuing education program. STA Comment Letter

Executive Summary

Amended Rule 606(b)(3) requires that brokers, upon request from their customers, provide a non-public report with a standardized set of individualized disclosures concerning the firm’s handling of that customer’s not-held orders.

  • Standardized disclosures include, but are not limited to, the First and Second routes on orders
  • As of Feb 15th, customers began requesting reports on First routes.
  • Beginning May 15th, customers can begin requesting First and Second route data.

Information on 606(a) and 606(b)(3) provided by Chris Bok, FIF can be found

HERE

[1]

 This brief is meant for informational purposes only and therefore should not be considered legal advice. STA’s and the STA Foundation’s goals is to raise awareness on this industry development and encourage dialogue.  

Comment Letter: FIF and STA Comments on Amended SEC Rule 606

Comment Letters

While much progress has been made with respect to the industry’s implied understanding of the scope and breadth of data that the SEC Staff expects to be reported pursuant to Rule 606, there remain several open questions that the SEC is still considering.

FIF and STA strongly emphasize that the lack of: 1) written guidance; 2) adequate resolution of open questions; and 3) clarity pertaining to reporting look-through data is preventing industry stakeholders from moving forward with the implementation of Rule 606 in a manner that will provide end-customers with consistent and accurate data.

Read full letter here

STA Conference First 15 Speakers and DC Meeting Recaps

Newsletter

FINRA holds July 2019 Board of Governors Meeting.

FINRA CEO Robert Cook, Chairman Bill Heyman, Board members and FINRA staff provided updates from the meeting in a video report . 

Emily Westerberg Russell Named Chief Counsel of Division of Trading and Markets

The Securities and Exchange Commission today announced that Emily Westerberg Russell has been named Chief Counsel of the Division of Trading and Markets. Ms. Russell has been a member of the division’s Office of Chief Counsel for a decade, and since 2011 has served as a Senior Special Counsel in the Office of Sales Practices.

Chairman Tarbert Announces CFTC Executive Leadership Appointments

U.S. Commodity Futures Trading Commission Chairman Heath P. Tarbert announced six appointments to key executive leadership positions at the CFTC.

Read July newsletter here

Talking Points – June 2019

Talking Points

Who We Are
STA is comprised of 24 affiliate organizations covering the entire US and Canada. The STA national board of governors is comprised of past presidents and industry specific leaders. Our membership represents INDIVIDUALS from varying business models – buy-side, sell-side, hedge funds, exchange traders and market makers- dealing in equity and derivative trading.

Issues
Regulatory Capital Rule: New Standardized Approach for Calculating the Exposure Amount of Derivative Contracts:
*STA believes that Basel III Standardized Risk Weighted Assets, “RWA” calculations on capital requirements are having an unnecessary & detrimental impact on market maker liquidity. We are supportive of a new approach for calculating the exposure amount for derivative contracts.

SEC Rule 606, aka, “Order Handling Disclosure Rule”
*As with any large scale industry project, regulatory guidance prior to implementation is often needed. As the Oct 1, 2019 compliance date for data collection approaches, the industry seeks SEC guidance on a range of areas, including but not limited to options calculations.
*STA believes that any guidance – even that which is simplistic in nature – at this stage will not allow segments of the industry to meet the Oct 1st deadline. STA therefore believes it is reasonable to request that should the SEC maintain the Oct 1st deadline it consider issuing “no-action” letters.

STA letter to SEC on proliferation of strikes in options markets
*In a April 5, 2019 letter to the SEC, STA relayed its view that the proliferation of series of options for quoting and trading has overly complicated the options markets and necessitated excessive (and thus inefficient) consummations of technology.
*We noted the Options Listing Procedures Plan (“OLPP”), a national market system plan which defines procedures for introducing new options series into the marketplace, is either silent or requires additional guidance in areas instrumental to its overall effectiveness.
*We requested the SEC “expressly authorize and direct the exchanges to participate in a working group to discuss and determine if the strike listing process should be improved and if so, what recommendations should be considered.”
*STA expects to file a supplemental letter with specific recommendations on changes to the OLPP which would improve its functionality and formalize certain core actions, such as regular meetings among the administrators and a means for industry participants to provide input.

Consolidated Audit Trail – Reporting Issues Specific to Options.
*Specific areas where guidance is requested include:
• Option Market Maker quote submission to the CAT will be performed by the exchanges. What happens if an exchange fails to submit the MM quotes?
• What are the reporting obligations and exemptions in Open Outcry Markets?

PDF version here

SEC Extends Compliance date on Rule 606

Newsletter

SEC extends compliance date on Rule 606

SEC has decided to extend the date by which broker-dealers will be required to collect information required by Rules 606(a) and 606(b) from May 20th to October 1st.

SEC announces agenda for FinTech Forum

In Nov. 2018, the SEC announced the formation of its Strategic Hub for Innovation and Financial Technology, SEC FinHub. Among the goals or purposes of the FinHub is to enable the SEC to actively engage with innovators, developers and entrepreneurs. SEC Staff and FinHub is hosting a 2019 FinTech Forum on Fri., May 31, beginning at 9:30 a.m. ET. The forum will feature four panels, click More for agenda and speaker list.

FINRA request for comments on corporate bonds

FINRA has issued Regulatory Notice 19-12 to request comment on a proposed pilot program to study changes to corporate bond block trade dissemination based on recommendations of the SEC Fixed Income Market Structure Advisory Committee (FIMSAC). Comments due Tues., June 11.

SEC Commissioner Peirce on Crypto & Grill

SEC Commissioner Hester Peirce discusses the role and responsibilities of the SEC, and how that impacts the crypto landscape with Crypto & Grill.

Read STA’s April Newsletter here

Open Call Report – Rule 606

Open Call

STA Open Call – March 13, 2019 – Call Notes[1]

Rule 606: Getting Closer

Mark Davies, S3

Rule 606 Infographic LINK

Opening Remarks – Jim Toes, STA

STA Comment Letters

Since the last Open Call, STA has filed three (3) comment letters on: SEC No-Action Letters on MiFID II, Senate Banking on Capital Formation and House Subcommittee on Diversity & Inclusion. LINK

STA Washington DC Trip

STA will be meeting with: SEC Division of Investment Management, Division of Trading & Markets, Commissioners Hester Peirce and Elad Roisman, and FINRA. Discussion Document LINK

FINRA ATS Working Report

STA continues to engage and challenge FINRA on its High Broker-Affiliated ATS Order Routing Associated with Lower Fill Rates, Higher Costs. LINK

Executive Summary – Jim Toes

On Nov. 2, 2018, the SEC amended Rules 605 & 606 under Reg NMS to require additional disclosures by broker-dealers to customers regarding the handling of their orders.  The intent of these amended rules is to provide more detailed and standardized information to customers—with a focus on institutional customers. The compliance date is May 20, 2019.

Presentation – Mark Davies, S3

Q1# Why is the SEC amending Rule 606(a)(1) and creating new reporting requirements Rule 606(b)(3)?

The SEC appears to be interested in finding out if rebates and fees affect the routing decisions that a firm makes, and if those decisions are in conflict with the firm’s best execution mandates.

Q2# Who does it apply to?

Any broker dealer that handles customer order flow. If a firm handles held customer NMS equity orders or if a firm handles customer NMS options orders less than $50,000. If a firm handles not held customer flow, they are required to produce an in-depth 606 report when requested by customers (subject to two de minimis exceptions).

Q3# How is the new Rule 606(a)(1) different?

For held equity orders: Broken out by Market, Marketable Limit, Non-Marketable Limit, Other and will include: Fees and Rebates paid to/by immediate downstream destination.

Q4# What is the new 606(b)(3)?

Customer Requested. Includes information sections about Orders executed as principal, exposed to Actionable IOIs, Routed and Executed; Including IOCs, Further Routable, Fill Rate, Spread side, add/remove liquidity, net fees/rebates, order lifetime

Q5# What are the areas the industry is requesting and waiting on guidance from the SEC on?

  • When does a firm have discretion?
  • What downstream information will Introducing BD need from Executing BDs?
  • Treatment and interpretation of IOI’s
  • Definition of Venue and certain calculations on listed options

View Pdf version here

[1] This brief is meant for informational purposes only and therefore should not be considered legal advice. STA’s goal is to raise awareness on industry developments and encourage dialogue.

Talking Points – March 2019

Talking Points

Discussion Document – March 2019


Who We Are
STA is comprised of 24 affiliate organizations covering the entire US and Canada. The STA national board of governors is comprised of past presidents and industry specific leaders. Our membership represents INDIVIDUALS from varying business models – buy-side, sell-side, hedge funds, exchange traders and market makers- dealing in equity and derivative trading


SEC Rule 606 – Requests for Guidance
*As with any large scale industry project, regulatory guidance prior to implementation is often needed. As the May 20th compliance date approaches the industry seeks SEC guidance on a range of areas, including but not limited to: options calculations & reporting on amended 606(a); definition of actionable IOIs under amended Rule 606; challenges for introducing BDs.


SEC Transaction Fee Pilot for NMS Securities – Spreads and Canadian Securities Administrator
*STA believes that the impact access fees have on our market structure has evolved since they were originally allowed and then capped. We therefore support a study that includes a pilot.
*STA also appreciates that the Commission, in its final decision, responded to remarks in STA’s letter which recommended reducing the number of securities in the pilot as a means to provide protections in the event that the pilot widens spreads in securities, and coordinating efforts with the Canadian Securities Administrator.


SEC no-action letter under the Investment Advisers Act of 1940 on MiFID II
*STA believes that a meaningful number of market participants anticipate the Commission granting an extension and/or expansion on the existing “no-action” relief. A decision to allow the relief to expire in July 2020 risks to be highly disruptive if firms are not provided adequate time to adjust to the regulatory regime.
*Expiration would have a particular impact on those broker-dealers who may decide to register their research departments as investment advisers to accommodate cash payments. *Additionally, we believe that the demands on SEC resources to process an initial influx of RIA registrations and to facilitate ongoing audit and supervision reporting would be meaningful.

FINRA Working Paper: High Broker-Affiliated ATS Order Routing Associated with Lower Fill Rates, Higher Costs
*STA looks forward to being a conduit for industry input until the paper takes it final form.


Exchange Traded Products (ETPs)
*In 2018 STA established an ETF Working Group partially in response to ETF participants’ willingness and desire to be part of larger and broader equity market structure conversations.
*Some initial areas of focus include: Allowing flexibility on creation/redemption unit sizes and SEC’s Transaction Fee Pilot;
*Proposed New Rule 6c-11 (ETF Rule) – Updates and Discussion
• Disclosure of Bid-Ask Spread Information
• Canadian “ETF Facts” Disclosure Requirements

Thinly Traded Securities – UTP
*It remains STA’s view that shareholders of small to mid-size securities which lack a robust secondary market benefit from the presence of market makers and block traders who can, among other things, provide enhanced liquidity to increase the depth of the market. While the factors in enhanced liquidity provision are numerous, there are certain core ones which include: quote quality; volatility; and reduction in costs.
*While STA understands and appreciates that the goal of suspending UTP is to enable “innovative market structure solutions” we still have concerns regarding a venture or thinly traded exchange regime which allows for the suspension of UTP as part of its construct.


Market Data & Market Access: Core Data – Order Protection Rule (OPR) & Best Execution
*STA looks forward to engaging the SEC as it reviews Regulation NMS. While we do not call for a wholesale revision or rollback, we believe there are certain areas which need to be revisited for their effectiveness in today’s market structure.
*STA is currently reviewing its opinion of the OPR which was last expressed in our May 2008 Special Report:
“STA is of the opinion that a marketplace without this order protection rule will be superior to enforcing the current OPR… While the OPR was well intended, its many complex exemptions complicate compliance and dilute its effectiveness… The STA believes that the elimination of the OPR contained in Regulation NMS will allow for superior executions and will positively impact displayed liquidity.”


Combatting Retail Fraud – Rule 15c2-11
*The SEC has explored eliminating the piggyback exemption and requiring broker-dealers to periodically update 15c2-11 materials (proposals in 1991, 1998 and 1999).
*Costs to broker dealers to maintain 15c2-11 materials are meaningful and the inability to recoup them (FINRA Rule 6432) disincentivizes broker-dealers from providing public pricing and liquidity services, ultimately resulting in less, not more, public information available about small cap issuers.

  • There are workable solutions to achieve the underlying purpose of the rule: to prevent and deter microcap fraud, particularly involving issuers for which public information is limited.
    • Rule 15c2-11 materials should be made public and issuers should be liable for any misrepresentations contained in these materials.
    • Trading venues that make that information publicly available, and indicate when the information is current, should be permitted to file Form 211 with FINRA.
    • For securities of issuers that have not made current information available for a defined period of time, the SEC may want to explore limiting trading to sophisticated investors with a high risk tolerance.

PDF version here

Open Call Report – Implementation of Amendments to Rule 606

Open Call
STA Open Call – December 11, 2018 – Call Notes[1]
Implementation of Amendments to Rules 605 & 606
Chris Bok, FIF & Son-Mi Lee, FIF
John Roeser, Associate Director, SEC Division of Trading & Markets

Ted Venuti, Assistant Director, SEC Division of Trading & Markets

 

Opening Remarks – Jim Toes, STA

Senate Banking Oversight Hearing on the SEC

Senate Banking Committee met in open session to conduct a hearing titled:  Oversight of the U.S. Securities & Exchange Commission. Jay Clayton, Chairman, SEC was the only witness. LINK

SEC Commissioner Hester Peirce

SEC Commissioner Peirce will address STA Chicago’s, STAC, Mid-Winter Meeting on Wed. Jan 16th LINK

2019 STA Sponsorship

In 2018, more than 160 firms sponsored at least one (1) STA Affiliate conference. As firms plan their 2019 budgets, please take the time to learn about STA sponsorship LINK

 

Executive Summary – Jim Toes

On Nov 2, 2018, the SEC amended Rules 605 & 606 under Reg NMS to require additional disclosures by broker-dealers to customers regarding the handling of their orders.  The intent of these amended rules is to provide more detailed and standardized information to customers—with a focus on institutional customers—thereby allowing a more effective assessment of how broker-dealers are carrying out their best execution obligations and the impact of a broker-dealer’s order routing decisions on the quality of their executions. The compliance date May 20, 2019. The final rule is over 300 pages, please send us questions at sta@securitytraders.org, we will get back to you with a reply.

Here this evening to provide guidance on questions by the industry on the Implementation of Amendments to Rules 605 & 606 is John Roeser, Associate Director, SEC Division of Trading & Markets & Ted Venuti, Assistant Director, SEC Division of Trading & Markets[2].

Questions 
Clock Start Date

More clarity is required with respect to when Broker-Dealers subject to SEC Rule 606 must begin recording amended rule 606 obligations (i.e. will Broker-Dealers be required to begin retention of 606 data on May 20th, 2019?). Response: The SEC staff confirmed that the compliance date of 606(b) information is May 20th , but will consider recommending it be moved to the beginning of the third quarter.

Specific to the quarterly reports, since the compliance date for Rule 606 begins on May 20, 2019.  Because May 20th falls in the middle of the 2nd quarter, are Broker-Dealers expected to report all 2nd quarter activity 30 days after the quarter ends?  Alternatively, would Rule 606, despite the May 20th compliance date, require Broker-Dealers to begin their revised 606 reporting responsibilities during the beginning of the 3rd quarter? Response: The SEC Staff has not yet determined the expectations of firms regarding when the quarterly reporting of revised order handling information will begin.

De minimis exemption

May firms operating multiple branches exclude the Not Held order flow from the Branch system under the de minimis exemption? Response: There is no branch exemption under Rule 606.

Marketability vs. Non-Marketability – for options & equities

At what point does the measurement of marketability v. non-marketability begin (i.e. does it begin at the parent order)? Response: Under revised Rule 606, the measure of marketability will begin at the child order level (order routed to market)

Definition of Venue for options & equities

What is the intended definition of venue.  I.e does the definition of a venue include exchanges and market makers and/or broker dealers? Response #1: With regard to not held order flow (i.e. actionable IOIs) sent to a venue, the definition of venue will include 1) Broker Dealers; 2) Market Centers; 3) non-Broker-Dealer external liquidity providers (i.e. any entity the broker is sending IOIs to) 4) Institutional Customers.  Further, if a firm sends multiple IOIs to institutional customers, firms may aggregate all IOIs.

Response #2: About held order flow, the definition of venue includes any trading center an order could be routed to for execution (i.e. broker dealer, exchanges).

Response #3: Specific to the quarterly reports, the definition of venue will remain the same as the prior rule.

Fees & Rebates on Orders Executed by SOR of Another Broker-Dealer

If Broker-Dealer A has discretion over how an order that is routed and executed through a Smart Order Router housed at Broker-Dealer B, is Broker-Dealer A required to provide the look-through information on how the order was treated on Broker-Dealer A’s customer-specific report ( Is Broker-Dealer A required to provide the look-through information on how the order was treated on Broker-Dealer B’s Smart Order Router to the customer? Response: Broker-Dealer A is responsible for acquiring and including on their customer report the look-though information from Broker-Dealer B’s Smart Order Router.

Payment for Order Flow Arrangements – Tiering Levels

Are firms expected to report tiering levels they do not nor did not hit? I.e. firms who do not sign a Retail – Attestation do not know their tiering level until after the volume calculation used for determining tiers is done. How should these firms report in situations when a reporting deadline occurs and they do not know their tier? Response: Firms are expected to describe the arrangements and the different levels that exist and how it applies to the orders submitted to the venue.

PDF version here

[1] This brief is meant for informational purposes only and therefore should not be considered legal advice. STA’s goal is to raise awareness on industry developments and encourage dialogue.

[2] The STA notes that SEC Staff expressed views do not necessarily reflect the views of the Commission, the Commissioners, or other members of the Commission’s staff.

 

Order Routing Disclosures: Part II

Comment Letters

The Security Traders Association (“STA”) appreciates the opportunity to offer additional comments on the Securities and Exchange Commission (“Commission” or “SEC”) proposed rule on Disclosure of Order Handling Information; File No. S7-14-16 (the “Proposal”).

Read full comment letter (PDF)>