About time we get a real 606! Not Your Father’s SEC Rule 606 … Chris Montagnino, Jordan & Jordan 08 February 2019 The changes to SEC Rule 606 and order routing disclosures will entirely overhaul the current 606 reporting requirements. Though the amended requirements will result in very little information regarding the routing of institutional orders being published publicly by broker-dealers, the requirements for the customer-requested reports have increased vastly and will provide extensive information for institutional customers concerning the routing and fees/rebates associated with their orders. Jordan & Jordan’s Chris Montagnino highlights the most notable changes, the difficulties that may arise for sell-side firms, and what broker-dealers can do now to prepare. Many firms are prioritizing the work to implement the changes to order routing disclosures over the Consolidated Audit Trail (CAT) work, given that Rule 606 is effective five months earlier (May 20, 2019) than CAT. The impact of the changes to 606 is significant and may implicate some of the same challenges posed by CAT, as well as entirely overhauling the current 606 reporting requirements. In this article, we will focus on the most notable changes and the difficulties that may arise for sell-side firms when attempting to implement such changes. So, what is changing? Most significantly with regard to the publicly disseminated reports, broker-dealers will now be required to report on transaction fees/rebates paid to or received from each venue to which they route orders. The new requirements call for quarterly reporting (broken out by month) of the net, aggregate amount of all fees/rebates related to each venue. The current rules require a written disclosure of such arrangements, but the amended rules now require data to be reported in addition to the disclosures. Perhaps even more challenging, broker-dealers will now be required to provide, upon request, a detailed report to a client about the routing of its orders during the prior six months, including specific detail on any fees/rebates passed through to the client. Many firms likely already have fee/rebate information that can be gathered for reporting but being able to link such information on a client-by- client, order-by-order basis can prove challenging for a lot of firms. [Related: “Smart New Rules for Smart Order Routing?”] The provision of fee/rebate information has sparked one of the more critical questions arising out of the new 606 requirements: Which fee/rebate information are broker-dealers required to provide? Does the rule only cover those venues with which the broker-dealer has a relationship and routes orders to directly? Or are broker-dealers expected to report on fees/rebates passed back to them from another broker-dealer, such as an algo or smart order provider? Based upon the SEC’s final rule release, it appears to be the latter, if the broker-dealer exercises a level of “discretion” when entering the order into the algo or smart order router. The SEC defined “discretion” in the release as choosing among trading algorithms, customizing algorithm parameters or performing other similar tasks involving its own judgment as to how and where to route orders. This is one of the critical areas where the industry and the Financial Information Forum are currently seeking guidance from the SEC prior to implementation. An additional item of significance that is being added to the reports available to clients upon request is information about which of their executed shares took liquidity versus provided liquidity and the associated fees/rebates with such executions. Broker-dealers must be able to isolate executions that provided or removed liquidity and calculate the respective fees/rebates realized by the client for such activity. None of this data is required currently under Rule 606. Two further items that are new categories under the amended rule include actionable indications of interest (“IOI”) and total shares routed that are further routable. First, in the customer requested reports, broker-dealers must indicate the total number of the customer’s orders that were exposed via actionable IOIs. These are defined as IOIs that explicitly or implicitly convey the symbol, side, price (at or better than the national best bid for buys and national best offer for sales) and a size of at least one round lot. Moreover, the broker-dealer must provide a list of venues to which the customer’s orders were exposed during the reporting period. Next, the broker-dealer must provide the customer with the number of orders that were routed for them which were further routable. This is another issue that is being raised with the SEC, as an understanding of what types of orders are required to be reported on is not clear. Are only those orders the customer or broker-order specifically flagged as not further routable excluded from the calculation? Or do broker-dealers need to conduct an assessment of all venues to which they route in order to determine which venues do not further route orders and factor that into their calculations? The new 606 requirements will essentially result in very little information regarding the routing of institutional orders being published publicly by broker-dealers. The amended requirements call for the publishing of detailed information only with respect to non-directed, held orders, whereas the majority of institutional orders tend to be not held and will not be captured in the public-facing reports. However, the requirements for the customer-requested reports have increased vastly and will provide extensive information for institutional customers concerning the routing and fees/rebates associated with their orders. Will we see an increase in requests to the sell-side from the institutions for this data? It is almost a certainty given that the new reports can assist buy-side firms with their best execution obligations. [Related: “SEC Rule 606: Repair Is Needed Before Any More Pilot Programs Are Started”] Other changes that you will note with the new rule is that the reports will no longer be divided based upon listing venue of the particular security. The new requirements eliminate that distinction and instead create two groupings for reporting equities, S&P 500 stocks and non-S&P 500 stocks. Lastly, the reporting of information based upon the order types of “market,” “limit” and “other” has now been expanded by dividing limit orders into marketable and non-marketable limit orders. What can broker-dealers do now to prepare? Broker-dealers thinking that their vendor which currently provides 606 reports can seamlessly generate the new reports should think again. Certain data, including payment/rebate detail, is not maintained by the vendors and, in many cases, may not be maintained currently by the broker-dealers. With the impending deadline of May 20, 2019, approaching, here are just a few actions that broker-dealers can undertake if they have not already: Gather an inventory of all venues where the firm has a relationship that results in fees/credits back to the firm. Confirm the types of third-party algorithms/SORs utilized by the firm and how the traders utilize the algos/SORs – i.e., do they customize any requirements before placing orders? Review the type of detail that is currently provided by the venues regarding the fees/rebates. Is the information provided by symbol, client, etc.? Are fee/rebate details provided on an execution-by-execution basis? Does the detail include information broken out by liquidity providing executions versus liquidity taking executions? Does your OMS provider include liquidity indicators on the execution records? Begin working with your developers or vendors on the new format and structure of the report to ensure you can obtain the necessary data to address new data requirements concerning marketable/non-marketable limit orders, actionable IOIs and orders that are further routable. In summary, the changes required by amended SEC Rule 606 are significant in several respects. The deadline is approaching six months earlier than CAT, so the time to act is now.