Forefront Communications

Markets Media: Rule 606 Update Nears

Sam Belden

Sam Belden

A lot has changed in equities markets since 2000, when the U.S. Securities and Exchange Commission adopted Rule 606 to improve public disclosure of brokers’ order-routing practices.

The NYSE-Nasdaq exchange duopoly is long gone. Electronic trading has evolved from a small corner of the market almost two decades ago, to ubiquitous now. And then-speedy trades measured in milliseconds are glacial today.

So with the old Rule 606 about as relevant today as rules pertaining to 3G mobile-phone technology, the updates the SEC outlined late last year will be substantial.

“By mandating and standardizing broker disclosure of order routing, the newly adopted Rule 606(b)(3) increases transparency and removes potential barriers that investors may face in monitoring broker order handling,” said Stephen Fitzpatrick, Senior Passive Equities Portfolio Manager and Senior Trader at the $48.1 billion Colorado Public Employees’ Retirement Association. “We are hopeful that the rule change will elevate the importance of conflict-free routing with investors, and could even improve routing before it takes effect, as brokers anticipate increased investor scrutiny.”

In a November 2018 release, the SEC highlighted that the rule update will require that broker-dealers provide customers more information on so-called not held orders, or those for which brokers have price and time discretion. The intent is to help investors better understand how brokers handle and route orders and assess the impact of routing decisions on order execution quality. The rule update goes into effect May 20.

Better Comps
Given the risk of ‘information leakage’ compromising order execution, the SEC has stipulated that information about not held orders be shared with customers, but not released publicly.

“Customers will be able to take this granular, standardized data and do a more thorough comparison of routing performance than they were able to do in the previous 606 regime,” said Venu Palaparthi, Chief Compliance Officer and Head of Regulatory Affairs at Dash Financial Technologies. “Previous 606 information was of very limited value to the customer because it was just high-level information on what percentage was non-directed broken down as market, limit or other.”

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