Background | Resources | Related Links
LATEST UPDATE:
SEC Letter to the Nasdaq Stock Market - 6/4/02
BACKGROUND
The Securities and Exchange Commission ("SEC") adopted two new rules on November 15, 2000 that require market centers and broker-dealers to make publicly available information regarding their order routing and execution practices. The added visibility regarding order execution quality mandated by Rule 11Ac1-5 and Rule 11Ac1-6 is intended to:
- Greatly increase the opportunity for public investors to evaluate what happened to their orders.
- Encourage competition among market centers and broker-dealers to provide the best possible price and speed of execution for investor orders.
The final rule for market centers, Rule 11Ac1-5, was adopted substantially as proposed, with only technical modifications. Rule 11Ac1-6, however, was adopted with significant changes from the proposed rule - changes that greatly reduced the amount of information that member firms would have been required to disclose in regard to their order routing choices. In its September 26, 2000 comment letter on the proposed rules, the SIA expressed its support for enhanced disclosure of order routing and execution practices, but emphasized that the disclosure must be fair, meaningful, and should not give rise to new liabilities.
The SEC addressed the latter with a specific addition to Rule 11Ac1-5, and discussed in the adopting release its reasoning behind the various data elements included in the final rules.
The new rules are in response to the SEC's continuing efforts to address the adverse effects of market fragmentation (the trading of orders in multiple locations without interaction among those orders). Enhanced disclosure of order routing and execution practices was one of the alternatives presented in the comments received by the SEC in response to its market fragmentation concept release issued last spring.
Although the consolidated public quote shows on a real-time basis the best displayed bid and offer for each equity security as collected from all significant market centers, market centers have not publicly disclosed information that depicts the extent to which the quality of order execution varies in the different market centers ("execution quality"). Also, there has been no marketwide requirement for broker-dealers to disclose to customers where their orders are routed for execution. The new rules call for the provision of such information.
As stated in both its September 26 comment letter and in a May 5, 2000 comment letter on the market fragmentation concept release, the SIA believes that disclosure of order routing and execution practices should contribute to making the markets less fragmented.
