FINRA and SROs Charting a Course for Enhanced Market Efficiency
In a pivotal move, the U.S. Securities and Exchange Commission (SEC) has adopted rule amendments aimed at enhancing the disclosure of order execution information, significantly amending Rule 605 of Regulation NMS. The rule focuses on national market system stocks (NMS stocks), listed on national securities exchanges.
Evolving Dynamics of Rule 605: A 24-Year Evolution
Established in 2000, Rule 605 originally aimed to empower the public by facilitating comparisons and evaluations of execution quality across various market centers. SEC Chair Gary Gensler acknowledges the need for an update, considering the transformative shifts in equity markets due to evolving technologies and business models over the past 24 years.
"I am pleased to support this adoption because it will improve transparency for execution quality and facilitate investors’ ability to compare brokers, thereby enhancing competition in our markets," states SEC Chair Gary Gensler.
Key Amendments for Enhanced Transparency
The final amendments introduce a comprehensive set of changes designed to fortify market transparency:
Expanded Scope: Entities subject to Rule 605 are broadened to include broker-dealers with a larger number of customer accounts and single dealer platforms, ensuring a more inclusive approach to reporting execution quality.
Redefinition of "Covered Order": The definition of "covered order" now includes specific orders submitted outside of regular trading hours, those with stop prices, and certain short sale orders, capturing a broader range of relevant execution quality information.
Categorization Adjustments: Changes to order size categories now encompass fractional share orders, odd-lot orders, and larger-sized orders, reflecting the evolving dynamics of market participation.
New Statistical Measures: Fresh statistical measures, such as average effective divided by quoted spread and size improvement statistics, are introduced to provide a more nuanced assessment of execution quality.
Summary Reports: All entities subject to Rule 605 are mandated to make a summary report publicly available, enhancing accessibility and understanding for investors.
SEC Directs the Overhaul of Market Data Governance
In conjunction with these amendments, the SEC has ordered the filing of a new national market system plan (NMS plan). The directive specifically instructs FINRA and 18 SROs associated with Cboe, Nasdaq, and NYSE to jointly develop the NMS plan. The revised plan, set to be published for public comment, comes with stringent requirements:
A date for full effectiveness.
A prescribed timeline and periodic progress reports.
Mandated adherence to the plan’s conflicts-of-interest and confidentiality policies.
Specialized provisions for sharing protected information.
Outlined rules regarding the use of subcommittees.
This directive is a result of the SEC's ongoing efforts to address conflicts of interest and enhance control over the equity consolidated tape. The move follows the SEC's initial order in May 2020, directing equity exchanges and FINRA to propose a National Market System plan for the public consolidated tape.
The recent announcement on September 1, 2024, underscores the SEC's commitment to modernizing and improving access to equity market data. The order acknowledges heightened conflicts of interest due to technological advancements and changes in equity markets, aiming to address concerns about the effectiveness of existing NMS plans.
As the SEC continues to steer the course toward transparency and fairness, these regulatory updates signify a concerted effort to empower investors and ensure the regulatory purpose of NMS plans. The amendments are set to become effective 60 days after the publication of the adopting release in the Federal Register, with a compliance date of 18 months after the effective date. Investors and market participants alike will be closely watching as these reforms reshape the landscape of equity market data governance.
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