SEC Trading and Markets FAQ: Rule 605 of Regulation NMS

Oct. 11, 2017

February 22, 2013

These staff FAQs will be effective until August 1, 2026 (the compliance date for the amendments to Rules 600 and 605 of Regulation NMS, published on April 15, 2024, at 89 FR 26428).

Responses to these frequently asked questions (“FAQs”) were prepared by and represent the views of the staff of the Division of Trading and Markets (“Staff”). They are not rules, regulations, or statements of the Securities and Exchange Commission (“Commission”). Further, the Commission has neither approved nor disapproved of these interpretive answers.

The Staff may update these FAQs periodically. In each update, the FAQs modified or added after publication of the last version will be marked with “MODIFIED” or “NEW.”

For Further Information Contact: Charles A. Sommers, Attorney-Adviser, at (202) 551-5787; Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-7010.

Introduction

Rule 605 of Regulation NMS was originally adopted in November 2000 as Rule 11Ac1-5 under the Securities Exchange of 1934.1 In 2005, Rule 11Ac1-5 was redesignated as Rule 605 with the adoption of Regulation NMS.2 Rule 605 generally requires a market center that trades NMS stocks to make available to the public monthly electronic execution reports that include uniform statistical measures of execution quality. The staff previously published Staff Legal Bulletin No. 12R, last revised on June 22, 2001, to address frequently asked questions about then Rule 11Ac1-5 (available at http://www.sec.gov/interps/legal/slbim12a.htm).

Staff Legal Bulletin No. 12R continues to be operative for Rule 605. This document (“FAQ Supplement”) supplements the older guidance to address questions that have arisen in the years since 2001. One question was previously addressed in connection with the implementation of Rule 611 of Regulation NMS (available at http://www.sec.gov/divisions/marketreg/nmsfaq610-11.htm), and another question was previously addressed in connection with the implementation of Rule 201 of Regulation SHO (available at http://www.sec.gov/divisions/marketreg/rule201faq.htm). The two questions and responses are republished here for ease of referral. In addition, this FAQ Supplement addresses a question that has arisen in connection with the forthcoming implementation of the National Market System Plan to Address Extraordinary Volatility (“Limit Up/Limit Down Plan”).3

Question 1: Rule 611 and Rule 605 – Special Handling of Certain ISOs

Rule 605 of Regulation NMS requires market centers to prepare monthly reports on order execution quality for covered orders in NMS stocks. Orders for which customers request special handling are excluded from the definition of covered orders in Rule 600(b)(15) of Regulation NMS. How should market centers treat intermarket sweep orders (“ISOs”) in their Rule 605 reports?

Answer: A market center should exclude an ISO from its Rule 605 report if the ISO has a limit price that is inferior to the national best bid and offer (“NBBO”) at time of order receipt (i.e., the limit price is less than the national best bid for sell orders or higher than the national best offer for buy orders). All other ISOs should be included in a trading center’s Rule 605 reports, absent another applicable exclusion from the definition of covered order.

ISOs can be used to achieve a variety of trading objectives, including both the sweep of multiple price levels and a best-price routing strategy. By marking an order as an ISO, the router indicates to the destination trading center that it has simultaneously routed additional ISOs, as necessary, to any better-priced protected quotations. When the limit price of an ISO is equal to or better than the NBBO at time of order receipt, there can be no better-priced quotations elsewhere, and the router is simply seeking an order execution at the best displayed price or better. In contrast, when the limit price of an ISO is inferior to the NBBO at time of order receipt, the customer is effectively instructing the trading center that it can execute the order at a price inferior to the NBBO, even if one or more trading centers are displaying better prices. This instruction constitutes a request for special handling at the trading center that excludes the ISO from the definition of covered order in Rule 600(b)(15). The execution prices of such excluded ISOs are likely to be inferior to the execution prices of orders with the same limit prices that are not ISOs. Consequently, excluding such ISOs from Rule 605 reports should enhance the comparability of order execution quality statistics across different market centers.

Question 2: Rule 605 and Non-Exempt Short Sales

Should non-exempt short sales be excluded from the monthly reports required by Rule 605?

Answer: Yes. Because in certain circumstances non-exempt short sale orders are subject to a price test under Rule 201 of Regulation SHO, and the circumstances could vary for different securities and different days throughout the month of a Rule 605 report, the staff would view all non-exempt short sale orders as special handling orders that are excluded from the definition of “covered order” in Rule 600(b)(15) of Regulation NMS. Orders marked “short exempt” are not subject to the price test of Rule 201, but potentially could qualify for exclusion from Rule 605 if they meet the terms of the exclusion.

Question 3: Rule 605 and the Limit Up/Limit Down Plan

Should market orders and marketable limit orders be excluded from the statistical reports under Rule 605 when they are received at a time when either the national best bid or the national best offer is not executable because it lies outside the relevant price bands published pursuant to the Limit Up/Limit Down Plan?

Answer: Yes. Several of the statistics for market orders and marketable limit orders under Rule 605 are made with reference to the national best bid and national best offer (or the midpoint between them) at the time of order receipt. A national best bid or national best offer at the time of order receipt that lies outside of the price bands published pursuant to the Limit Up/Limit Down Plan is not executable and may not provide a useful benchmark for calculating statistics for market orders and marketable limit orders.

Accordingly, market orders and marketable limit orders received during a time when either the national best bid or national best offer is not executable should be classified as requiring special handling and therefore excluded from the definition of “covered order” set forth in Rule 600(b)(15) of Regulation NMS. If, however, the market center cancels such an order back to the submitter and the order is subsequently resubmitted at a time when the national best bid and national best offer are within the Limit Up/Limit Down price bands, the resubmitted order would no longer require special handling and would be a covered order, subject to another applicable exclusion under Rule 605.

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1 Securities Exchange Act Release No. 43590 (November 17, 2000), 65 FR 75414 (December 1, 2000).

2 Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005).

3 Securities Exchange Act Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012).

Last Reviewed or Updated: Feb. 25, 2013