Member Obligations To Provide Statistical Information About Order Routing Under Rule 11Ac1-6 Of The Securities Exchange Act Of 1934
Disclosure Of Order Routing
Exchange Act Rule 11Ac1-6
Rule 11Ac1-6 under the Securities Exchange Act of 1934 (Exchange Act) requires all broker/dealers that route customer orders in equity and option securities to make publicly available quarterly reports that disclose the venues to which it routes non-directed orders in certain covered securities. The Rule further requires broker/ dealers to disclose the nature of any relationship they have with those venues, including any payment for order flow arrangements. Finally, the Rule requires broker/dealers to disclose, upon customer request, the venues to which individual orders were sent for execution. The compliance date for the Rule is July 2, 2001.
Please note that this is a Securities and Exchange Commission (SEC) rule. Accordingly, questions of interpretation or other concerns about the Rule should be directed to the SEC. However, members may direct general questions concerning this Notice to Kathleen O'Mara, Assistant General Counsel, or Philip Shaikun, Assistant General Counsel, Office of General Counsel, NASD Regulation, Inc., at (202) 728-8071.
Background And Information
In order to improve public disclosure of order execution and routing practices, the SEC on November 17, 2000 adopted Exchange Act Rules 11Ac1-51 and 11Ac1-6. Rule 11Ac1-6 requires all broker/dealers that route customer orders in equity and option securities to make publicly available quarterly reports about the routing of customer orders. More specifically, the Rule requires quarterly disclosure of the percentage of customer orders that were non-directed; the identity of the 10 venues to which the largest number of non-directed orders were routed for execution; the identity of any other venues to which at least five percent of nondirected orders were routed for execution; and disclosure of payment for order flow or other material arrangements between broker/dealers and those venues. The Rule further requires broker/dealers to disclose to customers, upon request, the venue to which the customer's orders were routed for the previous six months and certain other data about those customer orders. Attachment A of this Notice contains the text of the Rule.
The scope of Rule 11Ac1-6 differs in some ways from that of Rule 11Ac1-5. For example, Rule 11Ac1-6 covers a wider range of securities. First, whereas Rule 11Ac1-5 applies only to national market system securities, the definition of "covered security" in Rule 11Ac1-6 also includes Nasdaq SmallCap equities and listed options. Second, the Rule applies to all broker/dealers that route orders on behalf of their customers, whereas Rule 11Ac1-5 applies generally to broker/dealers that execute orders. The term "customer order" is defined in Rule 11Ac1-6 as any order to buy or sell a covered security that is not for the account of a broker/dealer. It excludes, however, any order for a quantity of a security having a market value of at least $50,000 for a covered security that is an option contract and a market value of at least $200,000 for any other covered security. Third, Rule 11Ac1-6 applies to all types of orders, some of which are specifically excluded from the coverage of Rule 11Ac1-5 (e.g., pre-opening orders and short sale orders), provided that they are "non-directed orders." All customer orders are considered to be nondirected in the absence of specific customer instructions on where they are to be routed.
The Rule requires that the quarterly reports be divided into four sections, each section to address a different category of covered securities: (1) equity securities listed on the New York Stock Exchange; (2) equity securities qualified for inclusion on Nasdaq; (3) equity securities listed on the American Stock Exchange or another national securities exchange; and (4) options. Each of these sections must contain the quantitative information identified above concerning the percentage of non-directed orders and the venues to which those orders were routed. Additionally, each section must discuss the broker/dealer's relationship, if any, with those venues, including payment for order flow or profit sharing arrangements.2
Broker/dealers must "make publicly available" the quarterly reports within one month after the end of the quarter addressed in the report. The Rule defines "make publicly available" to require broker/dealers to (1) post the report on a free Internet Web site; (2) furnish a written copy of the report on request; and (3) notify customers annually that a copy of the reports will be furnished on request.
Broker/dealers must comply with the Rule for all covered securities beginning on July 2, 2001. Therefore, the first required report must cover transactions during the quarter ending on September 30, 2001. That quarterly report must be made publicly available by October 31, 2001. Broker/dealers must also respond to customer requests for order-routing information for orders routed on July 2, 2001 and after.
1 Rule 11Ac1-5 requires "market centers" to provide statistical information concerning order execution. The details of that Rule are contained in NASD Notice to Members 01-16. Subsequent interpretive guidance and exemption information related to that Rule can be found on the NASD Regulation Web Site (www.nasdr.com)
2 The term "payment for order flow" is defined very broadly in Exchange Act Rule 10b-10(d)(9) to include any payment or benefit that results in compensation to the broker/dealer for routing orders to a particular venue. The term "profit-sharing relationship" is defined in paragraph (a)(7) of Rule 11Ac1-5 to mean any ownership or other type of affiliation under which the broker/dealer, directly or indirectly, shares in any profits that may be derived from the execution of nondirected orders. It, therefore, specifically covers internalization of customer orders by a broker/dealer that executes customer orders as principal.
§240.11Ac1-6 Disclosure of order routing information.