SUMMARY: The Securities and Exchange Commission (“Commission”) is proposing new rules

   
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Conformed to Federal Register version 
SECURITIES AND EXCHANGE COMMISSION  
17 CFR Parts 240 and 242 
[Release No. 34-96496; File No.  S7-32-22]                                 
RIN  3235-AN24 
Regulation Best Execution  
AGENCY: Securities and Exchange Commission.  
ACTION: Proposed rule.  
SUMMARY: The Securities and Exchange Commission (“Commission”) is proposing new rules 
under the Securities Exchange Act of 1934 (“Exchange Act”) relating to a broker-dealer’s duty 
of best execution.  Proposed Regulation Best Execution would enhance the existing regulatory 
framework concerning the duty of best execution by requiring detailed policies and procedures 
for all broker-dealers and more robust policies and procedures for broker-dealers engaging in 
certain conflicted transactions with retail customers, as well as related review and documentation 
requirements.  
DATES: Comments should be received on or before March 31, 2023.   
ADDRESSES: Comments may be submitted by any of the following methods:  
Electronic Comments: 
• Use the Commission’s internet comment form (https://www.sec.gov/regulatory-
actions/how-to-submit-comments); or  
• Send an email to [email protected]. Please include File Number S7-32-22 on the 
subject line. 

   
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Paper Comments: 
•     Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street 
NE, Washington, DC 20549-1090.  
All submissions should refer to File Number S7-32-22.  This file number should be included on 
the subject line if email is used.  To help the Commission process and review your comments 
more efficiently, please use only one method of submission.  The Commission will post all 
comments on the Commission’s website (https://www.sec.gov/rules/proposed.shtml
).  
Comments are also available for website viewing and printing in the Commission’s Public 
Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between 
the hours of 10 a.m. and 3 p.m.  Operating conditions may limit access to the Commission’s 
Public Reference Room.  All comments received will be posted without change.  Persons 
submitting comments are cautioned that the Commission does not redact or edit personal 
identifying information from comment submissions.  You should submit only information that 
you wish to make available publicly.  
Studies, memoranda, or other substantive items may be added by the Commission or staff 
to the comment file during this rulemaking.  A notification of the inclusion in the comment file 
of any materials will be made available on the Commission’s website.  To ensure direct 
electronic receipt of such notifications, sign up through the “Stay Connected” option at 
www.sec.gov to receive notifications by email. 
FOR FURTHER INFORMATION CONTACT:  David Dimitrious, Senior Special Counsel 
and Arisa Tinaves Kettig, Special Counsel at (202) 551-5500, Office of Market Supervision, 
Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549.  

   
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SUPPLEMENTARY INFORMATION:  The Commission is proposing to add the following 
new rules under the Exchange Act:  (1) 17 CFR 242.1100 (Rule 1100 of Regulation Best 
Execution); (2) 17 CFR 242.1101 (Rule 1101 of Regulation Best Execution); and (3) 17 CFR 
242.1102 (Rule 1102 of Regulation Best Execution).  The Commission is also proposing to 
amend 17 CFR 240.17a-4 (Rule 17a-4 under the Exchange Act). 
Table of Contents 
I. Introduction ......................................................................................................................... 6 
II.  Duty of Best Execution ..................................................................................................... 10 
A. Current Regulatory Framework ............................................................................ 11 
B. Prior Commission Statements ............................................................................... 13 
C. FINRA and MSRB Best Execution Rules ............................................................ 20 
III. Existing Order Handling Practices and Overview of Proposed Regulation Best Execution
 21 
A. Existing Order Handling Practices........................................................................ 21 
1. General Broker-Dealer Practices .............................................................. 21 
2. Order Handling Conflicts of Interest ........................................................ 28 
3. Crypto Asset Securities ............................................................................. 37 
B. Overview of Proposed Regulation Best Execution ............................................... 40 
IV. Discussion of Proposed Regulation Best Execution ......................................................... 48 
A. Proposed Rule 1100 – The Best Execution Standard ........................................... 49 
B. Proposed Rule 1101(a) – Best Execution Policies and Procedures ...................... 63 
1. Proposed Rule 1101(a)(1) – Framework for Compliance with the Best 
Execution Standard ............................................................................................... 65 
2. Proposed Rule 1101(a)(2) – Best Market Determination ......................... 80 
C. Proposed Rule 1101(b) – Policies and Procedures and Documentation for 
Conflicted Transactions ...................................................................................... 100 
1. Proposed Rules 1101(b)(1) and (2) – Policies and Procedures for 
Conflicted Transactions ...................................................................................... 110 
2. Proposed Rule 1101(b)(3) – Documentation for Conflicted Transactions
 115 

   
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3. Application of Proposed Rule 1101(b) to NMS Stock Market Conflicts of 
Interest122 
4. Application of Proposed Rule 1101(b) to the Options Market ............... 125 
5. Application of Proposed Rule 1101(b) to the Corporate and Municipal 
Bond Markets and Government Securities Markets ........................................... 128 
D. Proposed Rule 1101(c) – Regular Review of Execution Quality ....................... 130 
E. Proposed Rule 1101(d) – Introducing Brokers ................................................... 142 
1. Definition of Introducing Broker and Executing Broker ........................ 145 
2. Review of Executing Broker’s Execution Quality .................................. 151 
F. Proposed Rule 1102 – Annual Report ................................................................ 163 
G. Recordkeeping Requirements under Rule 17a-4 ................................................ 169 
V. Economic Analysis ......................................................................................................... 171 
A. Introduction ......................................................................................................... 171 
B. Baseline ............................................................................................................... 177 
1. Current Legal and Regulatory Framework ............................................. 178 
2. Best Execution Review Processes .......................................................... 195 
3. Description of Markets and Broker-Dealer Order Handling and Execution 
Practices .............................................................................................................. 199 
4. Broker-Dealer Services and Revenue ..................................................... 297 
C. Economic Effects and Effects on Efficiency, Competition, and Capital Formation
............................................................................................................................. 304 
1. Benefits ................................................................................................... 307 
2. Costs ........................................................................................................ 330 
3. Efficiency, Competition, and Capital Formation .................................... 350 
D. Reasonable Alternatives...................................................................................... 360 
1. SEC Adopts FINRA Rule 5310 and MSRB Rule G-18 Best Execution 
Rules   360 
2. Require Order Execution Quality Disclosure for Other Asset Classes... 361 
3. Utilize FINRA and MSRB Approach to Introducing Broker ................. 364 
4. Ban or Restrict Off-Exchange PFOF ...................................................... 365 
5. Require Broker-Dealers to Utilize Best Execution Committees ............. 367 

   
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6. Require Order-by-Order Documentation for Conflicted or All 
Transactions ........................................................................................................ 368 
7. Staggered Compliance Dates .................................................................. 370 
E. Request for Comments ........................................................................................ 371 
VI. Paperwork Reduction Act ............................................................................................... 382 
A. Summary of Collection of Information............................................................... 383 
1. Required Policies and Procedures and Related Obligations ................... 383 
2. Annual Report ......................................................................................... 387 
B. Proposed Use of Information .............................................................................. 387 
1. Required Policies and Procedures and Related Obligations ................... 388 
2. Annual Report ......................................................................................... 389 
C. Respondents ........................................................................................................ 389 
D. Total Initial and Annual Reporting and Recordkeeping Burdens ....................... 390 
1. Required Policies and Procedures and Related Obligations ................... 390 
2. Annual Report ......................................................................................... 399 
E. Total Paperwork Burden ..................................................................................... 407 
F. Collection of Information is Mandatory ............................................................. 409 
G. Confidentiality of Responses to Collection of Information ................................ 409 
H. Retention Period for Recordkeeping Requirements ........................................... 409 
I. Request for Comment ......................................................................................... 410 
VII. Consideration of Impact on the Economy ...................................................................... 411 
VIII. Initial Regulatory Flexibility Act Analysis ..................................................................... 411 
A. Reasons for and Objectives of the Proposed Action ........................................... 412 
B. Legal Basis .......................................................................................................... 415 
C. Small Entities Subject to the Proposed Rule....................................................... 415 
D. Projected Compliance Requirements of the Proposed Rule for Small Entities ..   416 
1. Required Policies and Procedures and Related Obligations ................... 416 
2. Annual Report ......................................................................................... 419 
E. Duplicative, Overlapping, or Conflicting Federal Rules .................................... 421 

   
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F. Significant Alternatives ...................................................................................... 421 
1. Adopt FINRA Rule 5310 and MSRB Rule G-18 Concerning Best 
Execution ............................................................................................................ 423 
2. Require Order Execution Quality Disclosure for Other Asset Classes... 425 
3. Define “Introducing Broker” to Include Those Entities That Qualify for 
Relief Under FINRA and MSRB Rules .............................................................. 426 
4. Ban or Restrict Off-Exchange Payment for Order Flow ........................ 427 
5. Require Broker-Dealers to Utilize Best Execution Committees ............. 428 
6. Require Order-by-Order Documentation for Conflicted or All 
Transactions ........................................................................................................ 429 
7. Staggered Compliance Dates .................................................................. 430 
G. General Request for Comment............................................................................ 431 
Statutory Authority and Text of the Proposed Rule .................................................................... 431 
 
 
I. Introduction 
The duty of best execution requires a broker-dealer to execute customers’ trades at the 
most favorable terms reasonably available under the circumstances,
1
 and customers benefit from 
broker-dealers’ robust considerations of execution opportunities that may provide customers with 
the most favorable terms.  Accordingly, promoting the best execution of customer orders is of 
fundamental importance to investors and the markets, and is an important aspect of investor 
protection.  The Financial Industry Regulatory Authority, Inc. (“FINRA”), a national securities 
association, and the Municipal Securities Rulemaking Board (“MSRB”) currently have rules and 
guidance directly addressing the duty of best execution.  The Commission has made statements 
concerning the duty over the years, but has never itself established a rule addressing best 
                                                 
1
  See infra note 21 and accompanying text. 

   
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execution. While the Commission believes the existing regulatory framework concerning the 
duty of best execution has helped broker-dealers fulfill their duty to their customers, the 
Commission believes this regulatory framework can be made more effective.  In particular, while 
FINRA and the MSRB have established best execution rules and provided guidance on how 
broker-dealers should achieve best execution in a variety of contexts, and generally require 
broker-dealers to have procedures for compliance with relevant laws and rules, the Commission 
believes it is appropriate to propose its own comprehensive and detailed best execution 
requirements.  The Commission understands that, currently, broker-dealers’ best execution 
policies and procedures, and the documentation relating to their best execution practices, may 
vary.  However, as described in section III.A below, the Commission believes that customers 
would benefit from consistently robust best execution practices by broker-dealers, and the 
execution of retail customer orders by broker-dealers that have certain order handling conflicts of 
interest warrants heightened attention by those broker-dealers.
2
 
The Commission believes that having Commission rules providing a policies and 
procedures-based best execution framework, along with regular reviews and related 
documentation, would help broker-dealers maintain consistently robust best execution practices 
and result in vigorous efforts by broker-dealers to achieve best execution, including in situations 
where broker-dealers have order handling conflicts of interest with retail customers.  The 
Commission also believes that detailed policies and procedures, regular reviews, and related 
documentations would allow broker-dealers to effectively assess their best execution practices 
                                                 
2
  See infra Section V.A (describing the “principal – agent” problem that may exist between 
a broker-dealer and its customer and how that can be exacerbated by other conflicts of 
interest).   

   
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and assist the Commission and self-regulatory organizations (“SROs”) to effectively examine 
and enforce broker-dealers’ compliance with the proposed rules.    
Proposed Regulation Best Execution would establish through a Commission rule a best 
execution standard for broker-dealers.
3
  Proposed Regulation Best Execution would also 
specifically require broker-dealers to establish, maintain, and enforce written policies and 
procedures reasonably designed to comply with that best execution standard.  Those policies and 
procedures would be required to address:  (1) how the broker-dealer will comply with the 
proposed standard of best execution, including by identifying material potential liquidity sources, 
incorporating material potential liquidity sources into its order handling practices, and ensuring 
that the broker-dealer can efficiently access each source, and (2) how the broker-dealer will 
determine the best market for customer orders received, including by assessing reasonably 
accessible and timely pricing information and opportunities for price improvement.   
 In addition, for retail customer transactions that present conflicts of interest, such as 
payment for order flow or internalization, that could create incentives for a broker-dealer to be 
less diligent in its search for better executions and potentially result in broker-dealers not 
providing best execution to customer orders, proposed Regulation Best Execution would require 
the broker-dealer’s policies and procedures to address how it will comply with the best execution 
standard in light of such conflicts, including how it would assess a broader range of markets than 
it would for non-conflicted transactions.  Proposed Regulation Best Execution would also require 
                                                 
3
  The proposed best execution standard is consistent with the best execution standards set 
forth in FINRA and MSRB rules. 

   
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broker-dealers to document their compliance with the best execution standard and the basis for 
their determinations that best execution would be achieved through conflicted transactions.   
 Proposed Regulation Best Execution would also require broker-dealers to review the 
execution quality of their customer orders at least quarterly, compare it with the execution 
quality that might have been obtained from other markets, and revise their best execution 
policies and procedures accordingly.   
Proposed Regulation Best Execution would exempt from specified requirements under 
the proposed rules an introducing broker (as defined in the proposed rules) that establishes, 
maintains, and enforces policies and procedures that require it to regularly review the execution 
quality obtained from its executing broker, compares that execution quality w ith the execution 
quality it might have obtained from other executing brokers, and revises its order handling 
practices accordingly.   
Finally, proposed Regulation Best Execution would require broker-dealers to review and 
assess the overall effectiveness of their best execution policies and procedures, including their 
order handling practices, on at least an annual basis, and prepare a report detailing the results of 
such review and assessment that would be presented to the broker-dealer’s board of directors (or 
equivalent governing body).   
 The Commission recognizes the importance of providing a broker-dealer flexibility to 
exercise its expertise and judgment when executing customer orders, and proposed Regulation 
Best Execution primarily would be a policies and procedures-based rule, similar to the Order 

   
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Protection Rule,
4
 the Risk Management Controls for Brokers or Dealers with Market Access 
Rule,
5
 and Regulation Systems Compliance and Integrity.
6
  Under proposed Regulation Best 
Execution, a broker-dealer’s failure to achieve the most favorable price possible under prevailing 
market conditions (“most favorable price”) for customer orders would be part of the 
consideration of whether the broker-dealer’s policies and procedures are reasonably designed 
and whether the broker-dealer is enforcing its policies and procedures.  A broker-dealer’s failure 
to achieve the most favorable price for customer orders would not necessarily be a violation of 
the proposed best execution standard, because it may not be the result of a failure by the broker-
dealer to use reasonable diligence to ascertain the best market and to buy or sell in such market 
so that the customer receives the most favorable price.
7
  However, a failure to establish and 
maintain reasonably designed policies and procedures applicable to all customer orders, or a 
failure to enforce those policies and procedures, would be a violation of the policies and 
procedures requirement under proposed Regulation Best Execution.  
II. Duty of Best Execution  
                                                 
4
  See 17 CFR 242.611. 
5
  See 17 CFR 240.15c3-5. 
6
  See 17 CFR 242.1001. 
7
  See also MSRB Rule G-18.01 (“A failure to have actually obtained the most favorable 
price possible will not necessarily mean that the dealer failed to use reasonable 
diligence.”).  Whether a broker-dealer has met the proposed best execution standard 
would turn on an objective assessment of the facts and circumstances at the time of the 
broker-dealer’s transactions for or with the customer (and not in hindsight). 

   
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A. Current Regulatory Framework 
A broker-dealer has a legal duty to seek best execution of customer orders.  The duty of 
best execution predates the Federal securities laws and is derived from an implied representation 
that a broker-dealer makes to its customers.
8
  The duty is established from “common law agency 
obligations of undivided loyalty and reasonable care that an agent owes to [its] principal.”
9
  This 
obligation requires that a “broker-dealer seek to obtain for its customer orders the most favorable 
terms reasonably available under the circumstances.”
10
  While there is no Commission rule or 
standard addressing a broker-dealer’s duty of best execution, the duty is addressed in FINRA and 
MSRB rules, as described in sections II.C and IV below.
11
  
                                                 
8
  See, e.g., Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 270 (3d 
Cir.), cert. denied, 525 U.S. 811 (1998). 
9
  See id. 
10
  See id.  See also Securities Exchange Act Release No. 37619A (Sept. 6, 1996), 61 FR 
48290 (Sept. 12, 1996) (“Order Execution Obligations Adopting Release”).  A Report of 
the Special Study of Securities Markets stated that, according to an NASD District 
Business Conduct Committee in a 1952 proceeding, “[t]he integrity of the industry can be 
maintained only if the fundamental principle that a customer should at all times get the 
best available price which can reasonably be obtained for him is followed.”  See SEC, 
Report of the Special Study of Securities Markets, H.R. Doc. No. 95, 88th Cong., 1st 
Sess. Pt. II, 624 (1963) (“Special Study”), available at 
https://www.sechistorical.org/collection/papers/1960/1963_SSMkt_Chapter_07_2.pdf.  
11
  The Commission also oversees investment advisers, which have a similar duty.  As part 
of its duty of care, an investment adviser has a duty to seek best execution of a client’s 
transactions where the adviser has responsibility to select broker-dealers to execute client 
trades, and the Commission previously has described the contours of that duty.  See 
Commission Interpretation Regarding Standard of Conduct for Investment Advisers, 
Advisers Act Release No. 5248 (June 5, 2019), 84 FR 33669, 33674-75 (July 12, 2019).  
In addition, the Commission has brought a variety of enforcement actions against 
registered investment advisers in connection with their alleged failure to satisfy their duty 
to seek best execution.  See, e.g., In the Matter of Aventura Capital Management, LLC, 
Investment Advisers Act Release No. 6103 (Sept. 6, 2022) (settled action); In the Matter 

   
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The Commission is proposing Regulation Best Execution pursuant to, among other 
provisions, sections 11A and 15 of the Exchange Act.
12
  In section 11A, Congress identified key 
national market system objectives, including the practicability of brokers executing investors’ 
orders in the best market.
13
  The Commission has rulemaking authority to further the section 11A 
objectives.
14
  Separately, section 15 of the Exchange Act provides authority for rules that are 
reasonably designed to prevent fraudulent acts or practices.  Specifically, section 15(c)(2)(A) 
provides that no broker or dealer may make use of the mails or any means or instrumentality of 
interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or 
sale of, any security (other than an exempted security
15
 or commercial paper, bankers’ 
acceptances, or commercial bills) otherwise than on a national securities exchange of which it is 
a member, in connection with which such broker or dealer engages in any fraudulent, deceptive, 
or manipulative act or practice, or makes any fictitious quotation.
16
  Section 15(c)(2)(B) 
prohibits brokers, dealers, and municipal securities dealers from engaging in such activity in 
                                                 
of Madison Avenue Securities, LLC, Investment Advisers Act Release No. 6036 (May 
31, 2022) (settled action).   
12
  15 U.S.C. 78k-1; 15 U.S.C. 78o. 
13
  15 U.S.C. 78k-1(a)(1)(C).  
14
  15 U.S.C. 78k-1(a)(2).   
15
  See 15 U.S.C. 78c(a)(12) (defining the term “exempted security” to include, among other 
things, government securities and municipal securities, as defined in sections 3(a)(42) 
and 3(a)(29) of the Exchange Act, respectively).  
16
  15 U.S.C. 78o(c)(2)(A). 

   
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“any municipal security.”
17
  Section 15(c)(2)(C) prohibits government securities brokers and 
government securities dealers from engaging in such activity in any “government security.”
18
  
Section 15(c)(2)(D) authorizes the Commission to adopt rules that define, and prescribe means 
reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or 
manipulative and such quotations as are fictitious.
19
  When a broker-dealer violates its duty of 
best execution, it could be in violation of section 15(c) of the Exchange Act.
20
    
B. Prior Commission Statements 
The Commission has made statements concerning the duty of best execution in various 
contexts over the years.  The following are some of the statements that the Commission has 
made with respect to the duty of best execution.  The Commission solicits comment below, 
however, on whether any of these prior statements should be revised in light of the proposed 
rules.     
The Commission has previously stated that the duty of best execution requires a broker-
dealer to execute customers’ trades at the most favorable terms reasonably available under the 
                                                 
17
  See 15 U.S.C. 78o(c)(2)(B).  See also 15 U.S.C. 78c(a)(29) (defining municipal 
securities). 
18
  See 15 U.S.C. 78o(c)(2)(C).  See also 15 U.S.C. 78c(a)(42) (defining government 
securities). 
19
  15 U.S.C. 78o(c)(2)(D). 
20
  See, e.g., In the Matter of Knight Securities L.P., Securities Exchange Act Release No. 
50867 (Dec. 16, 2004) (settled action) (finding that the broker-dealer defrauded its 
institutional customers by failing to provide best execution in violation of section 15(c) of 
the Exchange Act). 

   
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circumstances, i.e., at the best reasonably available price.
21
  The Commission has also 
recognized that price is a critical concern for investors.
22
  In addition, the Commission has 
described a non-exhaustive list of factors that may be relevant to broker-dealers’ best execution 
analysis.  These factors include the size of the order, speed of execution, clearing costs, the 
trading characteristics of the security involved, the availability of accurate information affecting 
choices as to the most favorable market center for execution and the availability of technological 
aids to process such information, and the cost and difficulty associated with achieving an 
execution in a particular market center.
23
   
Over the years, the Commission has stated the need for broker-dealers to continue to 
modernize their best execution practices.  For example, the Commission has stated that broker-
dealer practices for achieving best execution, including the data, technology, and types of 
                                                 
21
  Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37538 (June 
29, 2005) (“Regulation NMS Adopting Release”).  See also Geman v. SEC, 334 F.3d 
1183, 1186 (10th Cir. 2003) (“[T]he duty of best execution requires that a broker-dealer 
seek to obtain for its customer orders the most favorable terms reasonably available under 
the circumstances.”) (quoting Newton, supra note 
8, 135 F.3d at 270); Kurz v. Fidelity 
Management & Research Co., 556 F.3d 639, 640 (7th Cir. 2009) (describing the “duty of 
best execution” as “getting the optimal combination of price, speed, and liquidity for a 
securities trade”). 
22
  See Securities Exchange Act Release No. 43590 (Nov. 17, 2000), 65 FR 75414, 75418 
(Dec. 1, 2000) (“Order Execution and Routing Practice Release”) (“The Commission 
strongly believes, however, that most investors care a great deal about the quality of 
prices at which their orders are executed, and that an opportunity for more vigorous 
competition among market participants to provide the best quality of execution will 
enhance the efficiency of the national market system.”). 
23
  See id., at 75422; Regulation NMS Adopting Release, supra note 21, 70 FR 37538. 

   
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markets they access, must constantly be updated as markets evolve.
24
  In particular, the 
Commission has stated that the scope of the duty of best execution must evolve as changes occur 
in the market that give rise to improved executions for customer orders, including  opportunities 
to trade at more advantageous prices.
25
  As these changes occur, a broker-dealer’s procedures for 
seeking best execution for its customer orders also must be modified to consider price 
opportunities that become reasonably available.
26
  In doing so, broker-dealers must take into 
account price improvement opportunities
27
 and whether different markets may be more suitable 
for different types of orders or particular securities.
28
   
In addition, the Commission has expressed concerns regarding interpositioning and the 
duty of best execution.  Interpositioning can occur when a broker-dealer places a third party 
between itself and the best market for executing a customer trade in a manner that results in a 
                                                 
24
  See Regulation NMS Adopting Release, supra note 21, 70 FR at 37538; Order Execution 
Obligations Adopting Release, supra note 10, 61 FR at 48322-23. 
25
  See Order Execution Obligations Adopting Release, supra note 10, 61 FR 48323. 
26
  See id.; Regulation NMS Adopting Release, supra note 21, 70 FR 37516 (stating that 
broker-dealers must examine their procedures for seeking best execution in light of 
market and technology changes and modify those practices if necessary to enable their 
customers to obtain the best reasonably available prices). 
27
  See Order Execution Obligations Adopting Release, supra note 10, 61 FR 48323 n.357 
(stating that price improvement means the difference between execution price and the 
best quotes prevailing in the market at the time the order arrived at the market or market 
maker, and that any evaluation of price improvement opportunities would have to 
consider not only the extent to which orders are executed at prices better than the 
prevailing quotes, but also the extent to which orders are executed at inferior prices). 
28
  See id. 

   
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customer not receiving the best available market price.
29
  Interpositioning can violate the broker-
dealer’s duty of best execution when it results in unnecessary transaction costs at the expense of 
the customer.
30
 
The Commission has also discussed its views with respect to the application of best 
execution to different order types.  With regard to the handling of limit orders, broker-dealers 
must take into account material differences in execution quality, such as the likelihood of execution 
among the various markets or market centers to which limit orders may be routed.
31
  Broker-
dealers are also subject to the duty of best execution when executing customer orders at the 
                                                 
29
  See Edward Sinclair, et al., Securities Exchange Act Release No. 9115, 1971 WL 120487 
(Mar. 24, 1971) (Comm’n op.), aff’d, 444 F2d. 399 (2d Cir. 1971) (order clerk in OTC 
department of broker-dealer interposed a broker-dealer between his firm and best 
available market price in return for split of profits with the interposed broker); H.C. 
Keister & Co., et al., Securities Exchange Act Release No. 7988, 1966 WL 84120 (Nov. 
1, 1966) (Comm’n op.) (in exchange for payments, trader for a large broker-dealer 
interpositioned a small broker-dealer between its customers’ orders and the best available 
market prices); Synovus Securities, Inc., Securities Exchange Act Release No. 34313, 
1994 WL 323096 (July 5, 1994) (settled order) (broker-dealer and its president placed 
customer orders with person who was able to promptly sell the bonds to or buy the bonds 
from other brokers at a profit and customers did not get the best market price).  See also 
SEC v. Ridenour, 913 F.2d 515 (8th Cir. 1990) (a bond salesman violated the antifraud 
provisions based on his secret interpositioning of his personal trading account between 
his customers’ securities transactions and the fair market price of the trades).   
30
  See Thomson & McKinnon, Securities Exchange Act Release No. 8310, 1968 WL 87637 
(May 8, 1968) (Comm’n op.) (a National Association of Securities Dealers (“NASD”) 
member firm interposed broker-dealers between itself and the best available market, and 
the added transaction cost was borne by its customers; the Commission found that, “[i]n 
view of the obligation of a broker to obtain the most favorable price for his customer, 
where he interposes another broker-dealer between himself and a third broker-dealer, he 
prima facie has not met that obligation and he has the burden of showing that the 
customer’s total cost or proceeds of the transaction is the most favorable obtainable under 
the circumstances”). 
31
  See Order Execution Obligations Adopting Release, supra note 10, 61 FR 48323. 

   
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beginning of regular trading hours and should take into account alternative methods when 
considering how to execute these orders.
32
 
Moreover, the Commission has recognized practical challenges associated with the 
handling of a large volume of orders.  In particular, the Commission acknowledged in 1994 that 
although it may be impractical for a broker-dealer that handles a heavy volume of orders to make 
an individual determination regarding where to route each order it receives, the broker-dealer 
must use due diligence to seek the best execution possible given all facts and circumstances.
33
  
At that time, the Commission reasoned that, in such circumstances, the duty of best execution 
requires a broker-dealer to periodically assess the quality of competing markets to ensure that 
order flow is directed to the markets providing the most beneficial terms for its customer 
orders.
34
   
The Commission has further identified the types of data needed by broker-dealers to 
fulfill their duty of best execution.  For example, quotation information contained in the public 
quotation system must be considered in seeking best execution of customer orders.
35
  In adopting 
                                                 
32
  See Order Execution and Routing Practice Release, supra note 22, 65 FR 75422 
(recognizing that customer orders in listed securities were executed at one opening price 
in an auction whereas customer orders in Nasdaq securities at the time traded at the 
quoted bids and offers resulting in a liquidity premium for a large number of orders that 
effectively cross each other at a single point in time). 
33
  See Securities Exchange Act Release No. 34902 (Oct. 27, 1994), FR Document 94-27109 
(Nov. 2, 1994) (“Payment for Order Flow Release”). 
34
  See id.  See also Regulation NMS Adopting Release, supra note 21, 70 FR 37516. 
35
  See Order Execution Obligations Adopting Release, supra note 10, 61 FR 48324. 

   
18 
 
Rules 605 and 606 of Regulation NMS,
36
 the Commission recognized that the reports required of 
market centers would provide statistical disclosures regarding certain factors, such as execution 
price and speed of execution, relevant to a broker-dealer’s order routing decision and that these 
public disclosures of execution quality should help broker-dealers fulfill their duty of best 
execution.
37
  More recently, the Commission stated that broker-dealers should consider the 
availability of consolidated market data, including the various elements of data content and the 
timeliness, accuracy, and reliability of the data in developing and maintaining their best 
execution policies and procedures.
38
  However, recognizing that best execution analysis varies 
depending upon the characteristics of customers and orders handled and the large array of 
potential scenarios, the Commission stated that it cannot specify the data elements that may be 
relevant to every specific situation.
39
   
                                                 
36
  See 17 CFR 242.605, 242.606. 
37
  See Order Execution and Routing Practice Release, supra note 22, 65 FR 75418.  The 
Commission further stated that the rules were designed to generate uniform, general 
purpose statistics that will prompt more vigorous competition on execution quality.  The 
information provided by these reports is not, by itself, sufficient to support conclusions 
regarding the provision of best execution, and any such conclusions would require a more 
in-depth analysis of the broker-dealer’s order routing practices than will be available 
from the disclosures required by the rules.  See id. at 75420.  
38
  See Securities Exchange Act Release No. 90610 (Dec. 9, 2020), 86 FR 18596, 18605-06 
(Apr. 9, 2021) (“MDI Adopting Release”).  The Commission stated that it was not 
establishing minimum data elements needed to achieve best execution nor mandating 
consumption of the expanded data content.  The Commission also acknowledged that 
different market participants and different trading applications have different market data 
needs.  See id. (citing Securities Exchange Act Release No. 88216 (Feb. 14, 2020), 85 FR 
16726, 16734, 16755 (Mar. 24, 2020) (“Market Data Infrastructure Proposing Release”)). 
39
  See MDI Adopting Release, supra note 38, 86 FR at 18606. 

   
19 
 
The Commission has also stated the importance of price improvement opportunities in 
the context of listed and over-the-counter (“OTC”) equities.
40
  Simply routing customer order 
flow for automated executions or internalizing customer orders on an automated basis at the best 
bid or offer would not necessarily satisfy a broker-dealer’s duty of best execution for small 
orders in listed and OTC equities.
41
  Rather, broker-dealers handling small orders in listed and 
OTC equities should look for price improvement opportunities when executing these orders.
42
  
And the expectation of price improvement for customer orders is particularly important when 
broker-dealers receive payments in return for routing their customer orders.
43
    
                                                 
40
  See Order Execution Obligations Adopting Release, supra note 10, 61 FR at 48323.  See 
also id. at 48323 n.357.   
41
  See id. at 48323. 
42
  See id. 
43
  See Payment for Order Flow Release, supra note 33, 59 FR at 55008.  See also 17 CFR 
240.10b-10(d)(8) (defining “payment for order flow” as any monetary payment, service, 
property, or other benefit that results in remuneration, compensation, or consideration to 
a broker or dealer from any broker or dealer, national securities exchange, registered 
securities association, or exchange member in return for the routing of customer orders 
by such broker or dealer to any broker or dealer, national securities exchange, registered 
securities association, or exchange member for execution, including but not limited to: 
research, clearance, custody, products or services; reciprocal agreements for the provision 
of order flow; adjustment of a broker or dealer’s unfavorable trading errors; offers to 
participate as underwriter in public offerings; stock loans or shared interest accrued 
thereon; discounts, rebates, or any other reductions of or credits against any fee to, or 
expense or other financial obligation of, the broker or dealer routing a customer order that 
exceeds that fee, expense or financial obligation).  Retail broker-dealers receiving cash 
payments from wholesale market makers in return for routing their customers’ orders to 
the market maker for execution is a common example of payment for order flow.  See 
Memorandum to the SEC Equity Market Structure Advisory Committee from the SEC 
Division of Trading and Markets, Certain Issues Affecting Customers in the Current 
Equity Market Structure 5-6 (Jan. 26, 2016).  Staff reports, Investor Bulletins, and other 
staff documents (including those cited herein) represent the views of Commission staff 
and are not a rule, regulation, or statement of the Commission.  The Commission has 

   
20 
 
C. FINRA and MSRB Best Execution Rules 
FINRA, an SRO,
44
 has a best execution rule (Rule 5310) and has issued interpretive 
regulatory notices concerning its members’ duty to provide best execution to customer orders.
45
  
FINRA Rule 5310 states that, “[i]n any transaction for or with a customer or customer of another 
broker-dealer, a member and persons associated with a member must use reasonable diligence to 
ascertain the best market for the subject security and buy or sell in such market so that the 
resultant price to the customer is as favorable as possible under prevailing market conditions.”  
Over the years, FINRA and its predecessor, the NASD, have modified the rule and issued 
interpretations to account for changes in market practices and market structure, and to account 
for new technologies and new data available to broker-dealers that handle and execute customer 
orders.
46
   
                                                 
neither approved nor disapproved the content of these staff documents and, like all staff 
statements, they have no legal force or effect, do not alter or amend applicable law, and 
create no new or additional obligations for any person. 
44
  While the MSRB is an SRO for only certain purposes of the Exchange Act, see Exchange 
Act section 3(a)(26), 15 U.S.C. 78c(a)(26), MSRB rules are rules of an SRO, see 
Exchange Act section 3(a)(28), 15 U.S.C. 78c(a)(28).  FINRA and the MSRB are both 
referred to herein as SROs. 
45
  For ease of discussion and consistency, this release refers to FINRA members as broker-
dealers when discussing the FINRA rules that are applicable to FINRA members.   
46
  See, e.g., FINRA Regulatory Notices 21-23 (June 23, 2021), 21-12 (Mar. 18, 2021), 18-
29 (Sept. 12, 2018), 15-46 (Nov. 2015), and 09-58 (Oct. 2009); NASD Notices to 
Members 01-22 (Apr. 2001), 00-42 (June 2000), and 99-12 (Feb. 1999).  

   
21 
 
Modeled on FINRA Rule 5310,
47
 MSRB Rule G-18 is the best execution rule for 
transactions in municipal securities
48
 and similarly requires broker-dealers to “use reasonable 
diligence to ascertain the best market for the subject security and to buy or sell in that market so 
that the resultant price to the customer is as favorable as possible under prevailing market 
conditions.”   
The Commission describes the elements in FINRA Rule 5310 and MSRB Rule G-18, as 
well as the differences between those rules and the proposed rules, in section IV below.           
III. Existing Order Handling Practices and Overview of Proposed Regulation Best 
Execution 
A. Existing Order Handling Practices   
1. General Broker-Dealer Practices 
In the past few decades, there has been a proliferation of markets and increasingly 
accessible prices across asset classes.  For example, broker-dealers have numerous execution 
                                                 
47
  In proposing Rule G-18, the MSRB stated that a best execution rule should be generally 
harmonized with FINRA Rule 5310 for purposes of regulatory efficiency, but 
appropriately tailored to the characteristics of the municipal securities markets.  See 
Securities Exchange Act Release No. 73764 (Dec. 5, 2014), 79 FR 73658 (Dec. 11, 2014) 
(“MSRB Best Execution Approval Order”).  While proposed Regulation Best Execution 
does not include different requirements for markets with different characteristics, 
proposed Regulation Best Execution is designed to enable broker-dealers to tailor their 
compliance based on the different characteristics of the markets.   
48
  MSRB Rule G-18 applies to brokers, dealers, and municipal securities dealers.  For ease 
of discussion and consistency, when discussing the MSRB rule, the release refers to these 
entities collectively as broker-dealers.  Furthermore, the term “municipal securities” 
throughout this release is referred to as either “municipal bonds” or “municipal 
securities.”   

   
22 
 
venues from which to choose in the NMS stock market.  These include 16 registered equities 
exchanges, an increase from 11 registered equities exchanges approximately 12 years ago.
49
  In 
the options markets, the number of options exchanges continues to increase, with 6 new options 
exchanges in the last 10 years and 16 registered options exchanges operating today.  In the 
corporate and municipal bond markets and government securities markets, traditional OTC voice 
trading protocols and customer liquidity provision by principal trading desks of broker-dealers 
are being supplemented by other methods of execution that are both electronic and multilateral in 
nature.  As of October 31, 2022, there are 21 corporate bond alternative trading systems 
(“ATSs”), 7 municipal securities ATSs, and 14 government securities ATSs, each operating 
pursuant to a Form ATS currently on file with the Commission.   
The Commission believes that customers would benefit from broker-dealers’ robust 
considerations of liquidity sources and price improvement opportunities, which may provide 
customers with the most favorable prices.  In the NMS stock market, for example, broker-dealers 
that primarily service the accounts of individual investors (“retail broker-dealers”) route more 
than 90% of their customers’ marketable orders to a small group of off-exchange dealers, known 
as wholesalers,
50
 and the Commission believes that customers would benefit from considerations 
by these retail broker-dealers of whether other markets may provide customer orders, or a 
portion of those orders, with potentially better executions than wholesalers.   
                                                 
49
  See Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594 (Jan. 21, 
2010 (“Concept Release on Equity Market Structure”). 
50
  See Table 8, infra section V.B.3.a).i.d..  

   
23 
 
For NMS stock orders that receive price improvement from wholesalers, approximately 
18.6% of those shares receive an amount of price improvement of less than 0.1 cent per share 
when executed by the wholesaler.
51
  Moreover, for stocks priced higher than $30, between 
approximately 46-63% of shares executed by wholesalers received price improvement that was 
less favorable than the midpoint of the prevailing national best bid and offer (“NBBO”) at the 
time the wholesaler received the order.
52
  For stocks priced higher than $30, it appears that for 
between 60-93% of the shares executed by the wholesaler in a principal capacity at a price less 
favorable than the NBBO midpoint there was midpoint liquidity that was available on exchanges 
and ATSs at the time the wholesaler executed the order.
53
  Retail broker-dealers often do not 
route customer orders to execute against midpoint liquidity that may be present on other markets 
prior to routing for execution by wholesalers.
54
  While a retail broker-dealer’s decision to route 
orders to a wholesaler that provides price improvement may indeed be consistent with its duty of 
                                                 
51
  See Table 8, infra section V.B.3.a).i.d. 
52
  The percentage ranges are based on stock prices, the liquidity of the stock, whether or not 
the stock was in the S&P 500 Index, and whether or not the stock is an exchange-traded 
fund (“ETF”).  See Table 8, infra section V.B.3.a).i.d (analysis showing that depending 
on the type of NMS stock, its price, and liquidity, between 46% and 73% of retail 
marketable order shares are internalized by a wholesaler at a price worse than the NBBO 
midpoint).  
53
  See Table 8, infra section V.B.3.a).i.d (analysis showing that, depending on the type of 
NMS stock, its price, and its liquidity, between 40% and 93% of the shares in marketable 
retail orders that wholesalers internalize at prices less favorable than the NBBO midpoint 
had midpoint liquidity available at a better price on an exchange or ATS).  
54
  See Table 3, infra section V.B.3.a).i.d (according to Table 3, retail brokers appear to 
outsource handling of over 87% of customer orders and over 90% of customer 
marketable orders to wholesalers). 

   
24 
 
best execution in many cases,
55
 the Commission believes that customers would benefit from 
robust considerations by retail broker-dealers regarding, for example, the possibility of available 
liquidity priced at the midpoint of the NBBO at other markets.     
Similar considerations are present with the order handling and routing practices of 
wholesalers in the NMS stock market.
56
  While the prices that wholesalers provide to a customer 
may often justify the determination by the wholesaler that it is the best market for the customer 
order, the specific amount of price improvement for orders that are executed internally is largely 
within the discretion of the wholesaler.  The wholesaler typically first determines whether or not 
it desires to transact with a particular customer order in a principal capacity.  Should it choose to 
do so, the wholesaler determines what amount of price improvement it will provide for the order, 
and the data described above shows that wholesalers often do not execute customer orders at the 
NBBO midpoint.  When the wholesaler has determined that it does not want to transact with a 
customer order in a principal capacity, the wholesaler may attempt to route such order to other 
markets. 
As discussed in section III.A.2, the Commission believes that customers would benefit 
from robust considerations by broker-dealers of liquidity sources and price improvement 
                                                 
55
  For example, wholesalers appear to provide customers with executions in NMS stocks at 
the midpoint or better (based on the NBBO at the time the wholesaler received the order)  
for almost 46% of the customer orders executed by the wholesaler in a principal capacity.  
See Table 7, infra section V.B.3.a).i.d .  But see supra note 53
 and accompanying text 
(describing that for stocks priced higher than $30, it appears that between 60-93% of the 
shares executed by the wholesaler in a principal capacity at a price less favorable than the 
NBBO midpoint had liquidity available at the NBBO midpoint on an exchange or ATS). 
56
  Wholesalers owe a duty of best execution to the customers of retail broker-dealers under 
FINRA Rule 5310.  See FINRA Rule 5310(a) (applying its best execution requirements 
to any transaction for or with a customer or a customer of another broker-dealer). 

   
25 
 
opportunities in the options market, particularly with respect to transactions that involve order 
handling conflicts of interest. 
The corporate and municipal bond markets and the government securities markets are 
different from the NMS stock market in substantial ways that can impact how a broker-dealer 
fulfills its duty of best execution.  For example, market participants do not have the same level of 
price transparency in these markets as they do in the NMS stock market.  While the corporate 
and municipal bond markets disseminate post-trade price information, this information often is 
not available immediately upon execution of a bond transaction as FINRA and MSRB rules 
permit a trade to be reported within 15 minutes of the transaction.
57
  In the government securities 
market, there is no real-time public dissemination of post-trade price information.  Despite the 
increase in electronic trading and the use of ATSs, these markets are decentralized with most 
trading occurring through broker-dealers that make markets in securities they have underwritten 
or hold in inventory.
58
  There is virtually no exchange trading of these bonds.
59
  Generally, trades 
                                                 
57
  However, both FINRA and the MSRB recently solicited comment about shortening the 
applicable transaction reporting window to one minute.  See FINRA Regulatory Notice 
22-17 (Aug. 2, 2022); MSRB Notice 2022-07 (Aug. 2, 2022).  
58
  See, e.g., Maureen O’Hara & Xing (Alex) Zhou, Anatomy of a Liquidity Crisis: 
Corporate Bonds in the COVID-19 Crisis, 142 J. Fin. Econ. 46 (2021). 
59
  A small percentage of corporate bonds are exchange-traded on trading systems such as 
NYSE Bonds and the Nasdaq Bond Exchange.  See generally, 
https://www.nyse.com/markets/bonds and https://www.nasdaq.com/solutions/nasdaq-
bond-exchange.  Trading volume in exchange-traded bonds was reported to be around 
$19 billion as of January 2020.  See Securities Exchange Act Release No. 94062 (Jan. 26, 
2022), 87 FR 15496 (Mar. 18, 2022) (“Government Securities ATS Proposing Release”), 
at 15604 n.863 (citing Eric Uhlfelder, A Forgotten Investment Worth Considering: 
Exchange-Traded Bonds, Wall St. J. (Jan. 5, 2020), https://www.wsj.com/articles/a-
forgotten-investment-worth-considering-exchange-traded-bonds-11578279781). 

   
26 
 
occur both by voice and through the use of electronic systems that provide trading facilities and 
communication protocols with varying degrees of execution functionality and access to pre-trade 
pricing information.
60
  However, market participants in the corporate and municipal bond 
markets and the government securities markets are increasingly utilizing technology to trade 
these securities, and electronic trading is growing.
61
  The lower level of price transparency in, 
and the decentralized nature of, the corporate and municipal bond and government securities 
markets make it more difficult for customers to evaluate their transactions and highlights the 
importance of robust best execution considerations by broker-dealers in these markets. 
Commission analysis shows significant differences in the variability of execution prices 
among interdealer trades
62
 compared to the variability of execution prices among customer 
trades in the same bonds on the same trading day.  For example, in the corporate bond market, 
the dispersion, or standard deviation, of customer execution prices for transactions under 
$100,000 was almost 3 times more than that of interdealer execution prices.
63
  Similarly, in the 
municipal bond market, the dispersion of customer execution prices for transactions under 
$100,000 was more than 4 times greater than that of interdealer trades.
64
  And in the government 
                                                 
60
  See Government Securities ATS Proposing Release, supra note 59, 87 FR 15606. 
61
  For example, according to one industry group, approximately 32% of investment-grade 
and 23% of high-yield corporate bond daily dollar volumes are executed electronically.  
See id., at 15606 n.890. 
62
  It is well-established that interdealer prices can reflect the prevailing market value for a 
bond.  See, e.g., FINRA Rule 2121. 
63
  See Table 17, infra section V.B.3.b.i.  
64
  See Table 17, infra section V.B.3.b.i and V.B.3.b.ii.    

   
27 
 
securities market, the dispersion of customer execution prices for transactions under $100,000 
was almost 40 percent greater than that of interdealer trades.
65
  The variability of prices for 
customer transactions suggests that some customers may be paying or receiving worse prices 
than other customers in the same security on the same day because their broker-dealers may not 
be evaluating as many markets for those transactions as other broker-dealers.  While it is possible 
that some of the variability of prices paid by customers may be attributable to variations in 
broker-dealer compensation as reflected in the markups or markdowns charged by broker-dealers 
when they transact with customers in a principal capacity, the Commission does not believe that 
this is the only reason for customer price dispersion in the same bonds on the same day.
66
  For 
example, Commission analysis shows that in the corporate bond market, for trades that were 
reported by the broker-dealer as not involving any collection of commissions, markups or 
markdowns, the dispersion of customer execution prices was still 65% greater than that of 
interdealer trades.
67
  Because the variability in the customer execution prices suggests that some 
broker-dealers may not be exercising as much diligence in identifying the best market for 
                                                 
65
  See Table 17, infra section V.B.31.b.i and V.B.3.b.iii .  
66 
 See, e.g., John M. Griffin, Nicholas Hirschey, and Samuel Kruger, Do Municipal Bond 
Dealers Give their Customers ‘Fair and Reasonable’ Pricing? J. Fin., Forthcoming (Aug. 
4, 2022) (“Instead of delivering uniform pricing, dealer transactions with customers take 
place at highly variable markups relative to both reoffering prices and dealer costs.  On 
the same day, customers frequently buy the same bond at different prices from different 
dealers, and prices even vary across different customers purchasing the same bond from 
the same dealer on the same day.  These price differences are not explained by trade 
characteristics or by dealer costs.  Some dealers provide customers with low and 
consistent markups, but this does not appear to be the industry norm.  Pricing at quarter 
or eighth price or yield increments is common and is seemingly a method to deliver 
higher markups.”). 
67
  See infra note 478. 

   
28 
 
customer orders, the Commission believes that customers would benefit from consistently robust 
best execution considerations by broker-dealers, including considerations of the various markets 
that may provide their customers with the most favorable prices.   
2. Order Handling Conflicts of Interest  
The Commission also believes that execution of retail customer orders by broker-dealers 
that have order handling conflicts of interest warrants heightened attention by those broker-
dealers.  These order handling conflicts of interest include payment for order flow, principal 
trading, and routing customer orders to affiliates.   
Payment for order flow
68
 creates a conflict of interest because it creates an incentive for a 
broker-dealer to send customer orders to a market, such as a wholesaler or an exchange, which 
agrees to pay the broker-dealer for sending its customer orders.
69
  Payment for order flow may 
                                                 
68
  When discussing payment for order flow in the context of the proposed rules, the 
Commission uses the term as defined in Exchange Act Rule 10b-10(d)(8).  This 
definition includes payment for order flow from wholesalers to retail broker-dealers, as 
well as exchange rebates that are paid to broker-dealers in return for sending orders to the 
exchange.  See 17 CFR 240.10b-10 (defining payment for order flow and requiring a 
broker-dealer to disclose to the customer whether payment for order flow is received by 
the broker-dealer for the customer transaction and the fact that the source and nature of 
the compensation received in connection with the particular transaction will be furnished 
upon written request of the customer). 
69
  See, e.g., Payment for Order Flow Release, supra note 33, FR Doc No: 94-27109; FINRA 
Regulatory Notice 21-23; Robinhood Financial, LLC, Letter of Acceptance, Waiver and 
Consent (FINRA Case No. 2017056224001) (Dec. 2019) (“Robinhood FINRA”) 
(describing violations of FINRA’s best execution rule where the firm routed its 
customers’ orders to four broker-dealers that all paid for order flow and “did not exercise 
reasonable diligence to ascertain whether these four broker-dealers provided the best 
market for the subject securities to ensure its customers received the best execution 
quality from these as compared to other execution venues”); In the Matter of Robinhood 
Financial, LLC, Securities Exchange Act Release No. 90694 (Dec. 17, 2020) (settled 
action) (“Robinhood SEC”).  Broker-dealers that accept payment for order flow must 

   
29 
 
harm customers because the broker-dealer may be making order handling decisions to benefit 
itself at the expense of its customer.
70
  Because payment for order flow is a form of economic 
inducement that has the potential to influence the way a broker-dealer handles customer orders, 
the Commission has stated that such arrangements must be considered as part of a broker-
dealer’s best execution assessment.
71
   
While the Commission has stated that a broker-dealer’s receipt of payment for order flow 
is not a violation of its duty of best execution as long as it periodically assesses the quality of the 
markets to which it routes order flow, a broker-dealer must not allow payment for order flow to 
interfere with its efforts to obtain best execution.
72
  Likewise, FINRA has stated that broker-
dealers may not negotiate the terms of order routing arrangements for customer orders in a 
manner that reduces the price improvement opportunities that, absent payment for order flow, 
otherwise would be available to those customer orders.
73
  FINRA has also stated that obtaining 
price improvement is a heightened consideration when a broker-dealer receives payment for 
order flow and it is especially important to determine that customers are receiving the best price 
                                                 
disclose certain information concerning the payments publicly.  See 17 CFR 
242.606(a)(1)(iv) (requiring a description of any arrangement for payment for order flow 
and any profit-sharing relationship and a description of any terms of such arrangements, 
written or oral, that may influence a broker-dealer’s order routing decision).  
70
  See, e.g., Robinhood FINRA, supra note 69; Robinhood SEC, supra note 69 (finding that 
the retail broker-dealer explicitly offered to accept less price improvement for its 
customers than what the wholesalers were offering, in exchange for receiving a higher 
rate of payment for order flow for itself). 
71
  See Payment for Order Flow Release, supra note 33, FR Doc No: 94-27109.   
72
  See id. 
73
  See FINRA Regulatory Notice 21-23 (June 23, 2021). 

   
30 
 
and execution quality opportunities notwithstanding the payment for order flow.
74
  Accordingly, 
the Commission believes that the receipt of payment for customer order flow continues to 
warrant heightened attention by broker-dealers.
75
 
A significant portion of retail orders in the NMS stock and listed options market is routed 
in return for payment for order flow.  In the first quarter of 2022, wholesalers paid more than 
$796 million dollars to retail broker-dealers for order flow in NMS stocks and listed options.
76
  
Listed options represented approximately 70% of the total payment for order flow with more 
than $561 million paid to retail broker-dealers by wholesalers.
77
  Payment for order flow creates 
                                                 
74
  See id., at 3-4.  FINRA has also stated that “inducements such as payment for order flow 
and internalization may not be taken into account in analyzing market quality.”  See id. at 
4.  
75
  Commission staff, in a recent report, stated that wholesaler payment for order flow to 
retail broker-dealers is “individually negotiated prior to trading between the retail broker-
dealer and the [wholesaler], and the rates and amounts can vary substantially depending 
on the broker-dealer and its customer order flow.  [Wholesalers] may give the retail 
broker the choice of how to allocate those funds — either by applying some or all of that 
payment to improve the prices of its customers’ orders or by allowing the retail broker-
dealer to keep part of the payment for itself.”  Commission staff stated that these 
payments can create a conflict of interest for the retail broker-dealer.  See Staff Report on 
Equity and Options Market Structure Conditions in Early 2021 (Oct. 14, 2021), available 
at https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-
early-2021.pdf.  Additionally, Rule 606(a) of Regulation NMS requires broker-dealers to 
make publicly available on a quarterly basis certain aggregated order routing disclosures 
for held orders that provide, among other things, detailed disclosure of payments received 
from or paid to certain trading centers, as well as a discussion of the material aspects of 
broker-dealers’ relationships with those trading centers, including a description of any 
arrangements for payment for order flow and any profit-sharing relationships and a 
description of any terms of such arrangements, written or oral, that may influence broker-
dealers’ order routing decisions.  See 17 CFR 242.606(a). 
76
  See Table 12, infra section V.B.3.a).iii.a. 
77
  See id.  See also Thomas Ernst & Chester S. Spatt, Payment for Order Flow and Asset 
Choice, 40 (NBER Working Paper No. w29883, May 2022), 

   
31 
 
an incentive for the retail broker-dealer to adopt order handling and execution practices that may 
not result in best execution for their customers.
78
  For example, as discussed more fully in 
section V, analysis in the NMS stock market appears to show that payment for order flow can 
                                                 
https://ssrn.com/abstract=4068065 (retrieved from Elsevier database) (finding that 
approximately 65% of all payment for order flow is attributable to the options market).  
In addition to payment for order flow paid by wholesalers to retail broker-dealers, some 
exchanges administer “marketing fee” programs pursuant to rules filed with the 
Commission, that result in payment for order flow directed by exchange market makers 
to order flow providers, which can include retail broker-dealers.  See, e.g., Nasdaq Phlx 
LLC Options 7, Section 4; Miami International Securities Exchange LLC Fee Schedule 
Section (1)(a)(xi); NYSE American LLC Options Fee Schedule Section I.A.  Under these 
programs, the exchanges assess fees on market makers who then typically direct the 
disbursement of some or all of the marketing fees to selected market participants in return 
for retail order flow directed to the market makers from the broker-dealer recipients of 
the marketing fees.  If the directed market maker is quoting at the NBBO when the order 
is received, exchange rules typically guarantee the market maker a certain allocation of 
the incoming directed order, typically determined by the number of other market makers 
quoting at the NBBO at the time the order is received.  See, e.g., PHLX Options 3, 
Section 10(a)(1)(C) (describing the directed market maker priority). 
78
  The Commission and FINRA settled claims against a retail broker-dealer for, among 
other things, failing to provide best execution to customer orders for which it received 
payment for order flow.  See supra note 69
.  The inherent trade-off between payment for 
order flow for a retail broker-dealer and price improvement for their customers was 
discussed in the Commission’s settled enforcement action against the retail broker.  See 
Robinhood SEC, supra note 69.  The Commission found that the retail broker-dealer had 
negotiated with a number of wholesalers about potentially routing customer orders to 
those firms and that, in the course of those negotiations, certain of the wholesalers told 
the retail broker-dealer that there was a trade-off between payment for order flow on the 
one hand and price improvement on the other.  See id.  The Commission also found that 
the retail broker-dealer explicitly offered to accept less price improvement for its 
customers than what the wholesalers were offering, in exchange for receiving a higher 
rate of payment for order flow for itself.  See id.  Subsequently, the retail broker-dealer 
conducted a more extensive internal analysis, which showed that its execution quality and 
price improvement metrics were substantially worse than other retail broker-dealers in 
many respects, including the percentage of orders that received price improvement and 
the amount of price improvement, measured on a per order, per share, and per dollar 
traded basis.  See id.   

   
32 
 
harm customer execution quality.  More specifically, the orders of broker-dealers that receive 
more payment for order flow from wholesalers are internalized by wholesalers with (1) higher 
effective spreads, (2) higher execution quality ratios, and (3) slightly smaller price improvement 
when compared with the orders of broker-dealers that do not receive payment for order flow and 
that are internalized by wholesalers.
79
  In the context of exchange rebates in the options market, 
one study finds that some brokers seemingly route non-marketable orders to exchanges that offer 
large liquidity rebates to maximize the value of order flow and suggests that broker-dealers can 
enhance non-marketable limit order execution quality by routing those orders to exchanges that 
do not offer liquidity rebates to non-marketable limit orders.
80
  
The Commission has also acknowledged that the opportunity for a broker-dealer to trade 
with a customer order as principal is an order routing inducement that could interfere with the 
broker-dealer’s duty of best execution.
81
  Internalizing customer orders may create a conflict of 
interest because broker-dealers do so for the opportunity to capture the spread,
82
 and may 
thereby provide broker-dealers an incentive to trade with orders as principal.  In the NMS stock 
market and listed options market, principal trading with retail customers is a common practice.  
                                                 
79
  See Table 16, infra section V.B.3.b..iii.b.   
80
  See Robert Battalio et al., Do (Should) Brokers Route Limit Orders to Options 
Exchanges That Purchase Order Flow?, 56 J. Fin. & Quantitative Analysis 183 (2020). 
81
  See Order Execution Obligations Adopting Release, supra note 10, 61 FR 48323. 
82
  See Internalized/Affiliate Practices, Payment for Order Flow and Order Routing 
Practices, Securities Exchange Act Release No. 34903 (Oct. 27, 1994), 59 FR 55014, 
55014 (Nov. 2, 1994) (recognizing several commenters who described this conflict of 
interest). 

   
33 
 
As stated above in section III.A.1, a significant portion of retail customer orders are routed to 
wholesalers for handling and execution.  Once the wholesaler receives retail customer orders for 
handling and execution, it often trades with those customer orders as principal.  Wholesalers 
internalize over 90% of the dollar value of the marketable order flow retail broker-dealers send 
them.
83
  The Commission believes that the incentive to trade in a principal capacity at a price 
most advantageous for the wholesaler itself rather than the customer warrants heightened 
attention by the wholesaler.  
Principal trading in the listed options market is also common.  Options exchange trading 
and priority rules, which must be filed with the Commission under section 19(b) of the Exchange 
Act
84
 and Rule 19b-4 thereunder,
85
 provide wholesalers with a number of methods to internalize 
customer orders.  For example, the wholesaler or an affiliate is often either a specialist or 
directed market maker on one or more of the options exchanges.  Exchange rules typically 
provide the specialist or directed market maker with the right to trade with a certain portion of 
incoming order flow regardless of whether other market participants may also be quoting at the 
same price as the specialist or directed market maker.
86
  These “allocation guarantees” 
effectively allow the wholesaler to internalize a minimum amount of the customer orders by 
                                                 
83
  See Table 7, infra Section V.B.3.a.i.d. 
84 
 15 U.S.C. 78s(b). 
85
  17 CFR 240.19b-4.  
86
  See, e.g., BOX Exchange LLC Rule 7135(c); Miami International Securities Exchange 
LLC Rule 514(g)-(i); Nasdaq Phlx LLC Options 3, Section 10(a)(1); Nasdaq ISE, LLC 
Options 3, Section 10(c)(1); NYSE American LLC Rule 964NY(b)(2).   

   
34 
 
routing the customer orders to exchanges where the wholesaler or its affiliate is designated as a 
specialist or directed market maker.  Similarly, many options exchanges provide small order 
guarantees that permit the specialist (which potentially can be an affiliate of the wholesaler) to 
trade with 100% of all orders sent to the exchange for five contracts or less.
87
  Moreover, options 
exchanges’ two-sided auctions (“price improvement auctions”) allow a wholesaler to internalize 
a customer order by submitting a proposed transaction between the wholesaler and a customer at 
a specified price.
88
  Other market participants are permitted to compete with the wholesaler for 
the opportunity to trade with the customer order.  These price improvement auctions, however, 
generally afford the wholesaler with certain advantages over other market participants that may 
be interested in competing for the right to trade with a customer order.
89
  The Commission 
estimates that wholesalers in the listed options market generally internalize approximately 31% 
of the executed orders routed to option exchanges, with approximately 73% of orders routed to 
price improvement auctions being internalized and approximately 17% of orders routed to the 
limit order book being internalized.
90
  The Commission believes that the incentive to trade in a 
                                                 
87
  See, e.g., Nasdaq ISE, LLC Options 3, Section 10(c)(1)(D); Nasdaq Phlx LLC Options 3, 
Section 10(a)(1)(D); BOX Exchange LLC Rule 7135(c)(2)(iii); NYSE American LLC 
Rule 964NY(b)(2)(C)(iv).   
88
  Customer orders that are submitted into price improvement auctions are guaranteed 
complete execution at a minimum execution price and are electronically auctioned for 
price improvement.  See, e.g., Nasdaq ISE, LLC Options 3, Section 13; Nasdaq Phlx 
LLC Options 3, Section 13; Miami International Securities Exchange LLC Rule 515A; 
BOX Exchange LLC Rule 7150; NYSE American LLC Rule 971.1NY; Cboe Exchange, 
Inc. Rule 5.37. 
89
  See infra notes 137-140 and accompanying text.  
90
 See infra Section V.B.3.a.ii. 

   
35 
 
principal capacity at a price most advantageous for the wholesaler itself rather than the customer 
warrants heightened attention by the wholesaler.  
Finally, the practice of routing customer orders to affiliates raises a conflict of interest for 
the broker-dealer.  When a broker-dealer chooses to route customer orders to an affiliate, it may 
do so because of financial incentives, and these incentives can vary depending on the business 
model or business lines of the broker-dealer.  For example, broker-dealers may have conflicts of 
interest to the extent that they operate or are affiliated with an entity that operates a trading 
venue, such as an ATS, because the broker-dealer or its affiliate receives financial benefits when 
the broker-dealer operator chooses to route customer orders to its ATS for execution (e.g., by 
routing an order to its ATS, a broker-dealer operator that does not pass through trading fees to its 
customers may be able to avoid paying fees that it otherwise would have to pay when routing 
and executing orders on unaffiliated trading venues).
91
  A broker-dealer operator also benefits by 
routing to its ATS because it creates higher volume on the ATS, which can attract additional 
order flow to the ATS, ultimately increasing the ATS’ market share and associated revenue.
92
  
Another example of affiliate routing conflicts of interest relates to a financial services firm that 
                                                 
91
  See Amber Anand et al., Institutional Order Handling and Broker-Affiliated Trading 
Venues, 34 Rev. Fin. Stud. 3364, 3366 (July 2021) (“Anand”) (recognizing the conflict 
between obtaining the best outcome for the customer and maximizing the broker-dealer’s 
revenue due to avoiding a fee that is typically borne by the broker-dealer).  This study 
found that “institutional brokers who route more orders to affiliated [ATSs] are 
associated with lower execution quality (i.e., lower fill rates and higher implementation 
shortfall costs).”  Id.  See also Regulation of NMS Stock Alternative Trading Systems, 
Securities Exchange Act Release No. 83663 (July 18, 2018), 83 FR 38768, 38775, 38834 
(Aug. 7, 2018). 
92
  See Anand, supra note 91, at 3366. 

   
36 
 
may have an organizational structure that separates its retail facing business from its order 
handling and execution business.  The retail broker-dealer that receives a customer order may 
have a financial incentive to send the customer order to its affiliated executing broker-dealer 
because the affiliated executing broker-dealer may wish to trade as principal with the customer 
order.  While an affiliated executing broker-dealer could provide best execution for customer 
orders, the incentive to send customer orders to an affiliate may influence the broker-dealer to 
route the customer order in a manner that maximizes the broker-dealer’s interest, rather than 
route the customer order to another market consistent with its duty of best execution.
93
  
                                                 
93
  Recently, FINRA has entered into settlements with broker-dealers for best execution 
violations of FINRA rules involving affiliated routing practices.  In one case, FINRA 
found that the broker-dealer “failed to consider whether alternate routing arrangements 
could have provided price improvement opportunities and better speed of execution” for 
customer orders despite its consideration of certain execution quality factors for orders 
routed to an affiliated ATS.  FINRA also stated that “although [the firm] reviewed fill 
rates in [its affiliated ATS] during the relevant period, the firm failed to consider alternate 
routing arrangements when the firm showed that fill rates in [its affiliated ATS] were 
inferior to fill rates at some competing execution venues.”  FINRA found that this 
practice violated FINRA’s best execution rule.  See Barclays Capital Inc., Letter of 
Acceptance, Waiver, and Consent No. 2014041808601 (Oct. 4, 2022), available at 
https://www.finra.org/sites/default/files/2022-10/Barclays-Capital-AWC-100522.pdf.  In 
another case, FINRA found that the broker-dealer routinely routed institutional customer 
orders to its affiliated ATS prior to routing such orders to exchanges or to other ATSs.  
According to FINRA’s findings, the broker-dealer routed to its affiliated ATS despite 
having evidence that (1) orders that were sent to the affiliated ATS had lower fill rates as 
compared to orders sent directly to exchanges, and (2) other ATSs consistently ranked 
higher in the firm’s rankings for execution quality than the affiliated ATS.  FINRA found 
that this affiliated routing practice violated FINRA’s best execution rule 5310.  See 
Deutsche Bank Securities Inc., Letter of Acceptance, Waiver, and Consent No. 
2014041813501 (Mar.7, 2022), available at 
https://www.finra.org/sites/default/files/2022-03/deutsche-bank-awc-030722.pdf.   

   
37 
 
Accordingly, the Commission believes that the impact of this practice on customer orders 
continues to warrant heightened attention by broker-dealers.    
3. Crypto Asset Securities 
As discussed in section II.A above, a broker-dealer has a legal duty to seek best execution 
of customer orders in securities.  Proposed Regulation Best Execution would apply to all 
securities, including any digital asset that is a security or a government security under the Federal 
securities laws.  The term “digital asset” refers to an asset that is issued and/or transferred using 
distributed ledger or blockchain technology (“distributed ledger technology”), including, but not 
limited to, so-called “virtual currencies,” “coins,” and “tokens.”
94
   
Unlike securities that are not issued or transferred using distributed ledger technology, 
the Commission has limited information about the order handling and best execution practices of 
broker-dealers that engage in transactions for or with customers in crypto asset securities.
95
  This 
                                                 
94
  See Custody of Digital Asset Securities by Special Purpose Broker-Dealers, Securities 
Exchange Act Release No. 90788 (Dec. 23, 2020), 86 FR 11627, 11627 n.1 (Feb. 26, 
2021) (“Crypto Asset Securities Custody Release”).  A digital asset may or may not meet 
the definition of a “security” under the Federal securities laws.  See, e.g., Report of 
Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The 
DAO, Securities Exchange Act Release No. 81207 (July 25, 2017) (“DAO 21(a) 
Report”), available at 
https://www.sec.gov/litigation/investreport/34-81207.pdf.  See also 
SEC v. W.J. Howey Co., 328 U.S. 293 (1946).  To the extent digital assets rely on 
cryptographic protocols, these types of assets also are commonly referred to as “crypto 
assets” and “digital asset securities” can be referred to as “crypto asset securities.” For 
purposes of this release, the Commission does not distinguish between the terms “digital 
asset securities” and “crypto asset securities.” 
95
  See, e.g., Fin. Stability Oversight Council, Report on Digital Asset Financial Stability 
Risks and Regulation 119 (2022) (“FSOC Report”), available at 
https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf (“The 
crypto-asset ecosystem is characterized by opacity that creates challenges for the 
assessment of financial stability risks.”); U.S. Dep’t of the Treasury, Crypto-Assets: 

   
38 
 
information limitation is, in part, due to the fact that only a small portion of crypto asset security 
trading activity is occurring within entities that are registered with the Commission and any of 
the SROs.  For example, there are currently no special purpose broker-dealers authorized to 
maintain custody of crypto asset securities.
96
  Similarly, only a limited amount of crypto asset 
                                                 
Implications for Consumers, Investors, and Businesses 12 (Sept. 2022) (“Crypto-Assets 
Treasury Report”), available at  
https://home.treasury.gov/system/files/136/CryptoAsset_EO5.pdf (finding that data 
pertaining to “off-chain activity” is limited and subject to voluntary disclosure by trading 
platforms and protocols, with protocols either not complying with or not subject to 
obligations “to report accurate trade information periodically to regulators or to ensure 
the quality, consistency, and reliability of their public trade data”); Fin. Stability Bd., 
Assessment of Risks to Financial Stability from Crypto-assets 18-19 (Feb. 16, 2022) 
(“FSB Report”), available at https://www.fsb.org/wp-content/uploads/P160222.pdf 
(finding that the difficulty in aggregating and analyzing available data in the digital asset 
space “limits the amount of insight that can be gained with regard to the [digital asset] 
market structure and functioning,” including who the market participants are and where 
the market’s holdings are concentrated, which, among other things, limits regulators’ 
ability to inform policy and supervision); Raphael Auer et al., Banking in the Shadow of 
Bitcoin? The Institutional Adoption of Cryptocurrencies 4, 9 (Bank for Int’l Settlements, 
Working Paper No. 1013, May 2022), available at 
https://www.bis.org/publ/work1013.pdf (stating that data gaps, which can be caused by 
limited disclosure requirements, risk undermining the ability for holistic oversight and 
regulation of cryptocurrencies); Int’l Monetary Fund, The Crypto Ecosystem and 
Financial Stability Challenges, in Global Financial Stability Report 41, 47 (Oct. 2021), 
available at https://www.imf.org/-
/media/Files/Publications/GFSR/2021/October/English/ch2.ashx (finding that digital 
asset service providers provide limited, fragmented, and, in some cases, unreliable data, 
as the information is provided voluntarily without standardization and, in some cases, 
with an incentive to manipulate the data provided). 
96
  For background on Rule 15c3-3, 17 CFR 240.15c3-3, as it relates to digital asset 
securities, see U.S. Sec. & Exch. Comm’n, Joint Staff Statement on Broker-Dealer 
Custody of Digital Asset Securities (July 8, 2019), https://www.sec.gov/news/public-
statement/joint-staff-statement-broker-dealer-custody-digital-asset-securities; Fin. Indus. 
Regul. Auth., SEC Staff No-Action Letter, ATS Role in the Settlement of Digital Asset 
Security Trades (Sept. 25, 2020), available at 
https://www.sec.gov/divisions/marketreg/mr-noaction/2020/finra-ats-role-in-settlement-
of-digital-asset-security-trades-09252020.pdf.  To date, five offerings of crypto asset 

   
39 
 
security volume is executed on trading venues under the Commission’s ATS framework.
97
  This 
information limitation is also, in part, due to the significant trading activity in crypto asset 
securities that may be occurring in non-compliance with the Federal securities laws.
98
    
 
 
                                                 
securities have been registered or qualified under the Securities Act of 1933, and five 
classes of crypto asset securities have been registered under the Exchange Act.  The 
Commission issued a statement describing its position that, for a period of five years, 
special purpose broker-dealers operating under the circumstances set forth in the 
statement will not be subject to a Commission enforcement action on the basis that the 
broker-dealer deems itself to have obtained and maintained physical possession or control 
of customer fully paid and excess margin digital asset securities for purposes of Rule 
15c3-3(b)(1) under the Exchange Act.  See Crypto Asset Securities Custody Release, 
supra note 94.  To date, no such special purpose broker-dealer registration applications 
have been granted by FINRA.   
97
  ATSs that do not trade NMS stocks file with the Commission a Form ATS notice, which 
the Commission does not approve.  Form ATS requires, among other things, that ATSs 
provide information about:  classes of subscribers and differences in access to the 
services offered by the ATS to different groups or classes of subscribers; securities the 
ATS expects to trade; any entity other than the ATS involved in its operations; the 
manner in which the system operates; how subscribers access the trading system; 
procedures governing entry of trading interest and execution; and trade reporting, 
clearance, and settlement of trades on the ATS.  In addition, all ATSs must file quarterly 
reports on Form ATS-R with the Commission.  Form ATS-R requires, among other 
things, volume information for specified categories of securities, a list of all securities 
traded in the ATS during the quarter, and a list of all subscribers that were 
participants.  To the extent that an ATS trades crypto asset securities, the ATS must 
disclose information regarding its crypto asset securities activities as required by Form 
ATS and Form ATS-R.  Form ATS and Form ATS-R are deemed confidential when filed 
with the Commission.  Based on information provided on these forms, a limited number 
of ATSs have noticed on Form ATS their intention to trade certain crypto asset securities 
and a subset of those ATSs have reported transactions in crypto asset securities on their 
Form ATS-R. 
98
  See also FSOC Report, supra note 95, at 5, 87, 94, 97 (emphasizing the importance of the 
existing financial regulatory structure while stating that certain digital asset platforms 
may be listing securities while not in compliance with exchange, broker-dealer, or other 
registration requirements, which may impose additional risk on banks and investors and 
result in “serious consumer and investor protection issues”); Crypto-Assets Treasury 
Report, supra note 
95, at 26, 29, 39, 40 (stating that issuers and platforms in the digital 

   
40 
 
The Commission believes that it is appropriate for a broker-dealer that engages in 
transactions for or with customers or customers of another broker-dealer in crypto asset 
securities to be subject to proposed Regulation Best Execution.  As discussed in section I above, 
the duty of best execution is of fundamental importance to investors and the markets, including 
investors in, and the market for, crypto asset securities.  For example, a customer transacting in 
crypto asset securities should receive the protections afforded by the requirement that broker-
dealers exercise reasonable diligence to ascertain the best market for the crypto asset securities 
and buy and sell in such market so that the price to the customer is as favorable as possible under 
prevailing market conditions.  In doing so, broker-dealers should be taking steps to ensure that 
they are evaluating the range of markets that trade crypto asset securities and appropriately 
identifying those markets that may be likely to provide customers with the most favorable prices.   
B. Overview of Proposed Regulation Best Execution 
The Commission believes that proposed Regulation Best Execution would further the 
Congressional goal set forth in Exchange Act Section 11A(a)(1)(C)(iv) regarding executing 
investors’ orders in the best market and reinforce broker-dealer obligations concerning the duty 
of best execution.  In particular, proposed Regulation Best Execution would identify specific 
                                                 
asset ecosystem may be acting in non-compliance with statutes and regulations governing 
traditional capital markets, with market participants that actively dispute the application 
of existing laws and regulations, creating risks to investors from non-compliance with, in 
particular, extensive disclosure requirements and market conduct standards); FSB Report, 
supra note 95
, at 4, 8, 18 (stating that some trading activity in crypto assets may be failing 
to comply with applicable laws and regulations, while failing to provide basic investor 
protections due to their operation outside of or in non-compliance with regulatory 
frameworks, thereby failing to provide the “market integrity, investor protection or 
transparency seen in appropriately regulated and supervised financial markets”). 

   
41 
 
factors that must be addressed by a broker-dealer’s policies and procedures on best execution, 
impose additional requirements for conflicted transactions, and impose best execution-specific 
review and documentation requirements, all of which should better protect investors by 
promoting consistently robust order handling and execution practices.
99
   
Proposed Rule 1100 would set forth the standard of best execution, requiring a broker-
dealer to use reasonable diligence to ascertain the best market for a security, and buy or sell in 
such market so that the resultant price to the customer is as favorable as possible under 
prevailing market conditions.  Proposed Rule 1101 would require a broker-dealer to establish, 
maintain, and enforce written policies and procedures that address specific elements that are 
designed to promote the best execution of customer orders, and comply with certain execution 
quality review and documentation requirements.   
More specifically, proposed Rule 1101(a)(1) would require that a broker-d
ealer’s policies 
and procedures address how it will comply with the best execution standard in proposed Rule 
1100.  In particular, a broker-dealer’s policies and procedures would be required to address how 
it will:  (1) obtain and assess reasonably accessible information concerning the markets trading 
the relevant securities; (2) identify markets that may be reasonably likely to provide the most 
favorable prices for customer orders (“material potential liquidity sources”); and (3) incorporate 
the material potential liquidity sources into its order handling practices and ensure efficient 
                                                 
99
  See section IV for discussions of the differences between the proposed rules and the 
existing FINRA and MSRB rules on best execution.  As discussed in detail in section IV, 
proposed Regulation Best Execution is consistent with the FINRA and MSRB best 
execution rules in some respects and, in some other respects, goes beyond those rules 
imposing additional and/or more specific requirements. 
 

   
42 
 
access to each such material potential liquidity source.  The Commission believes this aspect of 
the proposal would promote consistently robust order handling practices by requiring each 
broker-dealer to establish a detailed framework to achieve best execution, which involves an 
analysis of relevant information, an evaluation of the range of liquidity sources, and the 
identification of and ability to efficiently access liquidity sources.       
Proposed Rule 1101(a)(2) would require a broker-dealer’s policies and procedures to 
address how it will determine the best market and make routing and execution decisions for the 
customer orders that it receives.  In particular, a broker-dealer’s policies and procedures would 
be required to address how it will:  (1) assess reasonably accessible and timely information, 
including information with respect to the best displayed prices, opportunities for price 
improvement, and order exposure opportunities that may result in the most favorable price; (2) 
assess the attributes of customer orders and consider the trading characteristics of the security, 
the size of the orders, the likelihood of execution, and the accessibility of the market, and any 
customer instructions in selecting the market most likely to provide the most favorable price; and 
(3) reasonably balance the likelihood of obtaining a better price with the risk that delay could 
result in a worse price when determining the number and sequencing of markets to be assessed.  
These considerations have been recognized as relevant for a broker-dealer’s duty of best 
execution.
100
   
As discussed in section IV.B below, the factors that must be included in a broker-dealer’s 
policies and procedures under proposed Rule 1101(a) are generally consistent with the factors 
                                                 
100
  See, e.g., supra notes 21-23 and accompanying text; FINRA Rules 5310(a)(1) and 
5310.09(b)(1).   

   
43 
 
that FINRA and the MSRB have identified as relevant to a broker-dealer’s best execution 
determinations.  The Commission understands that, currently, some broker-dealers incorporate 
various best execution factors from the FINRA and MSRB best execution rules in their policies 
and procedures.  However, by requiring broker-dealers’ best execution policies and procedures to 
explicitly address these factors, proposed Rule 1101(a) would help ensure that broker-dealers 
have established processes in place for considering these factors and that broker-dealers follow 
these processes when transacting for or with customers, which should promote consistently 
robust order handling practices among broker-dealers.
101
 
Proposed Rule 1101(b) would require broker-dealers that have certain conflicts of interest 
to establish additional policies and procedures to better position them to meet the best execution 
standard in these circumstances.  In particular, a broker-dealer’s policies and procedures for 
conflicted transactions would be required to address how it will:  (1) obtain and assess 
information beyond that required by proposed Rule 1101(a)(1)(i) in identifying a broader range 
of markets beyond the material potential liquidity sources; and (2) evaluate a broader range of 
markets beyond the material potential liquidity sources.  Proposed Rule 1101(b) would also 
require broker-dealers to document their compliance with the best execution standard for 
conflicted transactions, including all efforts taken to enforce their policies and procedures, and 
their basis and information relied on for determining that their conflicted transactions would 
                                                 
101
  Moreover, requiring broker-dealers’ best execution policies and procedures to address 
factors similar to those that FINRA and the MSRB have already identified as relevant to 
best execution determinations would mitigate compliance costs associated with the 
proposed rules. 

   
44 
 
comply with the proposed best execution standard.  Such documentation would be required to be 
done in accordance with written procedures.  Proposed Rule 1101(b) would also require broker-
dealers to document any arrangements concerning payment for order flow.
102
  These 
requirements for conflicted transactions would be in addition to the current FINRA and MSRB 
best execution rules, although the Commission understands that some broker-dealers currently 
preserve information that allows them to support their best execution determinations (e.g., 
information to recreate the pricing information that was available at the time an order was 
received).  The Commission believes that these requirements would encourage broker-dealers to 
exercise additional diligence with respect to conflicted transactions in light of the incentives to 
handle conflicted transactions in a manner that prioritizes their own interests over their 
customers’ interests, and are part of the Commission’s ongoing efforts to protect investors when 
conflicts of interest exist.  
Proposed Rule 1101(c) would require broker-dealers to review the execution quality of 
customer orders at least quarterly, and how such execution quality compares with the execution 
quality that might have been obtained from other markets, and revise their best execution 
policies and procedures, including order handling practices, accordingly.  The Commission 
understands that, currently, broker-dealers’ reviews of execution quality vary in rigor,
103
 and the 
Commission preliminarily believes that the proposed review requirement would further ensure 
                                                 
102
  See infra section IV.C.2 (discussing the proposed requirement to document payment for 
order flow arrangements). 
103
  See infra note 210 (discussing FINRA exam findings relating to execution quality 
reviews). 

   
45 
 
that broker-dealers evaluate the effectiveness of their current order handling practices and enable 
broker-dealers to make informed judgments regarding whether their policies and procedures or 
practices need to be modified.  This review requirement would also apply to a broader range of 
broker-dealers than FINRA’s rule that governs the review of execution quality,
104
 and would be 
in addition to the current MSRB best execution rule.   
Proposed Rule 1101(d) would exempt an introducing broker that routes customer orders 
to an executing broker from separately complying with proposed Rules 1101(a), (b), and (c), so 
long as the introducing broker establishes, maintains, and enforces policies and procedures that 
require the introducing broker to regularly review the execution quality obtained from its 
executing broker, compare it with the execution quality it might have obtained from other 
executing brokers, and revise its routing practices accordingly.  This provision would 
provide a tailored exemption from certain provisions of proposed Regulation 
Best Execution for broker-dealers that do not make decisions or exercise 
discretion regarding the manner in which their customer orders are handled 
and executed, beyond their determinations to engage the services of 
executing brokers.  This exemption would be provided to a narrower group of broker-
dealers than similar exemptions provided by FINRA and the MSRB, and would require 
additional specific policies and procedures that are not required under the FINRA and MSRB 
rules.
105
 
                                                 
104
  See infra section IV.D (discussing the proposed execution quality review requirement, 
including the scope of the proposed requirement). 
105
  See infra section IV.E (describing the applicability of the proposed exemption under 
proposed Rule 1101(d)). 

   
46 
 
Proposed Rule 1102 would require each broker-dealer to review and assess the design 
and overall effectiveness of their best execution policies and procedures, including their order 
handling practices, on at least an annual basis, and document such review and assessment in an 
annual report that would be provided to the broker-dealer’s governing body.  The Commission 
understands that, currently, broker-dealers periodically review their policies and procedures 
(including those related to best execution), although the frequency of review may vary.
106
  
However, proposed Rule 1102 would require the broker-dealer to review and assess the policies 
and procedures it established under proposed Regulation Best Execution, and the Commission 
believes that these requirements would help ensure the effectiveness of broker-dealers’ best 
execution policies and procedures that are adopted pursuant to the proposed rules.   
Finally, the Commission is proposing to amend Rule 17a-4 under the Exchange Act
107
 to 
include record preservation requirements for records made under proposed Regulation Best 
Execution.   
The Commission believes that proposed Regulation Best Execution would also enhance 
its oversight of broker-dealers through the broker-dealers’ best execution policies and procedures 
                                                 
106 
 See infra notes 222, 223, and 224 and accompanying text (describing the minimum 
frequency standards for review of execution quality under the FINRA and MSRB rules 
and how broker-dealers may need to review execution quality more frequently than the 
minimum requirements depending on the circumstances). 
107
  17 CFR 240.17a-4. 

   
47 
 
required by the proposal, as well as broker-dealers’ documentation of their compliance with 
proposed Regulation Best Execution.
108
   
Request for Comment 
The Commission requests comment on its understanding of broker-dealers’ current best 
execution practices, and in particular: 
1. Do commenters agree with the Commission’s understanding that some broker-dealers 
currently incorporate various best execution factors from the FINRA and MSRB best 
execution rules in their policies and procedures?  Please explain whether, and the extent 
to which, broker-dealers currently incorporate those factors in their policies and 
procedures.  For example, do broker-dealers currently incorporate all of the best 
execution factors from the FINRA and MSRB rules in their policies and procedures? 
2. Do commenters agree with the Commission’s understanding that some broker-dealers 
currently preserve information that allows them to support their best execution 
determinations, such as information to recreate the pricing information that was available 
at the time of an execution?  Please explain whether broker-dealers currently preserve 
                                                 
108 
 The Commission believes that Proposed Regulation Best Execution will also provide 
certain investor protection benefits.  As discussed in Section V below, by having its own 
rule, the Commission will be able to seek certain remedies and other sanctions for 
violations of the Commission rule best execution violations that are not necessarily 
available under the current regulatory framework.   In general, a best execution rule 
promulgated pursuant to the Exchange Act will expand and enhance the Commission’s 
flexibility when pursuing best execution violations and produce efficiencies resulting 
from that greater flexibility.    
 

   
48 
 
information that allows them to support their best execution determinations, and if so, the 
type of information that they preserve.   
3. Do commenters agree with the Commission’s understanding that, currently, broker-
dealers’ reviews of execution quality vary in rigor?  Please explain how broker-dealers 
currently conduct execution quality reviews of customer orders. 
4. Do commenters agree with the Commission’s understanding that, currently, broker-
dealers periodically review their best execution policies and procedures, but with varying 
frequency?  Please describe how frequently broker-dealers currently review their best 
execution policies and procedures. 
IV. Discussion of Proposed Regulation Best Execution 
As discussed in this section IV below, the Commission is proposing Regulation Best 
Execution, which is consistent with the FINRA and MSRB best execution rules in many respects 
and is different from those rules in some respects.  Proposed Regulation Best Execution would 
not affect a broker-dealer’s obligation to comply with the FINRA or MSRB best execution rule.  
Accordingly, a broker-dealer would be required to comply with proposed Regulation Best 
Execution, in addition to their existing obligations to comply with the FINRA and MSRB best 
execution rules, as applicable.
109
     
                                                 
109 
 For example, where proposed Regulation Best Execution would impose additional or 
more specific requirements as compared to the FINRA or MSRB rules, a broker-dealer 
would be required to comply with the additional or more specific requirements under the 
proposed rules.  See, e.g., infra section IV.A (discussing the application of proposed Rule 
1100 to transactions with sophisticated municipal market professionals, which are 
exempted from the MSRB’s best execution rule).  Similarly, where FINRA or the MSRB 
impose more specific requirement than proposed Regulation Best Execution, a broker-

   
49 
 
A. Proposed Rule 1100 – The Best Execution Standard 
Proposed Rule 1100 would set forth the best execution standard for broker-dealers.
110
  
Specifically, proposed Rule 1100 states that, in any transaction for or with a customer, or a 
customer of another broker-dealer, a broker-dealer, or a natural person who is an associated 
person of a broker-dealer,
111
 must use reasonable diligence to ascertain the best market for the 
security, and buy or sell in such market so that the resultant price to the customer is as favorable 
as possible under prevailing market conditions.
112
    
                                                 
dealer would be required to continue to comply with those requirements of FINRA and 
the MSRB.  See, e.g., infra note 223 and accompanying text (discussing the requirement 
under FINRA Rule 5310 for broker-dealers to conduct at least a quarterly review of 
execution quality). 
110 
 For purposes of this release and proposed Regulation Best Execution, “broker-dealer” 
refers to a broker, dealer, government securities broker, government securities dealer, and 
municipal securities dealer, unless specifically indicated otherwise. 
111
  Section 3(a)(18) of the Exchange Act defines “person associated with a broker or dealer” 
to mean any partner, officer, director, or branch manager of the broker or dealer (or any 
person occupying a similar status or performing similar functions), any person directly or 
indirectly controlling, controlled by, or under common control with the broker or dealer, 
or any employee of the broker or dealer.  15 U.S.C. 78c(a)(18).  Any person associated 
with a broker or dealer whose functions are solely clerical or ministerial is not included in 
the meaning this term for purposes of section 15(b) the Exchange Act (other than 
paragraph 6 thereof).  See id.  Proposed Rule 1100 would apply to a natural person who 
is an associated person of a broker-dealer, and would avoid the application of proposed 
Rule 1100 to all associated persons of a broker-dealer, as all associated persons would 
capture affiliated entities of the broker-dealer and could extend the application of 
proposed Rule 1100 to entities that are not themselves broker-dealers. 
112 
 FINRA Rule 5310.09(a) states that “[n]o member can transfer to another person its 
obligation to provide best execution to its customers’ orders.”  The standard proposed by 
the Commission in Rule 1100 is consistent with the FINRA rule, and would not establish 
any exception to allow a broker-dealer to transfer its obligation to provide best execution 
to another person.  

   
50 
 
The proposed best execution standard would apply to securities transactions for or with a 
broker-dealer’s own customers, as well as securities transactions for or with customers of another 
broker-dealer.
 
  A broker-dealer that initially receives customer orders may not necessarily be the 
broker-dealer that engages in transactions for or with those orders.  Instead, the broker-dealer 
receiving the customer orders may utilize the services of another broker-dealer to engage in 
transactions for or with those orders (e.g., a wholesaler, executing broker-dealer, or clearing firm 
that handles or executes those orders).  Even though the other broker-dealer does not have a 
direct relationship with the customers of the receiving broker-dealer, the other broker-dealer (or 
natural persons who are associated persons of that broker-dealer) would be required to comply 
with the proposed best execution standard because it would be engaged in transactions for or 
with a customer. 
In addition, the proposed best execution standard would apply to transactions for or with 
a customer, regardless of whether the broker-dealer is transacting for or with the customer on an 
agency basis or in a principal capacity.
113
  For example, the proposed best execution standard 
                                                 
113
  The proposed application of the standard to both agency and principal trades is consistent 
with FINRA and MSRB rules.  See FINRA Rule 5310(e) (stating that the best execution 
obligations in FINRA Rule 5310(a)-(d) exist not only where the broker-dealer acts as 
agent for the account of its customer but also where transactions are executed as 
principal); MSRB Rule G-18(c) (stating that the best execution obligations in MSRB 
Rule G-18(a)-(b) apply to transactions in which the broker-dealer is acting as agent and 
transactions in which the broker-dealer is acting as principal).  In addition, the application 
of the existing duty of best execution in both agency and principal transactions is well   -
established in common law.  See, e.g., Newton, 135 F.3d 266, 270 (3d Cir.), cert. denied, 
525 U.S. 811 (1998); E.F. Hutton & Co., Exchange Act Rel. No. 25887, 49 S.E.C. 829, 
832 (1988) (“A broker-dealer’s determination to execute an order as principal or agent 
cannot be ‘a means by which the broker may elect whether or not the law will impose 

   
51 
 
would apply to broker-dealers that internalize their customers’ orders, as well as to wholesalers 
or clearing firms that trade as principal with the customer orders routed to them from other 
broker-dealers.      
Proposed Rule 1100 would provide exemptions from the best execution standard for a 
broker-dealer, or a natural person who is an associated person of a broker-dealer, when the 
broker-dealer is (i) quoting a price for a security where another broker-dealer routes a customer 
order for execution against that quote or (ii) an institutional customer, exercising independent 
judgment, executes its order against the broker-dealer’s quotation.
114
  These exemptions 
                                                 
fiduciary standards upon him in the actual circumstances of any given relationship or 
transaction.’”) (citations omitted). 
114
  The first proposed exemption is consistent with FINRA Rule 5310.04, which states that a 
broker-dealer’s duty to provide best execution does not apply in circumstances when 
another broker-dealer is simply executing a customer order against the broker-dealer’s 
quote, and MSRB Rule G-18.05, which states that a broker-dealer’s duty to provide best 
execution does not apply in circumstances when the other broker-dealer is simply 
executing a customer transaction against the broker-dealer’s quote.  The second proposed 
exemption is new.  Like the first proposed exemption, the second would exempt a broker-
dealer that is acting solely as a buyer or seller of a securities.  However, under the second 
exemption, the broker-dealer would be acting solely as a buyer or seller of securities in 
transactions directly with an institutional customer.  In the corporate and municipal bond 
and government securities markets, for example, institutional customers often handle and 
execute their own orders.  Institutional customers in these markets commonly request 
prices from broker-dealers for particular securities (prices for any given security are often 
not quoted and made widely available) and exercise their own discretion concerning the 
execution of a particular transaction.  In these instances, a broker-dealer is simply 
responding to the institutional customer’s request (e.g., through widely known request for 
quote (“RFQ”) mechanisms) and the institutional customer is exercising independent 
discretion over the handling and execution of its orders.  Accordingly, the Commission 
believes that the broker-dealer in these circumstances should be exempted from the best 
execution standard under proposed Rule 1100.  However, in these circumstances, the 
broker-dealer would still be subject, if applicable, to FINRA Rule 2121 and MSRB Rule 

   
52 
 
distinguish between a broker-dealer that is acting solely as the buyer or seller of securities (it 
would be exempt) from a broker-dealer that is accepting order flow from another broker-dealer 
or institutional customer for the purpose of facilitating the handling and execution of those orders 
(it would not be exempt).
  
Proposed Rule 1100 would also provide a third exemption from the best execution 
standard for a broker-dealer or a natural person who is an associated person of a broker-dealer, 
when the broker-dealer receives an unsolicited instruction from a customer to 
route that customer’s order to a particular market for execution and the 
broker-dealer processes that customer’s order promptly and in accordance 
with the terms of the order.  In this scenario, the customer has determined the market 
where it wants to execute its order and is not relying on its broker-dealer to determine the best 
market for that order.
115
  
Under proposed Rule 1100, the term “market” could include broker-dealers (e.g., a 
broker-dealer’s principal trading desk), exchange markets, markets other than exchange markets, 
and any other venues that emerge as markets evolve.  The term “market” also could encompass 
                                                 
G-30 concerning fair prices and the fairness and reasonableness of commission rates and 
markups or markdowns.  See FINRA Rule 2121; MSRB Rule G-30. 
115
  This exemption is consistent with FINRA and MSRB rules.  See FINRA Rule 5310.08 
(stating that if a member receives an unsolicited instruction from a customer to route that 
customer’s order to a particular market for execution, the member is not required to make 
a best execution determination beyond the customer’s specific instruction); MSRB Rule 
G-18.07 (stating that if a dealer receives an unsolicited instruction from a customer 
designating a particular market for the execution of the customer’s transaction, the dealer 
is not required to make a best-execution determination beyond the customer’s specific 
instruction). 

   
53 
 
the wide range of mechanisms operated by any given market that a broker-dealer may use to 
transact for or with customers.  For example, markets may include different execution protocols, 
such as limit order books (some of which may provide for midpoint liquidity), floor auction 
facilities, or electronic auction mechanisms.  This description of “market” is expansive and 
would require a broker-dealer to take into consideration a broad range of potential trading and 
market centers and venues that may provide the best market for customers’ orders so that the 
resulting prices to the customers are as favorable as possible under prevailing market 
conditions.
116
   
Proposed Rule 1100 would codify, in a Commission rule, a best execution standard that is 
consistent with how the Commission and the courts have described the duty of best execution 
                                                 
116
  This expansive description of “market” is consistent with how FINRA and the MSRB 
describe the term in their rules, and therefore should be familiar to broker-dealers.  In 
particular, FINRA and the MSRB also broadly construe the term “market” for purposes 
of their best execution rules.  See FINRA Rule 5310.02 (stating that “market” 
encompasses a variety of different venues, including, but not limited to, market centers 
that are trading a particular security); MSRB Rule G-18.04 (stating that “market” 
encompasses a variety of different venues, including but not limited to broker’s brokers, 
alternative trading systems or platforms, or other counterparties, which may include the 
dealer itself as principal).  MSRB Rule G-18.04 also states that the term market “is to be 
construed broadly, recognizing that municipal securities currently trade over the counter 
without a central exchange or platform.  This expansive interpretation is meant both to 
inform dealers as to the breadth of the scope of venues that must be considered in the 
furtherance of their best-execution obligations and to promote fair competition among 
dealers (including broker’s brokers), alternative trading systems and platforms, and any 
other venue that may emerge, by not mandating that certain trading venues have less 
relevance than others in the course of determining a dealer’s best-execution obligations.”  
Pursuant to FINRA guidance, broker-dealers are also expected to consider new markets 
that become available as venues to which the broker-dealer could potentially route 
customer orders for execution.  See FINRA Regulatory Notice 15-46, at 5.  In doing so, 
broker-dealers should consider the execution quality of venues to which they are not 
connected and determine whether they should connect to new markets.  See id., at 4. 

   
54 
 
over the years.
117
  The proposed standard is also consistent with the best execution standards 
under FINRA Rule 5310
118
 and MSRB Rule G-18.
119
  However, with respect to municipal 
securities, while MSRB Rule G-48 exempts transactions with sophisticated municipal market 
participants (“SMMPs”)
120
 from the MSRB best execution rule, proposed Regulation Best 
                                                 
117
  See, e.g., Regulation NMS Adopting Release, supra note 21, 70 FR 37538 (stating that 
the duty of best execution requires, among other things, a broker-dealer to execute 
customers’ trades at the most favorable terms reasonably available under the 
circumstances, i.e., at the best reasonably available price); Newton, supra note 8, 135 
F.3d at 270 (noting that a broker-dealer’s duty of undivided loyalty to its customer 
requires that it “seek to obtain for its customer orders the most favorable terms 
reasonably available under the circumstances”).  As discussed below throughout this 
section IV, the Commission is also proposing requirements designed to help ensure 
compliance with the proposed best execution standard.  
118
  FINRA Rule 5310(a)(1) provides that, in any transaction for or with a customer or a 
customer of another broker-dealer, a member and persons associated with a member shall 
use reasonable diligence to ascertain the best market for the subject security and buy or 
sell in such market so that the resultant price to the customer is as favorable as possible 
under prevailing market conditions.  FINRA Rule 5310 applies to transactions by any 
FINRA member in government securities.  See FINRA Rule 0150(c).     
119
 MSRB Rule G-18(a) provides that, in any transaction in a municipal security for or with a 
customer or a customer of another broker, dealer, or municipal securities dealer 
(“dealer”), a dealer must use reasonable diligence to ascertain the best market for the 
subject security and buy or sell in that market so that the resultant price to the customer is 
as favorable as possible under prevailing market conditions.  
120
  MSRB Rule D-15 defines SMMP by three requirements:  the nature of the customer; a 
determination of sophistication by the dealer; and an affirmation by the customer.  
Specifically, the rule states that the customer must be:  (i) a bank, savings and loan 
association, insurance company, or registered investment company; (ii) an investment 
adviser registered either with the Commission under section 203 of the Investment 
Adviser Act of 1940 or with a state securities commission; or (iii) any other person or 
entity with total assets of at least $50 million.  To achieve a determination of customer 
sophistication, the broker-dealer must have a reasonable basis to believe that the 
customer is capable of evaluating investment risks and market value independently, both 
in general and with regard to particular transactions and investment strategies in 
municipal securities.  Finally, the customer must affirmatively indicate that it is 
exercising independent judgment in evaluating:  (a) the recommendations of the broker-

   
55 
 
Execution does not include a similar exemption for SMMPs from Rule 1100.
121
  Unlike the 
MSRB rules, proposed Rule 1100 is designed to apply broadly to transactions in all securities 
and is not limited to transactions in municipal securities.  The Commission also preliminary 
believes that customers that meet the MSRB’s definition of SMMP would benefit from the 
protections offered by proposed Regulation Best Execution, just as customers that do not meet 
the definition of SMMP or customers that transact in securities other than municipal securities 
would.
122
  At the same time, the Commission believes that proposed Regulation Best Execution 
contains several provisions that would mitigate the burdens on the broker-dealers that engage in 
                                                 
dealer; (b) the quality of execution of the customer’s transactions by the broker-dealer; 
and (c) the transaction price for non-recommended secondary market agency transactions 
as to which (i) the broker-dealer’s services have been explicitly limited to providing 
anonymity, communication, order matching, and/or clearance function and (ii) the 
broker-dealer does not exercise discretion as to how or when the transactions are 
executed.  The affirmation may be given orally or in writing, and may be given on a 
transaction-by-transaction basis, a type-of-municipal security basis, or an account-wide 
basis.  
121
  Additionally, MSRB Rule G-18.09 states that Rule G-18 does not apply to municipal 
fund securities.  While proposed Regulation Best Execution does not contain a similar 
exemption for municipal fund securities, the Commission believes that the Commission’s 
proposal and MSRB Rule G-18 would result in similar treatment for municipal fund 
securities.  Transactions in municipal fund securities must be executed directly with the 
issuer.  For this reason, there is only one market that can be accessed to fill a customer 
order in this type of security and, therefore, only one way to comply with Rule 1100 with 
respect to the handling and execution of a customer order in a municipal fund security.   
122
  When the Commission approved the MSRB’s exemption for transactions with SMMPs 
from its best execution rule, the Commission stated that the exemption “will facilitate 
transactions in municipal securities and help perfect the mechanism of a free and open 
market in municipal securities by avoiding the imposition of regulatory burdens if they 
are not needed.”  See MSRB Best Execution Approval Order, supra note 47
, 79 FR 
73664.  For the reasons discussed in this section, the Commission believes that the 
proposed rules are designed to mitigate the regulatory burdens for broker-dealers that 
transact for or with SMMP customers, while providing the benefit of the protections 
offered by the proposed rules under appropriate circumstances.  

   
56 
 
transactions for or with customers that meet the MSRB’s definition of SMMP, and proposed 
Regulation Best Execution would result in similar treatment as MSRB Rule G-18 and G-48 in 
many instances.  For example, as discussed above in this section, a broker-dealer would be 
exempt from proposed Rule 1100 if an institutional customer is exercising independent judgment 
and executing its orders against a broker-dealer’s quotation, and is not providing the broker-
dealer with orders for handling and execution.  Additionally, a broker-dealer would be exempt 
from proposed Rule 1100 if a customer gave the broker-dealer an unsolicited instruction to send 
its order to a particular market and the broker-dealer processes that customer’s 
order promptly and in accordance with the terms of the order.  Finally, as 
discussed in section IV.B.2 below, if a customer provides the broker-dealer with other 
instructions concerning the handling of its orders, the broker-dealer’s compliance with the best 
execution standard would be informed by such customer instructions.     
Request for Comment 
The Commission requests comment on all aspects of proposed Rule 1100, and in 
particular: 
5. Is the proposed best execution standard appropriate?  Why or why not?  Has the 
Commission identified all the differences between the proposed best execution standard 
and the standards under FINRA Rule 5310 and MSRB Rule G-18?  If not, please explain 
any differences that the Commission has not identified and any potential issues resulting 
from those differences. 
6. Are the differences between the proposed best execution standard and the standards under 
FINRA Rule 5310 and MSRB Rule G-18 appropriate?  Why or why not?  

   
57 
 
7. Do commenters agree that proposed Rule 1100 is consistent with prior Commission 
statements, including those described in section II.B above?  Why or why not?  If not, 
should the Commission revise any of its statements in light of the proposal?  Please 
explain. 
8. Do commenters agree that the proposed best execution standard should apply to natural 
persons who are associated persons of a broker-dealer?  Why or why not?   
9. Are there alternative definitions of “natural person who is an associated person” that the 
Commission should use instead?  Is the application of proposed Rule 1100 appropriately 
limited to “a natural person who is an associated person” of a broker-dealer?  Please 
explain.    
10. Would the proposed best execution standard pose any challenges or burdens for entities 
that are dually-registered broker-dealers and investment advisers?  As discussed above,
123
 
an investment adviser has its own duty to seek best execution of a client’s transactions 
where the adviser has the responsibility to select broker-dealers to execute client trades.  
What effect, if any, would the proposed best execution standard have on investment 
advisers and their duty to seek best execution?  
11. Are there elements of an investment adviser’s duty to seek best execution that are 
relevant in assessing the proposed best execution standard for a broker-dealer?  
12. Is it appropriate to provide an exemption from the proposed best execution standard to a 
broker-dealer when another broker-dealer is executing a customer order against the first 
broker-dealer’s quote?  Why or why not?     
                                                 
123
  See supra note 11. 

   
58 
 
13. Is it appropriate to provide an exemption from the proposed best execution standard to a 
broker-dealer when an institutional customer, exercising independent judgment, executes 
its order against the broker-dealer’s quotations?  Why or why not? 
14. Should the Commission define “institutional customer” for purposes of proposed Rule 
1100?  If so, how should “institutional customer” be defined?  For example, should the 
Commission define “institutional customer” as any person that is a qualified 
institutional buyer (“QIB”) as defined in Rule 144A under the Securities 
Act of 1933?
124
  Why or why not? 
15. Should the Commission define “institutional customer” to include a 
broader set of institutional customers than   the QIB definition, such as 
those entities that are included in the FINRA definition of “institutional 
account” under FINRA Rule 4512(c)?
125
  Please explain. 
16. Should the exemption concerning institutional customers in proposed Rule 1100 be 
limited to situations where the broker-dealer seeking the exemption has a reasonable 
basis to believe that the institutional customer (i) has the capacity to evaluate 
                                                 
124
  17 CFR 230.144A (defining “QIB” to mean a variety of entities such as insurance 
companies, investment companies registered under the Investment Company Act of 1940, 
and investment advisers registered under the Investment Advisers Act of 1940, among 
others, that in the aggregate own or invest on a discretionary basis at least $100 million). 
125
  FINRA Rule 4512(c) defines “institutional account” as the account of:  (1) a bank, 
savings and loan association, insurance company or registered investment company; (2) 
an investment adviser registered either with the Commission under section 203 of the 
Investment Advisers Act or with a state securities commission (or any agency or office 
performing like functions); or (3) any other person (whether a natural person, 
corporation, partnership, trust or otherwise) with total assets of at least $50 million.   

   
59 
 
independently the prices offered by the broker-dealer and (ii) is exercising independent 
judgment in deciding to enter into the transaction, such as is provided for in FINRA Rule 
2121 concerning suitability for institutional customers?  Please explain. 
17. Should the Commission define “institutional customer” for purposes of 
the proposed exemption in Rule 1100 to be consistent with the MSRB’s 
definition of SMMP?  For example, should an institutional customer be required to make 
an affirmation to the broker-dealer concerning its exercise of independent judgment in 
evaluating the quality of execution of its transaction with the broker-dealer?  Are there 
other affirmations relevant to best execution that should be required?
126
  Please explain. 
18. If an institutional customer affirmation should be required, how should such affirmation 
be provided?  Should an institutional customer be permitted to provide the affirmation to 
the broker-dealer orally or in writing?  Should an institutional customer be permitted to 
provide its affirmation on a trade-by-trade basis, a type-of-transaction basis, a type-of-
security basis (e.g., municipal security, including general obligation, revenue, variable 
rate municipal security; corporate bond, including investment grade and non-investment 
grade; OTC equity; NMS security), or an account-wide basis?  Please explain.   
19. Should a broker-dealer seeking the exemption in proposed Rule 1100 in transactions with 
institutional customers be required to disclose to the institutional customer that it is not 
required to comply with the best execution standard of proposed Rule 1100 for the 
                                                 
126
  For example, the MSRB’s definition of SMMP requires a variety of other affirmations 
(e.g., relating to suitability, access to timely information, fair pricing for agency 
transactions) as broker-dealers are also exempt from other non-best execution related 
obligations in transactions with SMMPs pursuant to MSRB Rules G-48(a)-(d).   

   
60 
 
relevant transactions?  Should this disclosure be provided in lieu of or in addition to a 
customer affirmation, if such affirmation should be provided by the institutional 
customer?  Please explain.  If disclosure should be required, what standards should apply 
to the disclosure?  For example, should a broker-dealer be required to make a disclosure 
to the institutional customer on a transaction-by-transaction basis?  If not, what would be 
the appropriate manner for this disclosure?  Please explain.  Should the disclosure be in 
writing or should a broker-dealer be permitted to provide the disclosure orally to the 
institutional customer?  Please explain. 
20. Should the proposed exemption concerning institutional customers in Rule 1100 be 
limited to only certain types of securities or only certain types of trading protocols where 
the institutional customer is executing against the broker-dealer’s quote?  For example, 
should the exemption be limited only to transactions in fixed income securities?  Should 
it be limited to transactions that occur through multilateral RFQ systems where the 
institutional customer is able to put multiple broker-dealers and other market participants 
in competition when soliciting quotes?  Should the exemption be available to a broker-
dealer that is responding to a request for quote by an institutional customer in a bilateral 
communication, whether over the phone or through another communication protocol?  
Please explain. 
21. Should the Commission provide a broader exemption from the proposed best execution 
standard for a broker-dealer when it engages in any transaction for or with institutional 
customers, similar to the exemption provided to broker-dealers under MSRB Rule G-
48(e) for SMMPs?  Please explain why such exemption should or should not be provided.   

   
61 
 
22. If a broader exemption for transactions with institutional customers should be provided, 
how should the Commission define “institutional customer”?  Similar to the requests for 
comment above, should the Commission define institutional customer as “QIB” as 
defined in Rule 144A under the Securities Act of 1933, an “institutional 
account” as defined in FINRA Rule 4512(c), or an SMMP as defined in MSRB Rule D-
15?  Is there another definition that would be appropriate?  Please explain.  Should other 
conditions apply to the exemption, as requested above, such as broker-dealer disclosure 
to the institutional customer, broker-dealer assessment of the institutional customer’s 
ability to evaluate the transaction, and institutional customer affirmations?  Please 
explain.   
23. What are the typical order handling practices of broker-dealers for the municipal bond 
orders of SMMPs?  Do these order handling practices vary depending on the type of 
SMMP under MSRB Rule D-15(a)?  Do SMMPs typically provide broker-dealers with 
orders to handle and execute, or do SMMPs typically handle and execute their own 
orders?  Please explain.  Do broker-dealers exercise any discretion in handling the orders 
of SMMPs, whether executing such order on an agency or principal basis?  Please 
explain. 
24. Do commenters agree that the proposed rules are designed to mitigate the regulatory 
burdens for broker-dealers that transact for or with SMMP customers, while providing 
the benefit of the protections offered by the proposed rules under appropriate 
circumstances?  Why or why not?  
25. Should the Commission provide an exemption from the proposed best execution standard 
for a broker-dealer that engages in transactions for or with sophisticated market 

   
62 
 
professionals in asset classes other than municipal securities?  Please explain why such 
exemption should or should not be provided. 
26. Is it appropriate to provide an exemption from the proposed best execution standard to a 
broker-dealer that receives an unsolicited instruction from a customer to 
route that customer’s order to a particular market for execution, where 
the broker-dealer processes that customer’s order promptly and in 
accordance with the terms of the order?  Why or why not? 
27. Should the Commission provide an exemption from the proposed best execution standard 
for transactions in municipal fund securities (which include interests in 529 college 
savings plans)?  Should such exemption only apply to municipal fund securities that are 
interests in 529 college savings plans?  If the Commission were to provide an exemption, 
should it apply similarly or differently to direct-sold and advisor-sold municipal fund 
securities?  Please explain why such exemption should or should not be provided.   
28. Should the Commission provide an exemption for mutual fund securities, such as equity 
and corporate bond mutual funds?  Should the Commission provide an exemption for any 
other type of security?  Please explain why such exemption should or should not be 
provided. 
29. Should the Commission provide any other exemptions from the proposed best execution 
standard?  If so, please explain. 
30. Should proposed Regulation Best Execution be the sole best execution rule applicable to 
broker-dealers?  Why or why not? 

   
63 
 
B. Proposed Rule 1101(a) – Best Execution Policies and Procedures  
Proposed Rule 1101(a) would require a broker-dealer that effects any transaction for or 
with a customer or a customer of another broker-dealer to establish, maintain, and enforce 
written policies and procedures reasonably designed to comply with the best execution standard 
under proposed Rule 1100 (“best execution policies and procedures”).  As discussed in sections 
IV.B.1 and 2 below, a broker-dealer’s best execution policies and procedures would be required 
to address:  (1) how the broker-dealer would comply with the best execution standard; and (2) 
how the broker-dealer would determine the best market for the customer orders that it receives.   
Proposed Rule 1101 does not include specific requirements regarding the manner in 
which broker-dealers would comply with the best execution standard.  Rather, proposed Rule 
1100 would require a broker-dealer to use reasonable diligence to ascertain the best market for a 
security, and buy or sell in such market so that the resultant price to the customer is as favorable 
as possible under prevailing market conditions, and proposed Rule 1101 would additionally 
require a broker-dealer to establish and maintain written policies and procedures reasonably 
designed to comply with the proposed standard.  The policies and procedures would be required 
to reflect the elements specified in proposed Rule 1101(a) (e.g., best displayed prices, 
opportunities for price improvement including midpoint executions, attributes of particular 
customer orders, the trading characteristics of the security).  For example, a broker-dealer could 
have policies and procedures that are tailored for different types of customers (e.g., retail 
customers, institutional customers) or for securities with different trading characteristics (e.g., 

   
64 
 
NMS stocks, municipal securities).
127
  All customer orders must be covered by a broker-dealer’s 
best execution policies and procedures, and the broker-dealer would be required to enforce such 
policies and procedures.   
While FINRA’s best execution rule does not require broker-dealers to have the same type 
of detailed best execution policies and procedures as proposed Rule 1101,
128
 FINRA Rule 
3110(b)(1)
129
 requires broker-dealers to have procedures for compliance with FINRA rules and 
Federal securities laws and regulations.    The MSRB’s best execution rule reflects a 
requirement for broker-dealers to have policies and procedures for 
determining the best available market for the executions of their customers’ 
                                                 
127
  Similar to this proposal, FINRA and MSRB rules also recognize that broker-dealers’ best 
execution practices would be tailored for securities with different characteristics.  For 
example, FINRA Rule 5310 recognizes that the markets for different securities can vary 
and the standard of reasonable diligence must be assessed by examining specific factors, 
such as the character of the market for the security and the accessibility of the quotation.  
See, e.g., FINRA Rules 5310.03 (Best Execution and Debt Securities); 5310.06 (Orders 
Involving Securities with Limited Quotations or Pricing Information); 5310.07 (Orders 
Involving Foreign Securities).  See also MSRB Rule G-18.06 (Securities with Limited 
Quotations or Pricing Information) (recognizing that markets for municipal securities 
may differ dramatically and referring to heightened diligence with respect to customer 
transactions involving securities with limited pricing information or quotations). 
128
  FINRA Rule 5310. 
129
  FINRA Rule 3110(b)(1) requires a FINRA member to establish, maintain, and enforce 
written procedures to supervise the types of business in which it engages and the 
activities of its associated persons that are reasonably designed to achieve compliance 
with applicable securities laws and regulations, and with applicable FINRA rules.  
Separately, FINRA Rules 3130(b) and (c) require the chief executive officer (or 
equivalent officer) of a FINRA member to certify annually that the member has in place 
processes to establish, maintain, review, test and modify written compliance policies and 
written supervisory procedures reasonably designed to achieve compliance with 
applicable FINRA rules, MSRB rules, and Federal securities laws and regulations. 

   
65 
 
transactions.
130
  In addition, MSRB Rule G-28 requires broker-dealers to 
have procedures for compliance with MSRB rules and the Exchange Act and rules 
thereunder.
131
  T  he Commission understands that broker-dealers currently have 
policies and procedures relating to their compliance with the FINRA and 
MSRB best execution rules, as applicable.  However, unlike the FINRA and 
MSRB rules, proposed Rule 1101(a)(1) would require broker-dealers’ best 
execution policies and procedures to include specific elements, as discussed in sections 
IV.B.1 and 2 below. 
1. Proposed Rule 1101(a)(1) – Framework for Compliance with the Best 
Execution Standard   
Proposed Rule 1101(a)(1) would require a broker-dealer’s best execution policies and 
procedures to address how it will comply with the proposed best execution standard by:  (i) 
obtaining and assessing reasonably accessible information, including information about price, 
volume, and execution quality, concerning the markets trading the relevant securities; (ii) 
identifying markets that may be reasonably likely to provide material potential liquidity sources 
                                                 
130
  MSRB Rule G-18.08 states that a broker-dealer must, at a minimum, conduct annual 
reviews of its policies and procedures for determining the best available market for the 
executions of its customers’ transactions, including assessing whether its policies and 
procedures are reasonably designed to achieve best execution, taking into account the 
quality of the executions the broker-dealer is obtaining under its current policies and 
procedures, among other things. 
131
  MSRB Rule G-28 requires broker-dealers to adopt, maintain and enforce written 
supervisory procedures reasonably designed to ensure that the conduct of the municipal 
securities activities of the broker-dealer and its associated persons are in compliance with 
MSRB rules and the applicable provisions of the Exchange Act and rules thereunder.  

   
66 
 
(as defined above); and (iii) incorporating material potential liquidity sources into its order 
handling practices and ensuring that it can efficiently access each such material potential 
liquidity source. 
Proposed Rule 1101(a)(1)(i) would require a broker-dealer to have 
policies and procedures for obtaining and assessing reasonably accessible information 
regarding the markets trading the relevant securities.
132
  Market information is 
relevant to a broker-dealer’s best execution analysis,
133
 and the Commission has previously 
identified price and execution quality information as among the factors relevant to that 
                                                 
132
  Proposed Rule 1101 would not establish minimum data elements needed to comply with 
the proposed best execution standard.  Rather, it would require broker-dealers to 
establish, maintain, and enforce policies and procedures reasonably designed to comply 
with the proposed best execution standard.  In implementing its policies and procedures 
(both for non-conflicted and conflicted transactions), including policies and procedures 
that address how the broker-dealer would obtain and assess reasonably accessible 
information or how the broker-dealer would obtain and assess other information for 
conflicted transactions (as discussed in section IV.C below), a broker-dealer may 
determine that it is appropriate to purchase certain proprietary data.  See also supra note 
38 (describing the Commission’s statements in the MDI Adopting Release that the 
Commission was not establishing minimum data elements needed to achieve best 
execution nor mandating consumption of certain data content, and acknowledging that 
different market participants and different trading applications have different market data 
needs).  
133
  See, e.g., Order Execution Obligations Adopting Release, supra note 10, 61 FR at 48322-
23 (stating that a broker-dealer’s practices for achieving best execution, including the 
data, technology, and types of markets it accesses, must constantly be updated as markets 
evolve); Order Execution and Routing Practice Release, supra note 22, 65 FR at 75418 
(stating that quotation information contained in the public quotation system must be 
considered in seeking best execution of customer orders); MDI Adopting Release, supra 
note 38, 86 FR at 18605 (stating that broker-dealers should consider the availability of 
consolidated market data, including the various elements of data content and the 
timeliness, accuracy, and reliability of the data in developing and maintaining their best 
execution policies and procedures). 

   
67 
 
analysis.
134
  The Commission believes that the ability of markets to attract trading interest as 
measured by trading volume would also be relevant to a broker-dealer’s best execution analysis, 
because trading volume can be an indicator of whether sufficient interest exists on a particular 
market to execute customer orders.
135
 
More specifically with respect to execution quality, the Commission believes that the 
level of competition within a market can impact the execution quality of that market and, 
therefore, broker-dealers should generally consider including the level of competition of a 
market as an element of its best execution policies and procedures.
136
      
                                                 
134
  See, e.g., Order Execution Obligations Adopting Release, supra note 10, 61 FR 48323 
(identifying price improvement and execution quality as among the relevant factors for a 
best execution analysis); MDI Adopting Release, supra note 38, 86 FR 18605 (identifying 
order size, trading characteristics of the security, speed of execution, clearing costs, and 
the cost and difficulty of executing an order in a particular market as relevant factors for a 
best execution analysis).   
135
  FINRA Rule 5310(a)(1) and MSRB Rule G-18(a) set forth similar factors that are 
relevant to a best execution analysis, including the character of the market for the security 
(e.g., price, volatility, relative liquidity, and pressure on available communications).  
However, unlike proposed Rule 1101(a), FINRA and MSRB rules do not explicitly 
require relevant factors to be included in a broker-dealer’s best execution policies and 
procedures.  The considerations in FINRA and MSRB rules concerning volatility, relative 
liquidity, and pressure on available communications could be included as part of the best 
market policies and procedures in proposed Rule 1101(a)(2), which requires 
consideration of the trading characteristics of a security.  See also FINRA Rule 5310.09 
(requiring a member to conduct regular and rigorous reviews of the quality of the 
executions of its customers’ orders); MSRB Rule G-18.08 (requiring a dealer to conduct 
periodic reviews of its best execution policies and procedures, taking into account the 
quality of the executions the dealer is obtaining under its current policies and procedures, 
among other things).  
136
  This could include considerations of auction features, such as allocation guarantees and 
fees, the types of market participants that can participate in an auction, the breadth of 
participation in an auction, and the accessibility of auction processes. This assessment of 
auction mechanisms would apply to a broker-dealer that is handling a customer order that 

   
68 
 
With respect to price improvement auctions offered by options exchanges, while the 
Commission believes that such auctions could provide better executions for customer orders than 
routing such orders to execute at the prevailing best bid or offer on an exchange, the selection of 
a particular price improvement auction could impact the execution quality of customer orders.  A 
broker-dealer should generally consider addressing in its policies and procedures how it would 
assess the features of options price improvement auctions, how those features might affect the 
level of competition and the execution quality offered by the auctions, and whether those 
features would allow an auction to provide the most favorable prices under prevailing market 
conditions.  For example, price improvement auctions have features, which have been 
implemented pursuant to proposed rule changes filed with the Commission, that allow a 
wholesaler to trade with much or all of the customer orders represented in an auction.
137
  The 
current fee structures for price improvement auctions may also affect market participants’ 
determination of whether to compete with a wholesaler for customer orders and provide more 
                                                 
is subject to the proposed requirements in the Order Competition Rule (known as a 
“segmented order”).  See Securities Exchange Act Release No. 34-96495 (Dec. 14, 
2022).  Were the Commission to adopt the proposed Order Competition Rule, a broker-
dealer that desires to trade as principal with a segmented order would, absent an 
exception, be required to expose certain orders to competition through use of “qualified 
auctions,” as defined by the proposed Order Competition Rule.  If the proposed Order 
Competition Rule were adopted, a broker-dealer when evaluating which qualified auction 
to use for segmented orders under proposed Regulation Best Execution (if adopted) 
would have to have policies and procedures addressing how the broker-dealer will assess 
the execution quality of different qualified auctions and identify those that are likely to 
result in the most favorable price for customer orders. 
137
  See, e.g., Nasdaq ISE, LLC Options 3, Section 13; Nasdaq Phlx LLC Options 3, Section 
13; Miami International Securities Exchange LLC Rule 515A; BOX Exchange LLC Rule 
7150; NYSE American LLC Rule 971.1NY; Cboe Exchange, Inc. Rule 5.37.  

   
69 
 
favorable prices.
138
  As reflected in the table below, as of May 25, 2022, the vast majority of 
options exchanges charge market participants that may desire to compete for customer orders 
response fees of $0.50 per contract (for options classes priced in $0.01 increments (“penny 
classes”)) and $1.00 or more per contract (for options classes priced in $0.05 increments (“non-
penny classes”)).  These response fees are not charged to wholesalers that initiate the price 
improvement auctions.  
Exchange 
Fees for Initiating 
Orders 
Auction Market Maker 
Response Fees (Penny 
Classes) 
Auction Market Maker Response  
Fees (Non-Penny Classes) 
CBOE 0.07 0.50 1.05 
EDGX 0.05 0.50 1.05 
PHLX 0.07 0.25 0.40 
MRX 0.02 0.50 1.10 
ISE 0.10 0.50 1.10 
GEMX 0.05 0.50 0.94 
AMEX 0.05 0.50 1.05 
MIAX 0.05 0.50 1.10 
BOX 0.05 0.50 1.15 
                                                 
138
  See Nasdaq ISE LLC Options 7, Section 3; Nasdaq GEMX LLC Options 7, Section 3; 
Nasdaq MRX LLC Options 7, Section 3.A.; Nasdaq Phlx LLC Options 7, Section 6.A.; 
BOX Exchange LLC Fee Schedule Section IV.B.; Miami International Securities 
Exchange LLC Fee Schedule Section (1)(a)(v); NYSE American LLC Options Fee 
Schedule Section I.G.; Cboe Exchange, Inc. Fee Schedule; Cboe EDGX Exchange, Inc. 
Options Fee Schedule n.6.     

   
70 
 
In addition, allocation guarantees, which permit the wholesaler to trade with a significant portion 
of the customer order, may affect competing market participants’ determinations of whether and 
how to participate in price improvement auctions.
139
  Likewise, “auto-match” features, which 
enable the wholesaler to automatically match the best prices submitted by competing market 
participants, may affect competing market participants’ determinations of whether and how to 
participate in price improvement auctions.
140
     
As another example, in considering RFQ systems as material potential liquidity sources 
for corporate and municipal bonds and government securities, a broker-dealer’s policies and 
procedures could assess the filtering practices that may be applied by the RFQ system operator 
and the impact that those practices may have on the execution quality of those markets.  If an 
RFQ system applies an automatic filter that prevents a broker-dealer that initiates the RFQ from 
sending that request to all participants on the RFQ system, a broker-dealer could evaluate the 
potential impact that may have on that market’s execution quality.  To the extent other RFQ 
systems do not apply such filters to the broker-dealer’s request, a broker-dealer could evaluate 
whether these other RFQ systems would be a better alternative for executing customer orders, 
taking into consideration other relevant information that the broker-dealer may obtain concerning 
the RFQ systems. 
                                                 
139
  See supra note 137.   
140
  See, e.g., Nasdaq ISE, LLC Options 3, Section 13(d)(3); Nasdaq Phlx LLC Options 3, 
Section 13(b)(1); Miami International Securities Exchange LLC Rule 515A(a)(2)(i)(A); 
BOX Exchange LLC Rule 7150(f); NYSE American LLC Rule 971.1NY(c)(1); Cboe 
Exchange, Inc. Rule 5.37(b)(5).   

   
71 
 
Proposed Rule 1101(a)(1)(ii) would require a broker-dealer’s policies and procedures to 
address how it will identify material potential liquidity sources, but it would not require a broker-
dealer to include in its policies and procedures a minimum number of markets that it would need 
to identify as material potential liquidity sources.  Rather, under proposed Rules 1101(a)(1)(i) 
and (ii), a broker-dealer would be required to follow its policies and procedures in assessing 
reasonably accessible information and determining material potential liquidity sources.  The 
Commission believes a broker-dealer’s identification of material potential liquidity sources could 
be influenced by the nature of the broker-dealer’s business operation and customer order flow.  
For example, some broker-dealers focus on the handling and execution of institutional orders or 
large-size orders, while some broker-dealers handle and execute retail orders or small-size 
orders.  These considerations may be relevant to the types of markets or market information that 
the broker-dealer assesses for purposes of identifying material potential liquidity sources.  The 
Commission further believes a broker-dealer’s assessment of market information and 
identification of material potential liquidity sources could vary depending on the trading 
characteristics of the relevant security, the level of transparency in the applicable market, and 
accessibility of a market, including the cost of maintaining connectivity, receiving market data, 
and transacting on the market.  For example, if a market charges unreasonably high fees for 
connectivity, market data, or transactions, a broker-dealer could consider whether such market’s 

   
72 
 
information is reasonably accessible and whether such market should be identified as a material 
potential liquidity source.
141
    
While proposed Rules 1101(a)(1)(i) and (ii) do not include an exhaustive list of the 
markets that might be considered material potential liquidity sources, or the potential sources of 
reasonably accessible information for different types of securities, some examples may be 
helpful.  For the NMS stock market, material potential liquidity sources could include exchanges, 
ATSs, and broker-dealers, including market makers and wholesalers.  It could also include 
trading protocols and auction mechanisms operated by these entities, including those that may 
provide price improvement opportunities, such as exchange limit order books, retail liquidity 
programs, midpoint liquidity, and wholesaler price improvement guarantees.  Concerning 
potential sources of reasonably accessible information, the Commission has stated that quotation 
data made publicly available must be considered by a broker-dealer when seeking best execution 
of customer orders.
142
  In addition, a broker-dealer generally should consider whether 
consolidated trade information, exchange proprietary data feeds, odd lot market data, and 
execution quality and order routing information contained in reports made pursuant to Rules 605 
                                                 
141
  The Commission has previously described a non-exhaustive list of factors that may be 
relevant to broker-dealers’ best execution analysis.  These factors include the size of the 
order, speed of execution, clearing costs, the trading characteristics of the security 
involved, the availability of accurate information affecting choices as to the most 
favorable market center for execution and the availability of technological aids to process 
such information, and the cost and difficulty associated with achieving an execution in a 
particular market center.  See supra note 23
 and accompanying text. 
142
  See Order Execution Obligations Adopting Release, supra note 10, 61 FR 48324. 

   
73 
 
and 606 of Regulation NMS are readily accessible and needed in order for the broker-dealer to 
identify material potential liquidity sources for its customers’ orders.
143
   
In the OTC equities market, a broker-dealer could consider whether ATSs, wholesalers, 
and other OTC market makers may be potential material liquidity sources.  With regard to 
reasonably accessible information, a broker-dealer could consider obtaining data from ATSs and 
OTC market makers, in addition to obtaining the data concerning transaction prices in OTC 
equities made publicly available through the FINRA Over-the-Counter Reporting Facility 
(“ORF”).   
In the options market, material potential liquidity sources could include the options 
exchanges and the range of trading protocols and auction mechanisms made available by them.  
These could include quotes from market makers resting on exchange limit order books, price 
improvement auctions, liquidity resting between the best bid and offer that may be available on 
exchange limit order books, and floor trading facilities that may provide a broker-dealer with the 
opportunity to seek competitive prices from floor participants for larger or complex options 
orders.  Other broker-dealers in the options market could also represent a type of market that 
generally should be considered when assessing material potential liquidity sources.  Specifically, 
many options trades are arranged away from the exchanges by broker-dealers and are often 
                                                 
143
  In a regulatory notice concerning its best execution rule, FINRA has provided guidance 
regarding the relevance of proprietary data feeds to a broker-dealer’s best execution 
assessment.  See FINRA Regulatory Notice 15-46, at 13 n.12 (“[A] firm that regularly 
accesses proprietary data feeds, in addition to consolidated data from the Securities 
Information Processors (SIPs), for its proprietary trading, would be expected to also use 
these data feeds to determine the best market under prevailing market conditions when 
handling customer orders.”). 

   
74 
 
brought to the exchanges for order exposure and potential price improvement prior to 
execution.
144
  Because options trades may be arranged in this fashion, a broker-dealer would 
need to consider whether other broker-dealers may represent material potential liquidity sources 
for its customers’ options orders.  With regard to reasonably accessible information, a broker-
dealer should consider whether proprietary data feeds and quarterly Rule 606 order routing 
reports are readily accessible and needed to identify material potential liquidity sources, in 
addition to consolidated trade and quotation data that is made publicly available. 
In addition, a number of markets could be considered for purposes of identifying material 
potential liquidity sources in the corporate and municipal bond markets and government 
securities markets.  These may include, for example, ATS and non-ATS electronic trading 
systems, RFQ systems, and other auction mechanisms.    Material potential liquidity sources in 
these fixed income markets could also include interdealer brokers and other broker-dealers 
willing to be a counterparty upon request.
145
  A broker-dealer’s own principal trading desk could 
                                                 
144
  See, e.g., Nasdaq ISE, LLC, Options 3, Section 11(b)-(e) (providing exchange 
functionality for facilitation and solicitation auctions, which permit an exchange member 
to attempt to execute large-sized orders it represents as agent against principal interest or 
contra-side orders it has solicited).  See also, e.g., Miami International Securities 
Exchange LLC Rule 515A(b); Cboe Exchange, Inc. Rule 5.39.  The ability to attempt to 
execute an agency order against principal or solicited interest is also permitted in the 
options exchange price improvement auctions.  See supra note 
137.  
145
  For example, for less widely-traded securities, broker-dealers that have previously traded 
such securities or that are otherwise known to trade in the securities can be markets for 
certain segments of the fixed income market.  See, e.g., MSRB Implementation Guidance 
on MSRB Rule G-18, on Best Execution at Item VI.1. (updated as of Feb. 7, 2019). 

   
75 
 
also be a market for purposes of identifying material potential liquidity sources.
146
  With respect 
to reasonably accessible information, a broker-dealer could consider whether to obtain data from 
ATSs and other trading platforms, such as RFQ systems, interdealer brokers, and dealers that 
handle and execute customer orders, in addition to obtaining consolidated trade data in the 
corporate bond and municipal bond markets made publicly available through FINRA’s Trade 
Reporting and Compliance Engine (“TRACE”) and the MSRB’s Real-time Transaction 
Reporting System (“RTRS”).
147
  A broker-dealer could also consider obtaining relevant data 
from information sources that do not provide execution services, such as price aggregator 
services or evaluated pricing services. 
Proposed Rule 1101(a)(1)(iii) would require a broker-dealer to have 
policies and procedures that address how the broker-dealer will incorporate 
material potential liquidity sources into its order handling practices and ensure that it can 
efficiently access each such material potential liquidity source.  This requirement is designed to 
enhance a broker-dealer’s ability meet the proposed best execution standard by helping to ensure 
that the broker-dealer incorporates the identified material potential liquidity sources into its order 
handling practices so that it can execute customer orders in those markets as appropriate.
148
   
                                                 
146
  Principal trading with a customer by a broker-dealer would be subject to more robust 
policies and procedures requirements under proposed Rule 1101(b). 
147
  See, e.g., https://www.finra.org/filing-reporting/trace/data and https://emma.msrb.org/ 
148
  FINRA Rule 5310(c) provides that a failure to maintain or adequately staff an OTC order 
room or other department assigned to execute customers’ orders is not a justification for a 
broker-dealer executing away from the best available market.  The provision further 
states that channeling orders through a third party as reciprocation for service or business 
does not relieve a broker-dealer of its obligation under FINRA Rule 5310.  FINRA Rule 

   
76 
 
Efficient access to each material potential liquidity source, as specified by proposed Rule 
1101(a)(1)(iii), may require different order handling processes and arrangements in different 
markets, and would not necessarily require that a broker-dealer directly connect to a market, as it 
may be efficient in some circumstances for a broker-dealer to use another broker-dealer to access 
a particular market for a customer order.  However, interposing a third-party between the broker-
dealer and the market reasonably likely to provide the most favorable price for its customer 
would not be consistent with the concept of “efficient access,” if the broker-dealer could access 
the market directly but chose instead to access the market indirectly resulting in a worse 
execution for the customer.
149
  As stated above, interpositioning can violate the broker-dealer’s 
                                                 
5310(d) also provides that a broker-dealer through which orders are channeled and that 
knowingly is a party to an arrangement whereby the initiating member has not fulfilled its 
obligations under FINRA Rule 5310 will be deemed to have violated the rule.  Similarly, 
MSRB Rule G-18.02 states that a broker-dealer’s failure to maintain adequate resources 
is not a justification for executing away from the best available market.  The proposed 
rules likewise would not exempt these scenarios from the proposed best execution 
standard.  The Commission also believes that these provisions reflect the concept of 
efficient access to the best market so that the resulting price to a customer is as favorable 
as possible under prevailing market conditions, and therefore are consistent with the 
Commission’s proposal to require a broker-dealer’s best execution policies and 
procedures to address how the broker-dealer will efficiently access material potential 
liquidity sources.  
149
  The proposed requirement that a broker-dealer’s policies and procedures address how it 
will be able to efficiently access any material potential liquidity source is consistent with 
FINRA and MSRB rules concerning interpositioning.  Specifically, FINRA Rule 
5310(a)(2) states that no broker-dealer or person associated with a broker-dealer may 
interject a third party between the broker-dealer and the best market for the subject 
security in a manner that would be inconsistent with FINRA’s best execution standard.  
FINRA Rule 5310(b) states that when a broker-dealer cannot execute directly with a 
market but must employ a broker’s broker or some other means in order to ensure an 
execution advantageous to the customer, the burden of showing the acceptable 
circumstances for doing so is on the broker-dealer.  And FINRA Rule 5310.05 states that 
examples of acceptable circumstances are where a customer’s order is “crossed” with 

   
77 
 
duty of best execution when it results in unnecessary transaction costs at the expense of the 
customer.
150
   
Request for Comment 
The Commission requests comment on all aspects of proposed Rule 1101(a)(1), and in 
particular: 
31. Do commenters believe that proposed Rule 1101(a)(1)(i) appropriately requires a broker-
dealer’s policies and procedures to reflect how it will obtain and assess reasonably 
accessible information, including information about price, volume, and execution quality, 
concerning the markets trading the relevant securities?  Why or why not? 
32. What factors would a broker-dealer consider in determining whether information is 
“reasonably accessible” for purposes of its best execution policies and procedures under 
the proposed rules?  Please explain.  
33. Should the Commission specify the types of information that would be “reasonably 
accessible” under proposed Rule 1101(a)(1)(i)?  For example, should the Commission 
specify that consolidated market data distributed by the securities information processors 
is a type of “reasonably accessible” information under the proposed rule?  Please explain. 
                                                 
another firm that has a corresponding order on the other side, or where the identity of the 
firm, if known, would likely cause undue price movements adversely affecting the cost or 
proceeds to the customer.  MSRB Rule G-18(b) similarly prohibits a broker-dealer from 
interjecting a third party between itself and the best market for the subject security in a 
manner inconsistent with the MSRB’s best execution standard.  However, unlike 
proposed Rule 1101(a), FINRA and MSRB rules do not require a broker-dealer’s best 
execution policies and procedures to explicitly address the incorporation of liquidity 
sources into its order handling practices or the efficient access of liquidity sources.   
150
  See supra notes 29-30 and accompanying text. 

   
78 
 
34. Do commenters agree that proposed Rule 1101(a)(1) is consistent with prior Commission 
statements, including those described in section II.B above?  Why or why not?  If not, 
should the Commission revise any of its statements in light of the proposal?  Please 
explain. 
35. Do commenters believe that proposed Rule 1101(a)(1)(ii) appropriately requires a broker-
dealer’s policies and procedures to reflect how it will identify material potential liquidity 
sources?  Why or why not? 
36.  Do commenters believe the Commission has appropriately defined material potential 
liquidity sources in proposed Rule 1101(a)(1)(ii)?  Please explain. 
37. What factors would a broker-dealer consider in identifying material potential liquidity 
sources under the proposed rules?  Please explain.  
38. In identifying material potential liquidity sources, do broker-dealers consider market 
connectivity fees and other access and transaction fees?  Please explain. 
39. Do commenters agree that proposed Rule 1101(a)(1)(ii) is consistent with prior 
Commission statements, including those described in section II.B above?  Why or why 
not?  If not, should the Commission revise any of its statements in light of the proposal?  
Please explain.  
40. Do commenters believe that proposed Rule 1101(a)(1)(iii) appropriately requires a 
broker-dealer’s policies and procedures to reflect how it will incorporate material 
potential liquidity sources into its order handling practices?  Why or why not? 
41. Do commenters believe that proposed Rule 1101(a)(1)(iii) appropriately requires a 
broker-dealer’s policies and procedures to reflect how it will ensure efficient access to 
each material potential liquidity source?  Why or why not? 

   
79 
 
42. What factors would a broker-dealer consider to ensure that it can efficiently access a 
material potential liquidity source under the proposed rules?  Please explain.   
43. Do commenters agree that proposed Rule 1101(a)(1)(iii) is consistent with prior 
Commission statements, including those described in section II.B above?  Why or why 
not?  If not, should the Commission revise any of its statements in light of the proposal?  
Please explain. 
44. Do commenters agree with the Commission’s understanding that broker-dealers currently 
have policies and procedures for how they comply with the FINRA and MSRB best 
execution rules, as applicable?  Please describe the types of best execution policies and 
procedures that broker-dealers currently have.  In particular, do broker-dealers’ policies 
and procedures address how they obtain and assess reasonably accessible information, 
including information about price, volume, and execution quality, concerning the markets 
trading the relevant securities?  Do broker-dealers’ policies and procedures address how 
they identify material potential liquidity sources?  Do broker-dealers’ policies and 
procedures address how they incorporate material potential liquidity sources into their 
order handling practices, and how they ensure that they can efficiently access each such 
material potential liquidity source? 
45. Do commenters believe that the Commission should provide staggered compliance dates 
for proposed Rule 1101(a)(1) for broker-dealers of different sizes, if the Commission 
adopts proposed Regulation Best Execution?  For example, should the Commission 
provide longer compliance dates for smaller broker-dealers?  If so, should the 
Commission define a smaller broker-dealer as a broker-dealer that qualifies as a “small 
entity” under the Regulatory Flexibility Act pursuant to 17 CFR 240.0-10(c) for this 

   
80 
 
purpose?
151
  Or should the Commission define a smaller broker-dealer in a different way?  
Please explain. 
2. Proposed Rule 1101(a)(2) – Best Market Determination  
Proposed Rule 1101(a)(2) would require a broker-dealer’s best execution policies and 
procedures to address how it will determine the best market and make routing or execution 
decisions for customer orders that it receives by:  (i) assessing reasonably accessible and timely 
information with respect to the best displayed prices, opportunities for price improvement, 
including midpoint executions, and order exposure opportunities that may result in the most 
favorable price; (ii) assessing the attributes of customer orders and considering the trading 
characteristics of the security, the size of the order, the likelihood of execution, the accessibility 
of the market, and any customer instructions in selecting the market most likely to provide the 
most favorable price; and (iii) in determining the number and sequencing of markets to be 
assessed, reasonably balancing the likelihood of obtaining better prices with the risk that delay 
could result in worse prices. 
In determining the best market for customer orders, the assessment of reasonably 
accessible and timely information
152
 with respect to the best displayed prices and opportunities 
                                                 
151
  17 CFR 240.0-10(c) defines a smaller broker-dealer as one that: (1) had total capital (net 
worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal 
year as of which its audited financial statements were prepared pursuant to Rule 17a-5(d) 
under the Exchange Act, or, if not required to file such statements, had total capital (net 
worth plus subordinated liabilities) of less than $500,000 on the last business day of the 
preceding fiscal year (or in the time that it has been in business, if shorter); and (2) is not 
affiliated with any person (other than a natural person) that is not a small business or 
small organization.  
 
152
  See supra notes 132 and 141 and accompanying text.   

   
81 
 
for price improvement would vary depending on the trading characteristics of particular 
securities.  Displayed prices can provide a useful reference price for a broker-dealer to consider 
when assessing the best market in which to execute customer orders, particularly in an asset class 
where there are consolidated displays of the best prices across the market, or for securities that 
are considered liquid and have firm prices that are accessible.  Accordingly, under proposed Rule 
1101(a)(2)(i), a broker-dealer’s policies and procedures would be required to address how it will 
assess reasonably accessible and timely information with respect to the best displayed prices in 
any given market or security.
153
  In addition, the Commission has previously stated that, when 
reviewing their procedures for seeking to obtain best execution, “broker-dealers must take into 
account price improvement opportunities, and whether different markets may be more suitable 
for different types of orders or particular securities.”
154
  Accordingly, under proposed Rule 
1101(a)(2)(i), a broker-dealer’s policies and procedures would be required to specifically address 
                                                 
153
  For fixed income securities, FINRA has also recognized that while a broker-dealer should 
consider using displayed prices on electronic trading platforms as part of its reasonable 
diligence in determining the best market for a security, executing a customer order at the 
displayed price may not necessarily fulfill the broker-dealer’s best execution obligations.  
See FINRA Regulatory Notice 15-46, at 8 (stating that displayed prices on electronic 
trading platforms may not be the presumptive best prices, especially for securities that are 
illiquid or trade infrequently).  Accordingly, the Commission believes that the concept of 
“best displayed prices” is applicable to the fixed income securities market. 
154
  Regulation NMS Adopting Release, supra note 21, 70 FR 37538.  See also Order 
Execution Obligations Adopting Release, supra note 10, 61 FR 48323 n.357 (stating that 
any evaluation of price improvement opportunities would have to consider not only the 
extent to which orders are executed at prices better than the prevailing quotes, but also 
the extent to which orders are executed at inferior prices). 

   
82 
 
how it will assess price improvement opportunities,
155
 including midpoint execution 
opportunities.
156
     
In addition to displayed prices and opportunities for price improvement, there may be 
other order exposure opportunities for customer orders (e.g., order handling and execution 
protocols that may provide exposure to a competitive process for customer orders).  For example, 
markets that operate limit order books and enable broker-dealers to post customer limit orders 
could represent a best market for customer orders.  These markets may provide an opportunity 
for executions at the prevailing best bid for customer buy orders or at the prevailing best offer for 
customer sell orders, rather than executing customer orders by crossing the prevailing bid-offer 
spread.  As another example, auctions may offer an opportunity to expose marketable customer 
orders to prices that are more favorable than prices that would be achieved by crossing the 
spread.  Accordingly, under proposed Rule 1101(a)(2)(i), a broker-dealer’s policies and 
procedures would be required to address how it will assess order exposure opportunities that may 
result in the most favorable price. 
                                                 
155
  Price improvement is the execution of an order at a price that is better than the best 
displayed buy or sell prices in the market, and an execution between the best displayed 
bid and offer is a form of price improvement.  See, e.g., Order Execution Obligations 
Adopting Release, supra note 10, 61 FR 48323 n.357 (stating that price improvement 
means the difference between execution price and the best quotes prevailing in the 
market at the time the order arrived at the market or market maker); FINRA Rule 
5310.09(b)(1) (describing price improvement opportunities to mean the difference 
between the execution price and the best quotes prevailing at the time the order is 
received by the market). 
156
  These executions occur at the midpoint of the best displayed buy and sell prices and may 
represent a significant amount of price improvement as compared to executing at the best 
displayed prices for customers seeking to trade immediately. 

   
83 
 
FINRA Rule 5310(a)(1) and MSRB Rule G-18(a) also identify price information as 
relevant when ascertaining the best market for a security.
157
  MSRB Rule G-18(a) also includes 
as an additional factor:  the information reviewed to determine the current market for the subject 
security or similar securities.
158
  As described in section IV.B.1 above, FINRA and MSRB rules 
reflect requirements for broker-dealers to have policies and procedures for compliance with 
relevant laws and rules.  However, FINRA and MSRB rules do not require a 
broker-dealer’s policies and procedures to specifically address the elements 
that are relevant to its best market determinations.  The Commission 
understands that broker-dealers currently generally have policies and 
procedures to ascertain the best market for a security, although such policies and 
procedures may need to be updated to address the elements specified in 
proposed Rule 1101(a)(2).  
For a retail broker-dealer in NMS stocks, its policies and procedures for the best market 
determination could include assessments of any assurances from a wholesaler that certain orders 
                                                 
157
  FINRA has also recognized the importance of considering midpoint liquidity.  See 
FINRA Regulatory Notice 15-46 at 4 n.25 (“For example, if a firm obtains price 
improvement at one venue of $0.0005 per share, and it could obtain mid-point price 
improvement at another venue of $0.025 per share, the firm should consider the 
opportunity of such midpoint price improvement on that other venue as part of its best 
execution analysis.”).  In addition, FINRA Rule 5310.09(b)(1) recognizes the relevance 
of price improvement opportunities.   
158
  This factor is consistent with proposed Rule 1101(a)(2) because a broker-dealer’s policies 
and procedures regarding the assessment of reasonably accessible and timely best 
displayed prices in the municipal bond market could include an assessment of 
information to determine the current market for the subject security or similar securities.   

   
84 
 
routed by the retail broker-dealer to the wholesaler would be guaranteed midpoint executions by 
the wholesaler or otherwise exposed to opportunities for midpoint executions.
159
  If midpoint 
executions were not guaranteed by a wholesaler, a retail broker-dealer’s policies and procedures 
could provide for assessments of whether customer orders would best be executed with midpoint 
liquidity that may be available on an exchange, ATS, or other market.  Following an assessment 
of the opportunities for midpoint executions, a broker-dealer’s policies and procedures could 
provide for an assessment of whether other price improvement opportunities might be available, 
such as from wholesalers,
160
 from resting liquidity between the best bid and offer on exchanges, 
through auctions, or otherwise.      
With respect to listed options, the Commission recognizes that midpoint liquidity is not 
as commonly available on options exchanges as it is in the NMS stock market.
161
  A broker-
dealer’s policies and procedures nevertheless would be required to address how it will assess 
potential midpoint executions, including to the extent additional midpoint liquidity emerges.  
Following an assessment of potential opportunities for midpoint executions, the Commission 
                                                 
159
  If wholesalers do not have a practice of routinely seeking and accessing midpoint 
liquidity as appropriate, the retail broker-dealer’s policies and procedures could address 
how it takes that into account when assessing whether a wholesaler is the best market for 
customer orders. 
160
  In considering wholesalers, such policies and procedures could address how the retail 
broker-dealer assesses the price improvement opportunities that may be available from 
different wholesalers, including an assessment of guarantees for price improvement that 
might be provided by wholesalers and the performance of wholesalers, such as the 
execution quality that the retail broker-dealer’s customers received from the wholesalers 
in the past. 
161 
 Given the lack of order types concerning midpoint liquidity, midpoint liquidity is not 
prevalent in the listed options market. 

   
85 
 
preliminarily believes that a broker-dealer’s policies and procedures could provide for an 
assessment of other price improvement opportunities that might be available.  These price 
improvement opportunities could include potential resting liquidity on exchange limit order 
books priced between the best bid and offer.  Price improvement opportunities may also be 
available through exchange price improvement auctions.
162
  A broker-dealer’s policies and 
procedures could also address how it will assess price improvement opportunities that may be 
available from different wholesalers, including an assessment of guarantees for price 
improvement that might be provided by wholesalers and the performance of the wholesalers, 
including the execution quality that the retail broker-dealer’s customers received from the 
wholesalers in the past.  In doing so, a broker-dealer’s policies and procedures could address 
how it will assess the exchanges and exchange mechanisms that wholesalers use, why they use 
those exchanges and mechanisms, and the relative competitiveness of those exchanges and 
mechanisms in light of fee differentials and functionality that can affect competitive responses 
and facilitate internalization. 
                                                 
162
  Price improvement auctions currently available on options exchanges are two-sided and 
thus may not be directly accessible by many retail broker-dealers because they do not 
commit capital to trade with customers.  Specifically, options price improvement auctions 
guarantee that a customer order will be executed by requiring the broker-dealer initiating 
the auction to commit to trade in a principal capacity with the customer order at a certain 
price, with exposure to potential price improvement from competitive responders.  See, 
e.g., Nasdaq ISE, LLC Options 3, Section 13; Nasdaq Phlx LLC Options 3, Section 13; 
Miami International Securities Exchange LLC Rule 515A; BOX Exchange LLC Rule 
7150; NYSE American LLC Rule 971.1NY; Cboe Exchange, Inc. Rule 5.37.  However, 
to the extent one-sided auctions (or other trading protocols providing a competitive 
process for exposing customer orders for the most favorable price) exist or emerge, a 
broker-dealer’s policies and procedures generally should consider addressing whether 
such price improvement opportunities represent the best market for customer orders when 
making a routing or execution decision.   

   
86 
 
The policies and procedures requirements under proposed Rule 1101(a)(2)(i) would also 
apply to wholesalers in the NMS stock and options markets.  For customer orders that a 
wholesaler intends to execute at prices worse than the midpoint, its policies and procedures could 
provide for an assessment of whether those orders would best be executed with midpoint 
liquidity that may be available on an exchange, ATS, or other market.  A wholesaler’s policies 
and procedures would also need to address how it will consider other opportunities for price 
improvement, which could include liquidity available on exchanges or other markets priced 
between the best bid and offer.  Finally, these policies and procedures would need to address 
how the wholesaler will assess order exposure opportunities for customer orders that may result 
in the most favorable price for those orders.   
In the corporate and municipal bond markets and government securities markets, some 
broker-dealers display executable prices to customers through proprietary customer-facing 
systems that enable customers to transact at the displayed prices.  Sometimes these prices 
represent securities that are available on other venues such as ATSs, interdealer brokers or 
otherwise, while other times these prices represent securities held in inventory by the broker-
dealer.  The policies and procedures of a broker-dealer in the corporate and municipal bond 
markets and government securities markets would need to address how it will assess reasonably 
accessible and timely information with respect to the best displayed prices.   
Information with respect to the best displayed prices would be different between the 
corporate and municipal bond markets and government securities markets, and the equities and 
options markets.  In particular, timely consolidated best prices are readily accessible in the 
equities and options markets, but there are no similar consolidated best prices in the corporate 
and municipal bond markets and government securities markets.  A broker-dealer’s policies and 

   
87 
 
procedures generally should therefore be tailored to reflect best displayed price information that 
is “reasonably accessible and timely” in the corporate and municipal bond markets and 
government securities markets.
163
   
The proposed rule requires policies and procedures of a broker-dealer in the corporate 
and municipal bond markets and government securities markets to also address how it will assess 
order exposure opportunities that may result in the most favorable price, which could include 
how it will assess RFQ mechanisms.  These mechanisms may represent the best market for 
customer orders in light of the trading characteristics of these securities, where there may be 
limited quotation or transaction pricing information available.  In the absence of reliable pricing 
information, such as bid, offer, or transaction data for a security, a competitive auction 
mechanism may result in the most favorable prices reasonably available.   
The policies and procedures of a broker-dealer in the corporate and municipal bond 
markets and government securities markets could also assess how its use of RFQ systems may 
                                                 
163
  FINRA Rule 5310 also states that “when quotations are available, FINRA will consider 
the accessibility of such quotations when examining whether a member has used 
reasonable diligence.”  See FINRA Rule 5310.03.   FINRA has also discussed the 
importance of a broker-dealer evaluating the quality of displayed prices in fixed income 
securities.  See FINRA Regulatory Notice 15-46, at 8 (“FINRA also notes that prices of a 
fixed income security displayed on an electronic trading platform may not be the 
presumptive best price of that security for best execution purposes, especially for 
securities that are illiquid or trade infrequently.  Thus, although a firm should consider 
using this information as part of its reasonable diligence in determining the best market 
for the security, executing a customer order at the displayed price may not fulfill the 
firm’s obligations, particularly if other sources of information indicate the displayed price 
may not be the best price available.  For example, if . . . a firm regularly uses a reliable 
similar security analysis to establish prices, that firm may need to use particular care 
before executing a trade at a price that is displayed by a trading system if its similar 
security analysis suggests that the displayed price is not reflective of the market.”). 

   
88 
 
affect the opportunity to expose a customer order to the most favorable price.  For example, 
when a customer wishes to buy or sell a bond, a broker-dealer may use an electronic RFQ system 
to solicit prices from other participants on the system.
164
  In this scenario, a broker-dealer’s 
policies and procedures could address how it will use “filters” and assess whether the use of 
filters would affect the exposure for customer orders.  Specifically, a broker-dealer that submits 
an RFQ on behalf of a customer typically has the option of deciding which participants it wants 
to request prices from.  While a broker-dealer may use filters in a way that is consistent with its 
duty of best execution, a broker-dealer could also potentially use filters to prevent certain market 
participants from receiving and participating in the RFQ in a way that prevents a customer order 
from being exposed to opportunities to receive the most favorable price (e.g., the participants 
that might have been willing to provide that price may have been precluded from the RFQ by the 
broker-dealer).
165
     
                                                 
164
  It is the Commission’s understanding that a broker-dealer typically uses RFQ systems to 
solicit prices when customers are selling bonds and that RFQ systems are used less for 
customers that are buying bonds. 
165
  FINRA and the MSRB have recognized the potential misuse of filters as well.  See 
FINRA Regulatory Notice 15-46, at 5 (“If a firm uses filters on counterparties or filters 
on specific securities intended to limit accessing bids and offers in those securities, they 
may be used only for a legitimate purpose consistent with obtaining the most favorable 
executions for customers, and should be reviewed on a periodic basis and adjusted as 
needed.”).  See MSRB Interpretive Guidance Section III.1 (“Some dealers may employ 
‘filters,’ which generally refer to automated tools that allow the dealer to limit its trading, 
with, for example, specific parties or parties with specified attributes with which it does 
not want to interact.  If a dealer uses filters on counterparties or filters on specific 
securities intended to limit accessing bids or offers in those securities, they may be used 
only for a legitimate purpose consistent with obtaining the most favorable executions for 
non-SMMP customers, and should be reviewed on a periodic basis and adjusted as 
needed.  The dealer, accordingly, should have policies and procedures in place that 
govern when and how to:  reasonably use filters without negatively impacting the quality 

   
89 
 
As another example, the policies and procedures of a broker-dealer in the corporate and 
municipal bond markets and government securities markets could address the use of “last look” 
functionalities.  When a broker-dealer uses an RFQ system, it will often receive responses in the 
form of bids (most common) or offers, and it typically has a certain amount of time to decide 
whether or not it chooses to execute the transaction with the best price or to match or improve 
that price in a principal trade with the customer.  One effect of this “last look” practice may be to 
deter market participants that might otherwise vigorously compete to trade with the customer’s 
order from submitting their most favorable prices, in light of the possibility that the broker-dealer 
is simply using the RFQ system for price discovery and ultimately intends to trade with its 
customer in a principal capacity.
166
  A broker-dealer’s policies and procedures could address 
how the broker-dealer uses “last look” in connection with its RFQs and whether this practice 
                                                 
of execution of non-SMMP customer transactions; periodically reevaluate their use; and 
determine whether to lift them upon request.”). 
166
  See Recommendation Regarding the Practice of Pennying in the Corporate and 
Municipal Bond Markets, SEC Fixed Income Market Structure Advisory Committee 
(June 11, 2019), available at https://www.sec.gov/spotlight/fixed-income-advisory-
committee/fimsac-pennying-recommendations.pdf (describing that the abusive use of the 
last look practice “harms competitiveness” and “deters aggressive pricing or participation 
in the auction process by other dealers who fear that the submitting dealer is going to 
‘step in front of’ their winning prices or is otherwise using the auction process solely for 
price discovery purposes”).  See also FINRA Regulatory Notice 20-29 (Aug. 17, 2020) 
(requesting comment on the impact of the broker-dealer practice of trading with a 
customer as principal by matching or slightly improving on the best auction responses 
without participating in the auction); MSRB Notice 2018-22 (Sept. 7, 2018) (requesting 
comment on the abusive practice of last look known as pennying and stating “[i]n recent 
outreach to a broad range of market participants, it has been suggested that pennying is 
prevalent in the municipal market and that widespread pennying does indeed 
disincentivize participation in the bid-wanted process, discourages bidders from giving 
their best price in a bid-wanted and may impact the efficiency of the market”).  

   
90 
 
affects the extent to which customer orders are exposed to opportunities to receive the most 
favorable price.
167
   
As a third example, the policies and procedures of a broker-dealer in the corporate and 
municipal bond markets and government securities markets could address the response times that 
a broker-dealer may require for responses to an RFQ.  Broker-dealers frequently request quotes 
and include a time limit by which all quotes must be received.  This practice permits market 
participants time to consider the request and provide a price for the security, while establishing a 
time limit so that the broker-dealer can execute its customer order in a timely manner.  The 
appropriate amount of time for responses can be influenced by important and variable 
considerations for different customer orders.  Response times that are too short, however, can 
prevent market participants that may otherwise be interested in competing for the customer order 
from being able to submit prices in response to the request.  A broker-dealer’s policies and 
procedures could address how the broker-dealer uses response times in connection with its RFQs 
and how its use might impact the exposure of a customer order to opportunities to receive the 
most favorable price.  
In addition to assessing reasonably accessible and timely information regarding displayed 
prices and price improvement and order exposure opportunities, proposed Rule 1101(a)(2)(ii) 
                                                 
167
  Last look practices can also be beneficial to customers.  For example, there could be 
situations where the responses received by the broker-dealer all reflect prices that the 
broker-dealer has reason to believe are not reflective of the most favorable price.  In these 
cases, last look enables the broker-dealer to evaluate those prices, determine not to 
execute the customer order at those prices, and either internalize the order at a price the 
broker-dealer believes is the most favorable price or seek additional liquidity for the 
customer order.   

   
91 
 
would require a broker-dealer’s policies and procedures to address how it will assess the 
attributes of its customers’ orders and consider the trading characteristics of the security, the size 
of the orders, the likelihood of execution, the accessibility of the market, and any customer 
instructions in selecting the market most likely to provide the most favorable price for the order.   
Not all customer orders have the same attributes or size and a broker-dealer’s best market 
determination is affected by the attributes of customer orders and the size of customer orders.
168
  
For example, when a broker-dealer is handling and executing large orders, it may likely be more 
sensitive to the possibility of information leakage and price impact that could harm the execution 
quality of such orders.  Therefore, the broker-dealer may make a best market determination 
designed to minimize the risk of information leakage and price impact concerns.
169
  In contrast, a 
broker-dealer handling and executing small orders may not be as concerned with information 
                                                 
168
  FINRA Rule 5310(a)(1) also recognizes the “size and type” of transactions as factors 
relevant to a broker-dealer’s exercise of reasonable diligence to ascertain the best market, 
although FINRA rules do not require a broker-dealer’s policies and procedures to 
explicitly address how it would assess these factors. 
169
  It is the Commission’s understanding that when an institutional customer gives a large 
order to be executed on behalf of one account (e.g., a single mutual fund or pension 
fund), it expects the broker-dealer that handles and executes such large order to do so in a 
manner that ensures best execution is provided to the “parent” order.  In other words, to 
the extent that a parent order is split into smaller “child” orders, the institutional customer 
expects the best execution analysis to evaluate whether the parent order was executed at 
the most favorable price possible under prevailing market conditions according to 
customer instructions.  See, e.g., Concept Release on Equity Market Structure, supra note 
49, 75 FR at 3604-3605 (measuring the transaction costs of institutional investors “can be 
extremely complex” because their “large orders often are broken up into smaller child 
orders and executed in a series of transactions” and “[m]etrics that apply to small order 
executions may miss how well or poorly the large order traded overall.”). 

   
92 
 
leakage, resulting in a different best market determination for execution of such orders.
170
  Other 
relevant customer order attributes could include whether or not the order is a market order or 
limit order.  A broker-dealer’s assessment of the best market to execute customer orders is 
different for customers interested in trading immediately
171
 and customers willing to execute 
orders over a longer period of time.  Moreover, the likelihood of execution is a relevant 
consideration for a broker-dealer, as the failure to receive an execution for orders from a 
particular market may negatively impact the ultimate execution quality received by customers.     
                                                 
170
  While the Commission has long-acknowledged a range of factors relevant for a best 
execution analysis, it has recognized price as a critical concern.  See supra note 22 and 
accompanying text.  The Commission has stated, for example, that it “strongly believes, 
however, that most investors care a great deal about the quality of prices at which their 
orders are executed....”  See Order Execution and Routing Practice Release supra note 
22, 65 FR at 75418.  Additionally, the Commission has stated that broker-dealers 
handling small orders in listed and OTC equities should look for price improvement 
opportunities when executing these orders.  See Order Execution Obligations Adopting 
Release, supra note 10, 61 FR 48323.  
171
  FINRA Rule 5310.01 requires a broker-dealer to make every effort to execute marketable 
customer orders fully and promptly.  Similarly, MSRB Rule G-18.03 requires a broker-
dealer to make every effort to execute a customer transaction promptly, taking into 
account prevailing market conditions, and recognizes that in certain market conditions a 
broker-dealer may need more time to use reasonable diligence to ascertain the best 
market for the subject security.  The MSRB has stated that while a broker-dealer must 
make every effort to execute a customer transaction promptly, the determination as to 
whether a firm exercised reasonable diligence necessarily involves a “facts and 
circumstances” analysis, and actions that in one instance may meet a broker-dealer’s 
best-execution obligation may not satisfy that obligation under another set of 
circumstances.  MSRB Interpretative Guidance, V1.1: Execution timing (Nov. 20, 2015).  
Similarly, when assessing the attributes of a customer order under proposed Rule 
1101(a)(2), a broker-dealer would be required to assess how it will execute marketable 
customer orders fully and promptly, taking into account prevailing conditions, given that 
the customer expectation when submitting a market order is to have the order executed 
immediately at the prevailing market price or better.   

   
93 
 
A broker-dealer’s best market determination is also affected by the trading characteristics 
of a security and the accessibility of a market.  For example, some securities may not have 
readily available or accessible quotation data or may trade in OTC markets.
172
  These 
characteristics affect how a broker-dealer would identify the best market for customer orders, 
and a broker-dealer may need to seek out pricing information that may not otherwise be available 
or accessible at the time it receives a customer order, such as by soliciting buy or sell interest 
from market participants through auction mechanisms, interdealer brokers, or otherwise.
173
  
                                                 
172
  See also FINRA Rule 5310(a)(1) (recognizing the relevance of the pressure on available 
communications as relevant for a broker-dealer’s best market determination).  A broker-
dealer’s assessment of the accessibility of a market could vary depending on the cost of 
maintaining connectivity, receiving market data, and transacting on the market.  
173
  These considerations are consistent with FINRA and MSRB rules concerning orders 
involving securities with limited quotations or pricing information.  See FINRA Rule 
5310.06 (providing that a broker-dealer must be especially diligent in ensuring that it has 
met its best execution obligations with respect to customer orders involving securities for 
which there is limited pricing information or quotations available; requiring each member 
to have written policies and procedures that address how it will determine the best inter-
dealer market for such a security in the absence of pricing information or multiple 
quotations and document its compliance with those policies and procedures; providing as 
an example that a broker-dealer should analyze pricing information based on other data, 
such as previous trades in the security, to determine whether the resultant price to the 
customer is as favorable as possible under prevailing market conditions; and providing 
that a broker-dealer should generally seek out other sources of pricing information or 
potential liquidity, which may include obtaining quotations from other sources (e.g., 
other firms with which the member previously has traded in the security)); MSRB Rule 
G-18.06 (providing that a broker-dealer must be especially diligent in ensuring that it has 
met its best-execution obligations with respect to customer transactions involving 
securities for which there is limited pricing information or quotations available; requiring 
each broker-dealer to have written policies and procedures in place to address how it will 
make its best execution determinations with respect to such a security in the absence of 
pricing information or multiple quotations and document its compliance with those 
policies and procedures; and providing as an example that a broker-dealer generally 
should seek out other sources of pricing information and potential liquidity for such a 
security, including other broker-dealers with which the broker-dealer previously has 

   
94 
 
Furthermore, extreme market conditions that result in heightened volatility or impact the 
liquidity for a security may affect a broker-dealer’s best market determination for customer 
orders as trading in those conditions may merit different order handling than in more normal 
market conditions.
174
   
Moreover, customer instructions are relevant for a broker-dealer’s best market 
determination.  Customers may provide a broker-dealer with specific instructions regarding how 
the broker-dealer should handle and execute their orders, including institutional customers that 
also owe their clients a duty to seek best execution.  A broker-dealer’s policies and procedures 
generally should address how the broker-dealer will assess the factors in proposed Rule 
1101(a)(2) within the context of and consistent with customer instructions.
175
  For example, 
some institutional customers may instruct their broker-dealer to handle and execute their orders 
with regard being given to the fees and rebates that may be charged or paid by a particular 
                                                 
traded in the security; and providing that a broker-dealer generally should, in determining 
whether the resultant price to the customer is as favorable as possible under prevailing 
market conditions, analyze other data to which it reasonably has access). 
174
  See also FINRA Regulatory Notice 21-12 (discussing the best execution obligations of 
broker-dealers handling and executing customer orders during extreme market 
conditions); FINRA Rule 5310(a)(1) (discussing the relevance of volatility and liquidity 
to a broker-dealer’s best market determination). 
175
  A broker-dealer that receives an unsolicited instruction from a customer to route that 
customer’s order to a particular market for execution and otherwise qualifies for the 
exemption from the proposed best execution standard in Rule 1100(c) would not be 
subject to the requirements of proposed Rule 1101, including the requirement to have 
policies and procedures that address how the broker-dealer would consider customer 
instructions in selecting the market most likely to provide the most favorable price. 

   
95 
 
market,
176
 and a broker-dealer’s policies and procedures generally should address how it would 
assess the relevant factors in proposed Rule 1101(a)(2) while taking into account the customer 
instructions in determining the best market for the customers’ orders.
177
     
Proposed Rule 1101(a)(2)(iii) would require a broker-dealer’s policies and procedures to 
address how it will reasonably balance the likelihood of obtaining better prices with the risk that 
delay could result in worse prices in determining the number and sequencing of markets to be 
assessed for its customers’ orders.
178
  An undue delay in execution of customer orders may 
detrimentally impact the execution of those orders, if there was a change in the price or liquidity 
available at the time of execution that was not favorable to the customer.  For example, in a 
volatile market, executing customer orders quickly may be necessary for the customer to receive 
the most favorable prices or to receive an execution at all.  Doing so may require the broker-
dealer to execute customer orders using fewer or different execution methods than it might 
otherwise use in a less volatile market.  Similarly, a broker-dealer that is handling large customer 
orders may determine that preventing information leakage is necessary in order for the large 
orders to be executed at the most favorable prices, which may affect the number and sequencing 
of the markets that it assesses.  Accordingly, the broker-dealer’s best execution policies and 
                                                 
176
  The Commission understands that these customers often pay the broker-dealer a lower 
commission or service fee for handling their orders, and the fees and rebates that are 
charged or paid by a market are often passed through to the customers.   
177
  To the extent rebates cause certain transactions to be “conflicted transactions” as defined 
in proposed Rule 1101(b), a broker-dealer’s policies and procedures must also address 
how it would assess the relevant factors in proposed Rule 1101(b) while taking into 
account the customer instructions. 
178
  For example, a broker-dealer could develop an automated process for determining the 
specific markets to which it routes orders and the sequence in which the orders are 
routed. 

   
96 
 
procedures generally should be tailored for the different circumstances in order to reflect a 
reasonable balance between the likelihood of obtaining better prices with the risk that delay 
could result in worse prices. 
FINRA Rule 5310(a)(1) and MSRB Rule G-18(a) set forth similar factors that are 
relevant to ascertaining the best market for customer orders, including the character of the 
market for the security (e.g., price, volatility, relative liquidity, and pressure on available 
communications), the size and type of transaction, the number of markets checked, the 
accessibility of the quotation,
179
 and the terms and conditions of the order that result in the 
transaction as communicated to the broker-dealer.  As described in section IV.B.1 above, FINRA 
and MSRB rules require broker-dealers to have policies and procedures for compliance with 
relevant laws and rules.  In addition, the FINRA and MSRB rules specifically require a broker-
dealer to establish written policies and procedures that address how it will determine the best 
market for a security in the absence of pricing information or multiple quotations and document 
its compliance with those policies and procedures.
180
  However, FINRA and MSRB rules do not 
require a broker-dealer’s policies and procedures to specifically address the elements that are 
relevant to its best market determinations.  The Commission understands that broker-dealers 
                                                 
179
  FINRA Rule 5310.03 provides that, for purposes of debt securities, the term “quotation” 
refers to either dollar (or other currency) pricing or yield pricing.  It also states that 
accessibility is only one of the non-exhaustive reasonable diligence factors, and in the 
absence of accessibility, members are not relieved from taking reasonable steps and 
employing their market expertise in achieving the best execution of customer orders.  
Proposed Rule 1101(a) similarly provides a list of non-exhaustive reasonable diligence 
factors that would be addressed in a broker-dealer’s best execution policies and 
procedures. 
180
  See supra note 173. 

   
97 
 
generally have policies and procedures to ascertain the best market for a security, although such 
policies and procedures may need to be updated to address the elements specified in proposed 
Rule 1101(a)(2).  
Request for Comment 
The Commission requests comment on all aspects of proposed Rule 1101(a)(2), and in 
particular:   
46. Has the Commission appropriately identified the considerations for determining the best 
market for customer orders?  Why or why not?   
47. Do commenters believe that proposed Rule 1101(a)(2)(i) appropriately requires a broker-
dealer’s policies and procedures to reflect how it will assess reasonably accessible and 
timely information with respect to the best displayed prices, opportunities for price 
improvement, including midpoint executions, and order exposure opportunities that may 
result in the most favorable price?  Why or why not? 
48. Do commenters believe that proposed Rule 1101(a)(2)(ii) appropriately requires a broker-
dealer’s policies and procedures to reflect how it will assess the attributes of customer 
orders and consider the trading characteristics of the security, the size of the order, the 
likelihood of execution, the accessibility of the market, and any customer instructions in 
selecting the market most likely to provide the most favorable price?  Why or why not? 
49. Do commenters believe that proposed Rule 1101(a)(2)(iii) appropriately requires a 
broker-dealer’s policies and procedures to reflect how it will reasonably balance the 
likelihood of obtaining better prices with the risk that delay could result in a worse price, 
in determining the number and sequencing of markets to be assessed?  Why or why not? 

   
98 
 
50. Do commenters agree that proposed Rule 1101(a)(2) is consistent with prior Commission 
statements, including those described in section II.B above?  Why or why not?  If not, 
should the Commission revise any of its statements in light of the proposal?  Please 
explain. 
51. While the considerations for determining the best market included in proposed Rule 
1101(a)(2) are non-exhaustive, should the Commission explicitly include other 
considerations in the rule?  If so, please explain.  
52. Is the list of considerations for determining the best market included in proposed Rule 
1101(a)(2) consistent with the considerations included in FINRA Rule 5310 and MSRB 
Rule G-18?  If not, please explain any differences and whether the considerations should 
be consistent. 
53. Do commenters agree with the Commission’s understanding that midpoint liquidity is not 
as commonly available in the options market as it is in the NMS stock market?  Why or 
why not? 
54. Should the Commission specify transaction fees in the rule text as considerations for 
determining the best market?  If so, please explain how fees may be relevant to the best 
execution standard and a broker-dealer’s best market determination.  Do broker-dealers 
route and execute customer orders based on a favorable transaction fee and does that 
impact the execution quality of customer orders?  Please explain. 
55. What factors should a broker-dealer consider in determining the number and sequencing 
of markets to be assessed, in addition to the likelihood of obtaining better prices and the 
risk that a delay could result in a worse price?  Please explain. 

   
99 
 
56. Do commenters agree with the Commission’s understanding that institutional customers 
expect broker-dealers that handle and execute their large orders for a single account to do 
so in a manner that ensures best execution is provided to the “parent” order?  
57. Do commenters agree with the Commission’s understanding that broker-dealers 
currently generally have policies and procedures to ascertain the best 
market for a security?  Please describe the types of best market policies and procedures 
that broker-dealers currently have.  In particular, do broker-dealers’ policies and 
procedures address how they assess reasonably accessible and timely information with 
respect to the best displayed prices, opportunities for price improvement, including 
midpoint executions, and order exposure opportunities that may result in the most 
favorable price?  Do broker-dealers’ policies and procedures address how they assess the 
attributes of customer orders and consider the trading characteristics of the security, the 
size of the order, the likelihood of execution, the accessibility of the market, and any 
customer instructions in selecting the market most likely to provide the most favorable 
price?  Do broker-dealers’ policies and procedures address how they reasonably balance 
the likelihood of obtaining better prices with the risk that delay could result in a worse 
price, in determining the number and sequencing of markets to be assessed? 
58. Do commenters believe that the Commission should provide staggered compliance dates 
for proposed Rule 1101(a)(2) for broker-dealers of different sizes, if the Commission 
adopts proposed Regulation Best Execution?  For example, should the Commission 
provide longer compliance dates for smaller broker-dealers?  If so, should the 
Commission define a smaller broker-dealer as a broker-dealer that qualifies as a “small 
entity” under the Regulatory Flexibility Act pursuant to 17 CFR 240.0-10(c) for this 

   
100 
 
purpose?
181
  Or should the Commission define a smaller broker-dealer in a different way?  
Please explain.  
C. Proposed Rule 1101(b) – Policies and Procedures and Documentation for 
Conflicted Transactions 
Proposed Rule 1101(b) would require a broker-d
ealer’s best execution policies and 
procedures to address additional considerations with respect to “conflicted transactions.”  It 
would also require a broker-dealer to document its compliance with the proposed best execution 
standard for conflicted transactions and document any arrangement concerning payment for 
order flow. 
Proposed Rule 1101(b) would define a “conflicted transaction” for purposes of proposed 
Regulation Best Execution as any “transaction for or with a retail customer” where a broker-
dealer:  (i) executes an order as principal, including riskless principal;
182
 (ii) routes an order to, 
                                                 
181
  See supra note 151 and accompanying text (describing the broker-dealers that qualify as 
small entities under the Regulatory Flexibility Act). 
182
  For purposes of proposed Rule 1101(b), a broker-dealer would be executing an order as 
“riskless principal” if, after having received an order to buy from a customer, the broker-
dealer purchases the security from another person to offset a contemporaneous sale to the 
customer or, after having received an order to sell, the broker-dealer sells the security to 
another person to offset a contemporaneous purchase from the customer.  See also, 
Exchange Act Rule 3a5-1; U.S. Securities and Exchange Commission, Report on the 
Municipal Securities Market (July 31, 2012) available at  
https://www.sec.gov/news/studies/2012/munireport073112.pdf.  The Commission 
preliminarily believes that it is appropriate to include riskless principal transactions as a 
type of conflicted transactions because of the variability of markups and markdowns 
associated with riskless principal transactions, which impacts the ultimate price paid by 
the customer (i.e., the ultimate execution received by the customer) and often is not 
known to the customer prior to transacting.  See, e.g., John M. Griffin, et al., supra note 
66. 

   
101 
 
or receives an order from, an affiliate for execution; or (iii) provides or receives payment for 
order flow as defined in Rule 10b-10(d)(8) under the Exchange Act.
183
  For purposes of 
paragraph (b), “affiliate” would be defined by proposed Rule 1101(b)(4)(iii) as, with respect to a 
specified person, any person that, directly or indirectly, controls, is under common control with, 
or is controlled by, the specified person.  “Control” would be defined for purposes of the 
proposed definition of “affiliate” by proposed Rule 1101(b)(4)(iii) as the power, directly or 
indirectly, to direct the management or policies of the broker-dealer whether through ownership 
of securities, by contract, or otherwise.  A person is presumed to control a broker-dealer if that 
person is a director, general partner, or officer exercising executive responsibility (or having 
similar status or performing similar functions); directly or indirectly has the right to vote 25 
percent or more of a class of voting securities or has the power to sell or direct the sale of 25 
percent or more of a class of voting securities of the broker-dealer; or in the case of a 
partnership, has contributed, or has the right to receive upon dissolution, 25 percent or more of 
                                                 
183
  See supra note 43 (setting forth the definition of “payment for order flow” under Rule 
10b-10(d)(8)).  Given the widespread use of the Rule 10b-10(d)(8) definition of 
“payment for order flow” and the collective understanding of the term by market 
participants, the Commission proposes to use the existing Rule 10b-10(d)(8) definition in 
proposed Regulation Best Execution.  As reflected in this definition, payment for order 
flow would include any payments from a wholesaler to a retail broker-dealer in return for 
order flow.  It would also include any exchange rebates paid to a broker-dealer in return 
for sending orders to the exchange.  When all payment for order flow for a customer 
order from a particular market is passed through to the customer and the broker-dealer 
retains no part of the payment for order flow associated with that customer order, the 
broker-dealer would not be engaging in a conflicted transaction under proposed Rule 
1101(b) with respect to that customer order. 

   
102 
 
the capital of the broker-dealer.
184
   In each of these types of conflicted transactions, the broker-
dealer has a financial interest that could disincentivize the broker-dealer from achieving best 
execution for its customer’s orders.
185
  Accordingly, the Commission proposes to require more 
robust policies and procedures, as well as documentation, for conflicted transactions with retail 
customers to better address these disincentives.     
Proposed Rule 1101(b) would apply to conflicted transactions for or with a retail 
customer, and proposed Rule 1101(b)(4)(i) would define a “transaction for or with a retail 
                                                 
184
  These definitions are substantially the same as the definitions of “affiliate” and “control” 
prescribed for purposes of the disclosures required of an ATS that trades NMS stocks 
(“NMS Stock ATS”) about its operations on Form ATS-N with the following 
modifications: the Form ATS-N definition of “affiliate” uses a separately-defined term 
“Person” instead of the statutory definition of “person,” and Form ATS-N defines 
“control” as applicable to the “broker-dealer of the alternative trading system” instead of 
as applicable to a “broker or dealer.” The Commission believes that it would be 
appropriate to use substantially similar definitions of “affiliate” and “control” in the 
context of proposed Rule 1101(b) because, for purposes of Form ATS-N, the 
Commission defined such terms for use with respect to disclosures designed to enable 
market participants to better evaluate how relationships between certain persons could 
affect the handling of orders on a particular NMS Stock ATS.  See Securities Exchange 
Act Release No. 83663 (July 18, 2018), 83 FR 38768 (Aug. 7, 2018).  The substantially 
similar proposed definitions, as used in the context of proposed Rule 1101(b), are 
similarly designed to recognize that relationships among certain persons may impact the 
handling of orders, and are designed to help ensure that broker-dealers that have conflicts 
of interest in their order handing are subject to additional obligations under proposed 
Rule 1101(b). 
185
  See generally section III.A.2 (discussing in more detail these conflicts of interest); see 
also 2022 Report on FINRA’s Examination and Risk Monitoring Program 45 (Feb. 
2022), available at https://www.finra.org/sites/default/files/2022-02/2022-report-finras-
examination-risk-monitoring-program.pdf (describing FINRA exam findings, including 
firms not considering and addressing potential conflicts of interest relating to routing 
orders to affiliated broker-dealers, affiliated ATSs, or market centers that provide routing 
inducements, such as payment for order flow from wholesale market makers and 
exchange liquidity rebates). 

   
103 
 
customer” as any transaction for or with the account of a natural person or held in legal form on 
behalf of a natural person or group of related family members.  The proposed definition’s 
limitation to accounts of natural persons is consistent with existing rules that are designed to 
identify the orders of individual investors.  For example, the definition of “retail customer” in the 
Commission’s Regulation Best Interest rule is limited to a “natural person.”
186
  Moreover, 
several national securities exchanges operate programs for trading “retail” orders that are limited 
to accounts of natural persons or certain accounts on behalf of natural persons.
187
  The proposed 
definition of retail customer is also consistent with FINRA’s rule for certain trade reporting.
188
  
                                                 
186
  17 CFR 240.15l-1(b)(1) (defining “retail customer” to mean, among other things, a 
natural person who receives a recommendation of any securities transaction from a 
broker or dealer and uses the recommendation primarily for personal, family, or 
household purposes).  Proposed Rule 1101(b) does not incorporate all of the definition of 
“retail customer” in Regulation Best Interest because that definition is limited to 
scenarios where a person receives and uses a recommendation.  In contrast, proposed 
Rule 1101(b) and the proposed standard of best execution are not limited to scenarios 
where a person receives and uses a recommendation.   
187
  See, e.g., Investors Exchange LLC Rule 11.190(b)(15) (providing, among other things, 
that “[a] Retail order must reflect trading interest of a natural person” and that “[a]n order 
from a retail customer can include orders submitted on behalf of accounts that are held in 
a corporate legal form—such as an Individual Retirement Account, Corporation, or a 
Limited Liability Company—that have been established for the benefit of an individual 
or group of related family members, provided that the order is submitted by an 
individual”); The Nasdaq Stock Market LLC, Equity 7, Section 118 (defining a 
“Designated Retail Order” as originating from a “natural person” and explaining that 
“[a]n order from a ‘natural person’ can include orders on behalf of accounts that are held 
in a corporate legal form—such as an Individual Retirement Account, Corporation, or a 
Limited Liability Company—that has been established for the benefit of an individual or 
group of related family members, provided that the order is submitted by an individual”). 
188
  FINRA Rule 7620A.01 (defining a “retail order” as originating from a “natural person” 
and explaining that “[a]n order from a ‘natural person’ can include orders on behalf of 
accounts that are held in a corporate legal form, such as an Individual Retirement 
Account, Corporation, or a Limited Liability Corporation that has been established for the 
benefit of an individual or group of related family members, provided that the order is 
submitted by an individual”). 

   
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Proposing a definition of retail customer that is similar to existing Commission and SRO rules 
would facilitate compliance with proposed Rule 1101(b) and help mitigate the costs of 
compliance because broker-dealers would already be familiar with identifying orders for the 
accounts of natural persons, or for related accounts, in these other contexts.  
In addition to the accounts of natural persons, the proposed definition of “transaction for 
or with a retail customer” would cover accounts held in legal form on behalf of a natural person 
or a group of related family members.  A “group of related family members” would be defined 
broadly in proposed Rule 1101(b)(4)(i) to include a group of natural persons with any of the 
following relationships:  child, stepchild, grandchild, great grandchild, parent, stepparent, 
grandparent, great grandparent, spouse, domestic partner, sibling, stepbrother, stepsister, niece, 
nephew, aunt, uncle, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, 
or sister-in-law, including adoptive and foster relationships; and any other natural person (other 
than a tenant or employee) sharing a household with any of the foregoing natural persons.  This 
proposed definition is broad so as not to restrict the types of arrangements that may be set up to 
benefit family groups, including individual retirement accounts, corporations, and limited 
liability companies for the benefit of related family members.   
Proposed Rule 1101(b) would create new requirements for broker-dealers’ conflicted 
transactions that are not currently required by FINRA or the MSRB.  Because a broker-dealer 
engaging in conflicted transactions for or with retail customers has an incentive to handle those 
orders in a manner that prioritizes its own interests over its customers’ interests, the Commission 
preliminarily believes that, correspondingly, additional policies and procedures elements and 
documentation requirements should apply to such transactions in order to help mitigate the 
potential for these incentives to negatively affect the broker-dealer’s best execution 

   
105 
 
determinations.  The Commission preliminarily believes that proposed Rule 1101(b) would help 
broker-dealers to comply with the proposed best execution standard with respect to conflicted 
transactions, because it would require heightened attention by broker-dealers for conflicted 
transactions and would require broker-dealers to document the basis for their determinations that, 
despite the conflicts of interest, they have complied with the best execution standard for their 
conflicted transactions. 
The Commission also preliminarily believes that retail customers generally would benefit 
more than non-retail customers from the more robust conflicted transactions requirements 
because retail customers are likely to have fewer resources for evaluating the best execution 
practices of their broker-dealers than non-retail customers.  For example, institutional customers 
likely have additional knowledge, experience, and analytical resources as compared to retail 
customers and, thus, are more readily able to evaluate the impact of their broker-dealers’ 
conflicted transactions.  In contrast, retail customers are less likely to have the same level of 
knowledge, experience, and resources to make such evaluations.     
Request for Comment 
The Commission requests comment on the types of conflicted transactions under 
proposed Rule 1101(b), and in particular: 
59. Is it appropriate for proposed Rule 1101(b) to incorporate the definition of “payment for 
order flow” from Exchange Act Rule 10b-10(d)(8)?  Why or why not?  If not, how 
should “payment for order flow” be defined for purposes of proposed Regulation Best 
Execution?  Please describe any alternative definition and explain why such definition 
would be appropriate.  

   
106 
 
60. Does proposed Rule 1101(b) appropriately identify the conflicts of interest of broker-
dealers that are most relevant to the handling of retail customer orders?  If not, why not? 
Are there other conflicted transactions that should be included in proposed Rule 1101(b) 
or are there transactions that are included that should be omitted?  If so, please explain. 
61. Should the principal trading conflict identified in proposed Rule 1101(b) include riskless 
principal trades with customers, as proposed?  Why or why not?  If riskless principal 
trades should be included, should they be defined as proposed – after having received an 
order to buy from a customer, the broker-dealer purchases the security from another 
person to offset a contemporaneous sale to the customer or, after having received an 
order to sell, the broker-dealer sells the security to another person to offset a 
contemporaneous purchase from the customer – similar to the definition of riskless 
principal in Exchange Act Rule 3a5-1?  Why or why not? 
62. Should the Commission provide an exemption from the definition of conflicted 
transactions for certain types of riskless principal trades?  For example, should the 
Commission exempt from the definition of “riskless principal” in proposed Rule 1101 
(b)(4)(ii) trades where the broker-dealer discloses to its customer the markup or 
markdown that it charges on these trades on a pre-trade basis?  Please explain.  If this 
type of exemption should be provided, what would be an appropriate method of pre-trade 
markup or markdown disclosure by the broker-dealer?  For example, would it be 
appropriate for the broker-dealer to disclose a markup or markdown schedule in a readily 
accessible place such as its website?  Please explain.   
63. Alternatively, should the Commission exempt from the definition of “riskless principal” 
in proposed Rule 1101(b)(4)(ii) trades where the contemporaneous purchases and sales 

   
107 
 
are executed at the same price resulting in a transaction with the customer that does not 
include any markup or markdown?  Please explain.  In these types of transactions, how 
would the broker-dealer be compensated by the customer?  Would it charge a 
commission that is separately disclosed to the customer on the confirmation?  Would the 
customer know the commission that it would pay the broker-dealer prior to engaging in 
the transaction?   
64. Is the proposed definition of a “transaction for or with a retail customer” in Rule 
1101(b)(4)(i), which would include accounts held in legal form on behalf of a natural 
person or a group of related family members, appropriate?  Why or why not?  Should the 
proposed definition be broadened or narrowed?  If so, please explain how the definition 
should be broadened or narrowed and why.  
65. Is the proposed definition of “group of related family members” in proposed Rule 
1101(b)(4)(i) appropriate?  Why or why not?  Should it be more or less inclusive, and if 
so, in what regard?  Please explain.  For example, instead of capturing a group of natural 
persons with “any” of the relationships in the proposed definition (child, stepchild, 
grandchild, great grandchild, parent, stepparent, grandparent, great grandparent, spouse, 
domestic partner, sibling, stepbrother, stepsister, niece, nephew, aunt, uncle, mother-in-
law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister in law, including 
adoptive and foster relationships; and any other natural person (other than a tenant or 
employee) sharing a household with any of the foregoing natural persons), should the 
proposed definition be limited to a group of natural persons consisting “only” of those 
relationships?   

   
108 
 
66. Should the definition of a “transaction for or with a retail customer” exclude a transaction 
with a “family office,” which is defined in Rule 202(a)(11)(G)-1(b) under the Investment 
Advisers Act of 1940 as a company (including its directors, partners, members, 
managers, trustees, and employees acting within the scope of their position or 
employment) that: (1) has no clients other than family clients (as defined in the rule) 
(provided that if a person that is not a family client becomes a client of the family office 
as a result of the death of a family member or key employee (as defined in the rule) or 
other involuntary transfer from a family member or key employee, that person shall be 
deemed to be a family client for purposes of the rule for one year following the 
completion of the transfer of legal title to the assets resulting from the involuntary event); 
(2) is wholly owned by family clients and is exclusively controlled (directly or indirectly) 
by one or more family members and/or family entities; and (3) does not hold itself out to 
the public as an investment adviser?  Why or why not? 
67. A
lternatively, should the definition of a “transaction for or with a retail customer” only 
exclude a subset of “family offices”?  For example, should it exclude a family office (as 
defined above) that (1) has one or more experienced securities or financial services 
professionals, (2) manages a threshold level of total assets (e.g., $50 million or more) that 
are indicative of an institutional account, (3) has the capacity to evaluate independently 
the execution quality received from the broker-dealer, and (4) has professionals who are 
independent representatives of their family clients?  Please explain.   
68. Is the proposed definition of an “affiliate” in proposed Rule 1101(b)(4)(iii) appropriate?  
Why or why not?  Should the proposed definition be broadened or narrowed?  If so, 
please explain how the definition should be broadened or narrowed and why.   

   
109 
 
69. Is the proposed definition of “control” for purposes of the proposed definition of 
“affiliate” in proposed Rule 1101(b)(4)(iii) appropriate?  Why or why not?  Should the 
proposed definition be broadened or narrowed?  If so, please explain how the definition 
should be broadened or narrowed and why.      
70. Should some or all institutional customers’ orders also have the protections afforded by 
proposed Rule 1101(b)?  Please explain.  If only certain categories of institutional 
customers’ orders should also have the protections afforded by proposed Rule 1101(b), 
how should the Commission identify and define the institutional customers’ orders that 
should benefit?   
71. Should the size of institutional customers be considered when determining whether or not 
they should be afforded the protections of proposed Rule 1101(b)?  If so, what would be 
the appropriate metric to identify such institutional customers?  For example, should the 
Commission consider the amount of assets under management when determining which 
institutional customers should be afforded the protections of proposed Rule 1101(b)?   
72. If the Commission were to apply the protections of proposed Rule 1101(b) to 
conflicted transactions for or with institutional customers, should it define “institutional 
customer” as any person that does not qualify as a QIB?
189
  S  hould it define 
“institutional customer” to include any person that qualifies as a QIB?  Or 
should it define “institutional customer” to include a broader set of 
                                                 
189
  See supra note 124 (providing the definition of QIB under Rule 144A under the Securities 
Act of 1933). 

   
110 
 
institutional customers than the QIB definition, such as those entities 
that are included in the FINRA definition of “institutional account” 
under FINRA Rule 4512(c)?
190
     
73. Do commenters believe there is another definition of “institutional customer” that would 
be more appropriate if the Commission were to apply the protections of proposed Rule 
1101(b) to conflicted transactions for or with institutional customers?  Please explain.  
74. If institutional customers’ orders should be afforded the additional protections, are some 
or all of the conflicts of interest identified in proposed Rule 1101(b) also relevant for 
institutional customers?  Are there other conflicts of interest relevant for institutional 
customers that should be included in proposed Rule 1101(b)?  Please explain. 
75. If institutional customers’ orders should be afforded the additional protections, should all 
the requirements under proposed Rule 1101(b) be extended to institutional customers’ 
orders, or should only certain of the requirements be extended to institutional customers’ 
orders?  Should the Commission include other requirements for the protection of 
institutional customers’ orders?  Please explain. 
1. Proposed Rules 1101(b)(1) and (2) – Policies and Procedures for 
Conflicted Transactions 
Proposed Rules 1101(b)(1) and (2) would require a broker-dealer’s best execution 
policies and procedures to address the following with respect to conflicted transactions:  (1) how 
the broker-dealer will obtain and assess information beyond that required by proposed Rule 
                                                 
190
  See supra note 125 and accompanying text (describing the definition of institutional 
account in FINRA Rule 4512(c)). 

   
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1101(a)(1)(i), including additional information about price, volume, and execution quality, in 
identifying a broader range of markets beyond those identified as material potential liquidity 
sources; and (2) how the broker-dealer will evaluate a broader range of markets, beyond those 
identified as material potential liquidity sources, that might provide the most favorable price for 
customer orders, including a broader range of order exposure opportunities and markets that may 
be smaller or less accessible.   
Proposed Rule 1101(b) is not designed to eliminate order handling conflicts of interest, 
and does not ban conflicted transactions.  However, because a broker-dealer engaging in 
conflicted transactions for or with retail customers has an incentive to handle those orders in a 
manner that prioritizes its own interests over its customers’ interests, the Commission 
preliminarily believes that, correspondingly, such transactions should be subject to more robust 
policies and procedures in order to help mitigate the potential for these incentives to negatively 
affect the broker-dealer’s best execution determinations.  Specifically, to help ensure that a 
broker-dealer exercises the reasonable diligence required by proposed Rule 1100 despite its 
incentives not to, a broker-dealer would be required to have policies and procedures that are 
specific to conflicted transactions to address how it will assess information beyond what is 
required for non-conflicted transactions and how it will identify and evaluate of a broader set of 
liquidity sources than for non-conflicted transactions.  These policies and procedures are 
designed to help ensure that a broker-dealer exercises additional diligence in considering relevant 
information and identifying the best market for customer orders, despite their conflicts of 
interest.    
Specifically, proposed Rule 1101(b)(1) would require a broker-dealer’s policies and 
procedures for conflicted transactions to address how it will obtain and assess information 

   
112 
 
beyond what it would obtain and assess for non-conflicted transactions, including additional 
information about price, volume, and execution quality, in identifying a broader range of markets 
beyond those identified as material potential liquidity sources.  While a broker-dealer would use 
reasonably accessible information in identifying material potential liquidity sources for non-
conflicted transactions, a broker-dealer would additionally be required to consider how it would 
use information beyond what it used for non-conflicted transactions in identifying a broader 
range of markets beyond material potential liquidity sources for conflicted transactions.
191
   
Proposed Rule 1101(b)(2) would require a broker-dealer’s policies and procedures for 
conflicted transactions to address how it will evaluate a broader range of markets, beyond those 
identified as material potential liquidity sources, that might provide the most favorable price for 
retail customer orders, including a broader range of order exposure opportunities and markets 
that may be smaller or less accessible than those identified as material potential liquidity sources.  
Because a broker-dealer may have a financial incentive to engage in conflicted transactions, it 
may have an incentive to more quickly conclude that the conflicted transactions represent the 
                                                 
191
  Proposed Rule 1101(b) would require a broker-dealer to consider a broader range of 
markets for conflicted transactions than non-conflicted transactions.  In doing so, the 
broker-dealer may need to obtain and assess information beyond what it obtains and 
assesses for non-conflicted transactions.  It is possible, however, that a broker-dealer 
obtains and assesses information beyond what is needed to identify material potential 
liquidity sources for non-conflicted transactions, including information concerning 
markets that it did not identify as material potential liquidity sources.  Under these 
circumstances, the information the broker-dealer obtained and assessed for non-conflicted 
transactions may include information beyond what is required by proposed Rule 
1101(a)(1), and this information may be sufficient for it to identify a broader set of 
markets beyond those identified as material potential liquidity sources.  See also supra 
note 132 and accompanying text.   

   
113 
 
best market and thus execute the trade in a conflicted transaction.  Accordingly, the proposed 
rule would require a broker-dealer to have policies and procedures that reflect additional efforts 
to identify a broader range of markets, including a broader range of order exposure opportunities, 
that may provide retail customers with the most favorable price and the establishment of order 
handling, routing, and execution arrangements with this broader range of potential liquidity 
sources.
192
  
Request for Comment  
The Commission requests comment on all aspects of proposed Rules 1101(b)(1) and (2), 
and in particular: 
76. Do proposed Rules 1101(b)(1) and (2) represent an appropriate approach to addressing 
conflicted transactions?  Why or why not? 
                                                 
192
  For example, a retail broker-dealer, in accordance with its policies and procedures related 
to the identification of material potential liquidity sources as required by proposed Rule 
1101(a), may have evaluated a certain number of markets and identified a subset of those 
markets as material potential liquidity sources for non-conflicted transactions.  For 
conflicted transactions, the broker-dealer, in accordance with its policies and procedures 
for conflicted transactions, would additionally evaluate some of the markets that it did not 
identify as material potential liquidity sources for non-conflicted transactions.  Conflicted 
transactions, such as routing orders to an affiliated ATS for execution, may involve 
financial incentives for the broker-dealer and could result in the broker-dealer prioritizing 
its own interests over its customers’ interests.  The additional requirements of proposed 
Rule 1101(b) are designed to help ensure that the broker-dealer exercises reasonable 
diligence for conflicted transactions in light of these incentives.  As stated above, 
proposed Rule 1101(a)(1)(ii) would not prescribe the minimum number of markets that a 
broker-dealer would need to identify as material potential liquidity sources.  See supra 
section IV.B.1.  Rather, as stated above, the Commission believes that the identification 
of these markets could be influenced by the nature of the broker-dealer’s business 
operation and customer order flow, such as whether it handles institutional or retail 
orders.  See id.    

   
114 
 
77. Should a broker-dealer be required to establish, maintain, and enforce best execution 
policies and procedures for conflicted transactions that address the additional 
requirements under proposed Rules 1101(b)(1) and (2)?  Why or why not? 
78. Should a broker-dealer’s policies and procedures for conflicted transactions be required 
to address how it will obtain and assess information beyond what it would obtain and 
assess for non-conflicted transactions, including additional information about price, 
volume, and execution quality, in identifying a broader range of markets beyond the 
material potential liquidity sources?  Why or why not? 
79. Should a broker-dealer’s policies and procedures for conflicted transactions be required 
to address how it will evaluate a broader range of markets beyond material potential 
liquidity sources, including a broader range of order exposure opportunities and markets 
that may be smaller or less accessible?  Why or why not? 
80. Would retail customers benefit from potentially having their orders exposed by a broker-
dealer to a broader array of liquidity sources where the broker-dealer would have a 
conflict of interest?  Why or why not?   
81. Should proposed Rules 1101(b)(1) and (2) include different or additional requirements 
for conflicted transactions in different asset classes?  Please explain. 
82. What challenges, if any, would broker-dealers encounter in implementing proposed Rules 
1101(b)(1) and (2)?  Please explain. 
83. Do commenters believe that the Commission should provide staggered compliance dates 
for proposed Rules 1101(b)(1) and (2) for broker-dealers of different sizes, if the 
Commission adopts proposed Regulation Best Execution?  For example, should the 
Commission provide longer compliance dates for smaller broker-dealers?  If so, should 

   
115 
 
the Commission define a smaller broker-dealer as a broker-dealer that qualifies as a 
“small entity” under the Regulatory Flexibility Act pursuant to 17 CFR 240.0-10(c) for 
this purpose?
193
  Or should the Commission define a smaller broker-dealer in a different 
way?  Please explain. 
2. Proposed Rule 1101(b)(3) – Documentation for Conflicted Transactions  
Proposed Rule 1101(b)(3) would require a broker-dealer to document its compliance with 
the best execution standard for conflicted transactions, including all efforts taken to enforce its 
policies and procedures for conflicted transactions and the basis and information relied on for its 
determination that such conflicted transactions would comply with the best execution standard.  
Proposed Rule 1101(b)(3) would require that such documentation be done in accordance with 
written procedures.   
The Commission understands that broker-dealers currently differ in documentation 
practices relating to their compliance with their duty of best execution, and some broker-dealers 
currently retain information that allows them to recreate the prices that were available at the time 
of an execution.  While proposed Rule 1101(b)(3) would not require a broker-dealer to document 
its compliance with the best execution standard with respect to its conflicted transactions in any 
specific way, the broker-dealer would need to document all efforts taken to enforce its policies 
                                                 
193
  See supra note 151 and accompanying text (describing the broker-dealers that qualify as 
small entities under the Regulatory Flexibility Act). 

   
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and procedures for its conflicted transactions
194
 and to demonstrate the basis and information 
relied on for its determination that its conflicted transactions would comply with the best 
execution standard.
195
  Proposed Rule 1101(b)(3) also would not prescribe the manner in which a 
broker-dealer would need to document its compliance with the proposed best execution standard, 
and the Commission preliminarily believes that the manner of documentation may vary 
depending on various considerations specific to the broker-dealer, such as the nature of its 
customers and the characteristics of the securities traded.  The Commission preliminarily 
believes that, in connection with documenting its compliance with the proposed best execution 
standard and its best execution determinations for conflicted transactions, the broker-dealer could 
document the prices received from those markets that it checked pursuant to its policies and 
procedures.  The Commission preliminarily believes that such information could serve as a basis 
for demonstrating a broker-dealer’s best execution efforts and determinations, and broker-dealers 
already maintain much of this information pursuant to existing regulatory or operational 
requirements.
196
   
                                                 
194
  A failure to have the policies and procedures required by proposed Rule 1101(b) that are 
applicable to all conflicted transactions, or a failure to enforce such policies and 
procedures, would be a violation of proposed Regulation Best Execution.   
195
  This proposed documentation requirement would differ from proposed Rule 1101(a), 
which would more generally require the broker-dealer’s policies and procedures to be 
reasonably designed to comply with the best execution standard and to address a number 
of specified elements. 
196
  The Commission preliminarily believes that this documentation would be similar to many 
of the records that broker-dealers currently maintain pursuant to regulatory requirements, 
such as trade-through prohibitions and the National Market System Plan Governing the 
Consolidated Audit Trail (“CAT Plan”) reporting.  For example, the CAT Plan requires a 
broker-dealer to report the entire lifecycle of an order.  See CAT Plan, Appendix C, 

   
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The proposed documentation requirement, including the obligation to document pursuant to 
written procedures, would assist broker-dealers in complying with proposed Regulation Best 
Execution and regulators in overseeing broker-dealers’ compliance.  As stated above in this 
section, while the Commission understands that some broker-dealers retain information that 
allows them to recreate the prices that were available at the time of an execution (for example, in 
response to a regulatory inquiry), the Commission understands that broker-dealers have varying 
degrees of documentation with respect to their best execution practices.  By specifically 
requiring all broker-dealers that engage in conflicted transactions to document their compliance 
with the proposed best execution standard, including all efforts to enforce their policies and 
procedures, and the basis and information relied on for their determinations that the conflicted 
transactions would comply with the best execution standard, such broker-dealers would be 
required to collect important information concerning the application of their best execution 
process.  This information may help broker-dealers better evaluate the effectiveness of their best 
execution policies and procedures, including their order handling practices.  Moreover, by 
requiring that the documentation be conducted pursuant to written procedures, the proposed rule 
                                                 
Section A. 2 (3); See also Rule 613(c)(1) of Regulation NMS, 17 CFR 242.613(c)(1) 
(stating that the CAT plan must provide for an accurate, time-sequenced record of orders 
beginning with the receipt or origination of an order by a member of a national securities 
exchange or national securities association, and document the life of the order through the 
process of routing, modification, cancellation, and execution (in whole or in part) of the 
order).  This order lifecycle information that today is reported to the CAT Plan could 
include information that is relevant for the documentation provision of proposed Rule 
1101(b).  For example, in documenting the markets checked, a broker-dealer that routes 
customer orders to markets in an attempt to access midpoint liquidity could retain records 
concerning the markets it pinged for potential midpoint executions.   

   
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would help ensure that all broker-dealers that engage in conflicted transactions (and any 
applicable associated persons of such broker-dealers) document their compliance with the best 
execution standard in a consistently robust manner.
197
  Similarly, the proposed documentation 
requirement would help ensure that regulators have access to a consistent and minimum level of 
information in overseeing broker-dealers’ efforts to satisfy the best execution standard in 
proposed Rule 1100 with respect to conflicted transactions with retail customers.  
Proposed Rule 1101(b)(3) would also require a broker-dealer to document any 
arrangement, whether written or oral, concerning payment for order flow, including but not 
limited to the parties to the arrangement, all qualitative and quantitative terms concerning the 
arrangement,
198
 and the date and terms of any changes
199
 to the arrangement.
200
  This proposed 
                                                 
197
  For example, the written procedures concerning documentation could describe the 
obligations of various personnel within the broker-dealer with respect to this 
documentation requirement.   
198
  Qualitative and quantitative terms would include any terms that impact the variability or 
establish a condition concerning payment for order flow.  These could include, for 
example, any terms based on the characteristics of an order (e.g., size, marketability, held 
or not held, special order handling instructions, whether the order is a complex options 
order) and the type of security involved (e.g., whether the security is in the S&P 500 
Index, ETF) or the price of a security.   
199
  The proposed rule would require a broker-dealer to document the date and terms of any 
changes to an existing payment for order flow arrangement.   
200
  This proposed requirement would apply whether or not there is any contractual obligation 
associated with the payment for order flow arrangement, and is intended to capture 
payment for order flow arrangements between broker-dealers and between broker-dealers 
and other markets, such as exchanges.  Such documentation would be required in any 
scenario where payment for order flow is actually made or received by a broker-dealer.  
This proposed documentation requirement would also apply to rebates paid by an 
exchange to a broker-dealer in return for routing orders to the exchange.  For example, a 
broker-dealer must document the specific rebate tiers that it qualifies for with respect to 
each exchange from which it receives payment for order flow.  Furthermore, should a 

   
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documentation requirement would complement the other requirements of proposed Rule 
1101(b), and could facilitate a broker-dealer’s understanding of the effect of such arrangements 
on its order handling and execution practices, and more broadly, on its compliance with the best 
execution standard and proposed Rules 1100-1102.  This proposed requirement would also help 
ensure that regulators have fuller and more efficient access to details regarding broker-dealers’ 
payment for order flow arrangements,
201
 which in turn should facilitate regulators’ oversight of 
broker-dealers’ compliance with the proposed rules by providing more context with respect to 
broker-dealers’ operations, business model, and order handling and execution practices.   
Request for Comment  
The Commission requests comment on all aspects of the proposed documentation 
requirement under proposed Rule 1101(b)(3), and in particular: 
84. Are the proposed documentation requirements appropriate?  Why or why not? 
85. Should such documentation requirements apply only to broker-dealers’ conflicted 
transactions?  Alternatively, should they apply to all transactions, including non-
conflicted transactions?  Or should they apply to all conflicted transactions and to a 
subset of non-conflicted transactions?  Please explain.   
                                                 
broker-dealer have an arrangement with an exchange for the establishment of a tier aimed 
at earning that broker-dealer’s order flow, the broker- dealer must document that 
arrangement.  
201
  Existing Commission rules, such as Rule 10b-10(d)(8), 17 CFR 240.10b-10(d)(8), and 
Rule 606 under Regulation NMS, 17 CFR 242.606, do not require the same level of detail 
with respect to the payment for order flow practices of broker-dealers that would be 
required under proposed Rule 1101(b)(3).  

   
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86. Should such documentation be required to be done pursuant to written procedures?  
Please explain.  
87. As proposed, a broker-dealer would need to document, for its conflicted transactions, its 
compliance with the best execution standard, including all efforts taken to enforce its best 
execution policies and procedures for conflicted transactions and the basis and 
information relied on for its determinations that the conflicted transactions would comply 
with the best execution standard.  What challenges, if any, would a broker-dealer 
encounter in complying with the proposed documentation requirements?  Would such 
challenges differ based on the type of security being traded or the type of broker-dealer 
engaging in the conflicted transactions?  Please explain. 
88. Do commenters agree with the Commission’s understanding that broker-dealers have 
varying degrees of documentation with respect to their best execution practices?  Why or 
why not? 
89. Should the proposed documentation requirements apply only to certain types of 
conflicted transactions or for all types of conflicted transactions?  Please explain.   
90. Should broker-dealers in the NMS stock and listed options markets be subject to the 
documentation requirements for the orders they execute on a principal basis, or for which 
they have paid or received payment for order flow, or routed to an affiliate, as proposed?  
Why or why not? 
91. Should broker-dealers in the corporate and municipal bond markets and government 
securities markets be subject to the documentation requirements for the orders they 
execute on a principal basis, as proposed?  Why or why not?  

   
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92. Are there other aspects of the proposed additional requirements for a broker-dealer’s 
policies and procedures for conflicted transactions that should also be required to be 
documented?  Please explain.   
93. Are there practices other than the proposed additional requirements for conflicted 
transactions that should be required to be documented?  Please explain. 
94. Should a broker-dealer be required to document any payment for order flow arrangement, 
whether written or oral, as proposed?  Why or why not?  If so, should such 
documentation requirements include the parties to the arrangement, all qualitative and 
quantitative terms concerning the arrangement, and the date and terms of any changes to 
the arrangement?  Why or why not?  Are there other aspects of the arrangements that 
should also be included in the documentation requirement?  If so, please describe.  
95. Are there other types of arrangements involving conflicted transactions that should also 
be subject to a documentation requirement?  Please explain. 
96. Do commenters believe that the Commission should provide staggered compliance dates 
for proposed Rule 1101(b)(3) for broker-dealers of different sizes, if the Commission 
adopts proposed Regulation Best Execution?  For example, should the Commission 
provide longer compliance dates for smaller broker-dealers?  If so, should the 
Commission define a smaller broker-dealer as a broker-dealer that qualifies as a “small 
entity” under the Regulatory Flexibility Act pursuant to 17 CFR 240.0-10(c) for this 

   
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purpose?
202
  Or should the Commission define a smaller broker-dealer in a different way?  
Please explain.   
3. Application of Proposed Rule 1101(b) to NMS Stock Market Conflicts of 
Interest 
Br
    oker-dealers that engage in conflicted transactions for or with retail customers in NMS 
stocks would be required to comply with the additional policies and procedures requirements 
under proposed Rule 1101(b).  For example, a retail broker-dealer that receives payment for 
order flow from a wholesaler would need to establish, maintain, and enforce policies and 
procedures to address how it will evaluate additional liquidity sources that the broker-dealer 
would not need to evaluate if it did not receive payment for order flow.  Therefore, in connection 
with a determination of whether to route customer orders to the wholesaler that pays for order 
flow, the retail broker-dealer could evaluate other exchanges, ATSs, or order exposure 
opportunities that may not have been determined by the retail broker-dealer to be material 
potential liquidity sources for non-conflicted transactions under proposed Rule 1101(a)(1).   
Retail broker-dealers that receive payment for order flow for retail customer orders must 
also comply with the documentation requirement under proposed Rule 1101(b)(3).  For example, 
to the extent a retail broker-dealer attempts to execute customer orders prior to sending them to a 
wholesaler in return for payment, it could document such efforts by, for example, retaining a 
record of the markets at which it attempted to execute customer orders at prices better than the 
                                                 
202
  See supra note 151 and accompanying text (describing the broker-dealers that qualify as 
small entities under the Regulatory Flexibility Act). 

   
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NBBO (e.g., markets pinged for midpoint liquidity),
203
 or documenting how it otherwise used 
reasonable diligence in assessing whether those markets may be the best market for customer 
orders.  For retail nonmarketable orders routed to markets (e.g., exchanges) that pay rebates for 
those orders, a retail broker-dealer would need to document its basis for determining that routing 
orders to such markets would comply with the best execution standard, as well as the information 
relied on for such determination.  It could do so by, for example, documenting its assessment of 
fill rates and the likelihood of execution for nonmarketable orders at such markets as compared 
to other markets that do not provide such rebates.
 
 
 
Furthermore, in documenting its determination that transactions that are conflicted due to 
payment for order flow from a wholesaler would comply with the best execution standard, a 
retail broker-dealer could document its process for evaluating and routing to wholesalers that pay 
it for order flow, including its assessment of wholesaler performance and any price improvement 
commitments.  Additionally, a retail broker-dealer would be required to document its 
determination that customer transactions for which it receives payment for order flow would 
comply with the best execution standard.
204
  A retail broker-dealer could do this by, for example, 
                                                 
203
  See supra note 196 (describing records and documentations under the CAT Plan).  As 
discussed above in section IV.C.2, proposed Rule 1101(b)(3) would not require a broker-
dealer to document its efforts to comply with the best execution standard with respect to 
its conflicted transactions in any specific way.  However, the broker-dealer would need to 
document in accordance with its written procedures the basis and information relied on 
for its determination that its conflicted transactions would comply with the best execution 
standard. 
204
  Similarly, FINRA has stated that broker-dealers may not negotiate the terms of order 
routing arrangements for customer orders in a manner that reduces the price improvement 
opportunities that, absent payment for order flow, otherwise would be available to those 
customer orders.  See FINRA Regulatory Notice 21-23. 

   
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soliciting price improvement commitments from wholesalers for customer orders in the absence 
of payment for order flow and comparing those commitments to the price improvement 
commitments that the wholesaler would make if it were to pay the retail broker-dealer for order 
flow, and documenting these efforts.  Finally, as described above in section IV.C.2, a retail 
broker-dealer would be required to document any arrangement concerning payment for order 
flow. 
A wholesaler that executes customer orders in a principal capacity or pays a retail broker-
dealer for order flow would also be required to document its compliance with the best execution 
standard for conflicted transactions.
205
  For example, a wholesaler could document the prices 
received from those markets that it checked pursuant to its policies and procedures, such as by 
retaining a record of the markets at which it attempted to execute customer orders at prices better 
than the NBBO (e.g., markets pinged for midpoint liquidity)
206
 and by retaining records of 
market data feeds that the wholesaler uses when handling retail customer orders.  A wholesaler 
could also document how it otherwise used reasonable diligence in its best execution 
determinations.  For retail nonmarketable orders routed to markets that pay rebates for those 
orders, a wholesaler could document its basis for determining that routing to such markets would 
comply with the best execution standard and the information relied on for such determination by, 
for example, documenting its assessment of fill rates and the likelihood of execution for 
nonmarketable orders at such markets as compared to other markets that do not provide such 
rebates.   
                                                 
205
  See supra note 200. 
206
  See supra note 203. 

   
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The wholesaler would also be required to document any arrangement concerning 
payment for order flow as described above in section IV.C.2.  Furthermore, the wholesaler would 
be required to document its determination that its transactions with customer orders that were 
sent to it in return for payment would comply with the best execution standard.  For example, a 
wholesaler could document that it provides the same price improvement to the customers of 
retail broker-dealers to which it does not pay for order flow that it provides to the customers of 
broker-dealers to which it pays for order flow.   
4. Application of Proposed Rule 1101(b) to the Options Market 
As discussed above, payment for order flow, principal trading, and affiliated routing 
conflicts of interest in the execution of retail customer orders also exist in the options market.
207
   
Under proposed Rule 1101(b), a wholesaler that pays for order flow or transacts with retail 
customers in a principal capacity would need to establish, maintain, and enforce policies and 
procedures for conflicted transactions that address how it will obtain and assess information 
beyond that required by proposed Rule 1101(a)(1)(i) and evaluate a broader range of liquidity 
sources, including a broader range of order exposure opportunities, which could include an 
evaluation of whether any price improvement auctions may provide an opportunity to execute a 
customer order at a price that is better than the displayed best bid and offer.
 208
    
                                                 
207
  See supra section III.A.2 (discussing the payment for order flow, affiliated routing and 
principal trading conflicts of interest in the options market). 
208
  As discussed above, the wholesaler’s policies and procedures that would be required by 
proposed Rule 1101(a)(1) could address how the wholesaler assesses price improvement 
auctions, including  their relative competitiveness, when identifying material potential 
liquidity sources.  A similar assessment would be required under proposed Rule 
1101(b)(2) for a broader range of order exposure opportunities that may result in the most 

   
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Under proposed Rule 1101(b)(3), a wholesaler that engages in conflicted transactions 
would also be required to document, in accordance with written procedures, its compliance with 
the best execution standard for such conflicted transactions, including all efforts to enforce its 
policies and procedures for conflicted transactions and the basis and information relied on for its 
determinations that such conflicted transactions would comply with the best execution standard.  
For example, as with conflicted transactions in NMS stocks, a wholesaler could document the 
prices received from those markets that it checked pursuant to its policies and procedures, such 
as by retaining records of market data feeds that the wholesaler uses when handling retail 
customer orders.  The wholesaler’s documentation could also include a description of its decision 
making process for routing retail customer orders to execute against the wholesaler’s or its 
affiliates’ displayed prices on exchanges and when it chooses to execute through a price 
improvement auction that may provide an opportunity for price improvement.  For retail 
nonmarketable orders routed to markets that pay rebates for those orders, a wholesaler would 
need to document its basis for determining that routing to such markets would comply with the 
best execution standard and the information relied on for such determination.  It could do so by, 
for example, documenting its assessment of fill rates and the likelihood of execution for 
nonmarketable orders at such markets as compared to other markets that do not provide such 
rebates.   
                                                 
favorable price for customer orders.  A wholesaler’s best execution policies and 
procedures that favor one price improvement auction when other, more competitive, price 
improvement auctions exist may be relevant to an assessment of whether such policies 
and procedures are reasonably designed to identify material potential liquidity sources or 
to evaluate a broader range of order exposure opportunities that may result in the most 
favorable price for the customer order, as required by proposed Rules 1101(a) and 
1101(b).   

   
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The wholesaler would also be required to document any arrangement concerning 
payment for order flow as described above in section IV.C.2.  Furthermore, the wholesaler would 
be required to document its determination that its transactions with the customer orders that were 
sent to it in return for payment would comply with the best execution standard.  For example, a 
wholesaler could document that it provides the same execution quality to the customers of retail 
broker-dealers to which it does not pay for order flow that it provides to the customers of broker-
dealers to which it pays for order flow.   
A retail broker-dealer in the listed options market would be engaged in a conflicted 
transaction under proposed Rule 1101(b) if it receives payment for order flow and its policies 
and procedures would have to address how it evaluates a broader range of markets, including 
opportunities to expose customer orders for the most favorable price.  A retail broker-dealer’s 
policies and procedures could evaluate wholesaler practices concerning the use of price 
improvement auctions and whether such wholesalers are appropriately considering a broader 
range of opportunities to expose customer orders and identifying exposure opportunities that are 
designed to enhance competition for customer orders.   
Retail broker-dealers that accept payment for order flow for retail customer orders would 
also be required to comply with the documentation requirement under proposed Rule 1101(b)(3).  
To the extent a retail broker-dealer routes retail customer nonmarketable orders to markets that 
pay rebates for those orders, a retail broker-dealer would need to document its basis for 
determining that routing to such markets would comply with the best execution standard and the 
information relied on for such determination.  It could do so by, for example, documenting its 
assessment of fill rates and the likelihood of execution for nonmarketable orders at such markets 
as compared to other markets that do not provide such rebates.   

   
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Furthermore, in documenting its determination that transactions conflicted due to 
payment for order flow from a wholesaler would comply with the best execution standard, a 
retail broker-dealer could document its process for evaluating and routing to wholesalers that pay 
it for order flow, including its assessment of wholesaler performance and any price improvement 
commitments.  Additionally, under proposed Rule 1101(b)(3), a retail broker-dealer would need 
to document its determination that customer transactions for which it receives payment for order 
flow would comply with the best execution standard and the information relied on for such 
determination.  A retail broker-dealer could do this by, for example, soliciting price improvement 
commitments from wholesalers for customer orders in the absence of payment for order flow and 
comparing those commitments to the price improvement commitments that the wholesaler would 
make if it were to pay the retail broker-dealer for order flow.  Finally, a retail broker-dealer 
would be required to document any arrangement concerning payment for order flow, as 
described above in section IV.C.2. 
5. Application of Proposed Rule 1101(b) to the Corporate and Municipal 
Bond Markets and Government Securities Markets 
Many broker-dealers in the corporate and municipal bond markets and government 
securities markets trade with retail customers in a principal capacity and therefore engage in 
conflicted transactions.  Such broker-dealers would also be subject to proposed Rule 1101(b) 
with respect to their conflicted transactions.  A broker-dealer’s policies and procedures for 
conflicted transactions would be required to address how it will evaluate a broader range of 
markets, including a broader range of order exposure opportunities.  This could include 
evaluation of a broader range of ATSs, broker’s brokers, RFQ systems, and other broker-dealers 

   
129 
 
that trade corporate and municipal bonds and government securities, than the markets that the 
broker-dealer identifies as material potential liquidity sources under proposed Rule 1101(a)(1).   
Under proposed Rule 1101(b)(3), a retail broker-dealer that trades in a principal capacity 
with retail customers would be required to document, in accordance with written procedures, its 
compliance with the best execution standard for conflicted transactions, including all efforts 
taken to enforce its policies and procedures for conflicted transactions and the basis and 
information relied on for its determinations that such conflicted transactions would comply with 
the best execution standard.  In doing so, a retail broker-dealer could retain records of any data 
feeds or other pricing information that the retail broker-dealer uses when handling retail 
customer orders, including ATS data feeds, responses to RFQs, transaction prices, and evaluated 
pricing information.
209
  In documenting its efforts to comply with the best execution standard, a 
retail broker-dealer could also document its order handling practices that can impact whether 
customer orders are executed in compliance with the best execution standard.  This could 
include, for example, its practices concerning the use of RFQ systems, including its filtering, 
response time, and last look practices and how those practices promote the execution of retail 
                                                 
209
  As discussed above in section IV.C.2, proposed Rule 1101(b)(3) would not require a 
broker-dealer to document its efforts to comply with the best execution standard with 
respect to its conflicted transactions in any specific way.  However, the broker-dealer 
would need to document the basis and information relied on for its determination that its 
conflicted transactions would comply with the best execution standard, and the 
Commission preliminarily believes that the manner of documentation may vary 
depending on asset class.  For example, a broker-dealer’s best execution policies and 
procedures may provide for more individualized handling of customer orders in corporate 
and municipal bonds and government securities than in equities securities.  Accordingly, 
the broker-dealer’s documentation for conflicted retail transactions in corporate and 
municipal bonds and government securities would need to reflect the more individualized 
best execution process.  

   
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customer orders in a manner that complies with the best execution standard.  Finally, broker-
dealers could document their markup policies for principal trades, including documenting how 
the broker-dealer assesses markups for trades with customers and any variation in its markups 
depending on the nature of the transaction (e.g., riskless principal trades versus trades with the 
broker-dealer’s inventory).   
Request for Comment 
The Commission requests comment on the application of proposed Rule 1101(b) to the 
NMS stock, options, corporate and municipal bond markets, and government securities markets, 
and in particular:  
97. Has the Commission appropriately described the various practices in sections IV.C.3-5 
that should be addressed in a broker-dealer’s policies and procedures for conflicted 
transactions?  Please explain. 
98. Are there other practices not described in sections IV.C.3-5 that should be addressed in a 
broker-dealer’s policies and procedures for conflicted transactions, or any that are 
described that should be not be addressed?  Please explain. 
D. Proposed Rule 1101(c) – Regular Review of Execution Quality 
Proposed Rule 1101(c) would require a broker-dealer, no less frequently than quarterly, 
to review the execution quality of its transactions for or with its customers or customers of 
another broker-dealer, and how such execution quality compares with the execution quality the 
broker-dealer might have obtained from other markets, and to revise its best execution policies 
and procedures, including its order handling and routing practices, accordingly.  Proposed Rule 
1101(c) would also require a broker-dealer to document the results of this review. 

   
131 
 
While the Commission understands that broker-dealers generally currently conduct 
certain execution quality reviews,
210
 including pursuant to FINRA’s best execution rule, the 
scope of proposed Rule 1101(c) differs from FINRA’s best execution rule in that it would apply 
to a broader range of broker-dealers.
211
  Specifically, while FINRA’s execution quality review 
requirement applies only to a broker-dealer that routes customer orders to other broker-dealers 
for execution on an automated, nondiscretionary basis or that internalizes customer order flow,
212
 
proposed Rule 1101(c) would apply to all broker-dealers that are not introducing brokers 
(discussed in section IV.E below) that transact for or with customers.  The Commission 
preliminarily believes that it would be beneficial to customers for a broader range of broker-
dealers to regularly review the execution quality that their customer orders receive.  Aside from 
                                                 
210
  FINRA describes the findings from its best execution exams in an annual report.  See, 
e.g., 2022 Report on FINRA’s Examination and Risk Monitoring Program, supra note 
185, at 44-45 (describing FINRA exam findings, including:  not comparing the quality of 
the execution obtained via firms’ existing order-routing and execution arrangements 
against the quality of execution they could have obtained from competing markets; not 
conducting adequate reviews on a type-of-order basis, including, for example, on market, 
marketable limit, or non-marketable limit orders; not considering certain factors set forth 
in FINRA Rule 5310 when conducting a “regular and rigorous review,” including, among 
other things, speed of execution, price improvement and the likelihood of execution of 
limit orders; and using routing logic that was not necessarily based on quality of 
execution). 
211
  The MSRB rule does not require broker-dealers to conduct quarterly (or more frequent) 
comparative analysis of execution quality.  Rather, MSRB Rule G-18 requires an annual 
review of the broker-dealer’s policies and procedures that takes “into account the quality 
of the executions the [broker-dealer] is obtaining under its current policies and 
procedures, changes in market structure, new entrants, the availability of additional pre-
trade and post-trade data, and the availability of new technologies” and requires the 
broker-dealer “to make promptly any necessary modifications to such policies and 
procedures as may be appropriate in light of such reviews.”  See MSRB Rule G-18.08(a).   
212
  See FINRA Rule 5310.09. 

   
132 
 
this distinction in scope, proposed Rule 1101(c) is designed to be consistent with FINRA Rule 
5310.09.   
The requirements of proposed Rule 1101(c) would complement a broker-dealer’s policies 
and procedures concerning how it will comply with the proposed best execution standard and the 
determination of the best market for customer orders, as well as the additional policies and 
procedures for conflicted transactions.  As proposed, a broker-dealer must compare the execution 
quality it obtains via its current order routing and execution arrangements (including through the 
internalization of its order flow or executing its order flow through another broker-dealer in a 
wholesaler or other arrangement) to the execution quality it might have obtained from other 
markets.  A broker-dealer would not meet the requirements of proposed Rule 1101(c) if it solely 
conducted its review based on the markets to which it currently routes customer orders without 
considering other
 markets or trading venues.
213
  Rather, a broker-dealer would be required to 
consider the potential execution quality at trading venues that it does not currently use to execute 
customer orders, including new markets to the extent they become available, and consider 
whether it needs to access such markets in order to attain best execution for its customer 
orders.
214
 
                                                 
213
  This is consistent with FINRA’s rule concerning the review of execution quality.  See 
FINRA Rule 5310.09(b) (“To assure that order flow is directed to markets providing the 
most beneficial terms for their customers’ orders, the member must compare, among 
other things, the quality of the executions the member is obtaining via current order 
routing and execution arrangements (including the internalization of order flow) to the 
quality of the executions that the member could obtain from competing markets.”).   
214
  FINRA has pursued enforcement against broker-dealers relating to compliance with 
FINRA Rule 5310.09 concerning the regular and rigorous review of execution quality.  
See, e.g., TradeStation Securities, Inc., Letter of Acceptance, Waiver and Consent 

   
133 
 
In reviewing and comparing the execution quality of its customer transactions to the 
execution quality that might have been obtained from other markets, a broker-dealer could 
consider various factors, including price improvement opportunities, differences in price 
disimprovement,
215
 likelihood of execution of limit orders, speed of execution, size of execution, 
transaction costs, customer needs and expectations, and the existence of internalization or 
payment for order flow arrangements.
216
  Furthermore, a broker-dealer that routinely routes 
                                                 
(FINRA Case No. 2014041812501) (Mar. 2021) (describing violations of FINRA’s best 
execution rule where the firm “did not exercise reasonable diligence to ascertain whether 
the venues where it routed certain equity and option customer orders provided the best 
market for the subject securities as compared to the execution quality that was being 
provided at competing markets”); Robinhood FINRA, supra note 69
 (describing 
violations of FINRA’s best execution rule where the firm routed its customers’ orders to 
four broker-dealers that all paid for order flow and “did not exercise reasonable diligence 
to ascertain whether these four broker-dealers provided the best market for the subject 
securities to ensure its customers received the best execution quality from these as 
compared to other execution venues”); E*Trade Securities LLC, Letter of Acceptance, 
Waiver, and Consent (FINRA Case No. 20130368815-01) (June 2016) (describing 
violations of FINRA’s best execution rule where the firm lacked sufficient information to 
reasonably assess the execution quality it provided to its customer because, among other 
things, the firm “did not take into account the internalization model employed by the 
firm” and “was overly reliant on comparisons of the firm’s overall execution quality with 
industry and custom averages, rather than focusing on comparisons to the actual 
execution quality provided by the market centers to which the firm routed orders”). 
215
  Price disimprovement occurs when a customer receives a worse price than the best quotes 
prevailing at the time the order is received by the market.  See, e.g., FINRA Rule 
5310.09(b)(2).   
216
  These considerations are consistent with FINRA’s rule regarding the review of execution 
quality.  See FINRA Rule 5310.09(b) (providing that, in reviewing and comparing the 
execution quality of its current order routing and execution arrangements to the execution 
quality of other markets, a member should consider:  (1) price improvement 
opportunities; (2) differences in price disimprovement; (3) the likelihood of execution of 
limit orders; (4) the speed of execution; (5) the size of execution; (6) transaction costs; 
(7) customer needs and expectations; and (8) the existence of internalization or payment 
for order flow arrangements).  

   
134 
 
customer orders to multiple trading centers, whether internal or external, could evaluate the 
latency impacts, fill rates, information leakage, and resulting execution quality harms.
217
  And 
when conducting these reviews, a broker-dealer could consider the procedures it uses or would 
use for executing the same or similar transactions for its own accounts.
218
  The Commission 
believes that, when compared to the execution quality that the broker-dealer might have obtained 
from other markets, the review could help the broker-dealer evaluate the effectiveness of its 
current best execution policies and procedures, including its order handling practices, and enable 
the broker-dealer to make informed judgments regarding whether these policies and procedures 
and practices need to be modified.   
As described in this section IV.D above, proposed Rule 1101(c) would apply to a broader 
range of broker-dealers than FINRA Rule 5310.09.  However, the substantive review 
requirements of proposed Rule 1101(c) are similar to FINRA Rule 5310.09, which requires a 
broker-dealer to compare, among other things, the quality of the executions it is obtaining via 
current order routing and execution arrangements to the quality of the executions that the broker-
dealer could obtain from competing markets.   
While the review under FINRA Rule 5310.09 must be conducted on a security-by-
security, type-of-order basis (e.g., limit order, market order, and market on open order), proposed 
Rule 1101(c) does not provide this level of specificity concerning the manner of execution 
                                                 
217
  This is also consistent with existing FINRA guidance concerning these types of reviews.  
See FINRA Regulatory Notice 15-46, at 4-5. 
218
  This is consistent with existing FINRA guidance.  See FINRA Regulatory Notice 15-46, 
at 4-5.  FINRA states that “firms should consider the risk of information leakage by 
routing orders to a particular venue in light of the fill rates achieved at that venue and 
carefully assess whether the risks outweigh the potential for an execution.”  Id. at 5. 

   
135 
 
quality reviews.  The Commission believes that execution quality reviews would differ based on 
the characteristics of a market or of a broker-dealer’s business, and the methods for conducting 
execution quality reviews would evolve over time based on the availability of data and 
advancements in technology.  A broker-dealer generally should conduct such reviews in a 
manner that will provide it with robust information concerning its customer orders’ execution 
quality so that it can assess whether it needs to revise its best execution policies and procedures.  
In doing so, a broker-dealer should exercise its expertise and judgment in this regard and the 
manner of its execution quality reviews may be tailored to reflect various factors (e.g., whether 
the broker-dealer engages in conflicted transactions, the sizes of customer orders).
219
   
                                                 
219
  Under FINRA Rule 5310.09, a broker-dealer must have procedures in place to ensure it 
periodically conducts regular and rigorous reviews of the quality of the executions of its 
customers’ orders if it does not conduct an order-by-order review.  FINRA has stated in a 
regulatory notice that broker-dealers must conduct order-by-order best execution reviews 
rather than relying on regular and rigorous reviews in certain circumstances.  In 
particular, FINRA has stated that a “regular and rigorous review alone (as opposed to an 
order-by-order review) may not satisfy best execution requirements, given that the 
execution of larger-size orders ‘often requires more judgment in terms of market timing 
and capital commitment.’”  FINRA has also stated that “[o]rders that a firm determines to 
execute internally are subject to an order-by-order best execution analysis.”  Finally, 
FINRA has recognized that advances in order routing technology make order-by-order 
reviews of execution quality for a range of orders in all equity and standardized options 
increasingly possible.  See FINRA Regulatory Notice 15-46, at 3-4.  As stated above, 
proposed Regulation Best Execution would not affect a broker-dealer’s obligation to 
comply with the FINRA or MSRB best execution rule.  Accordingly, a broker-dealer 
would be required to comply with proposed Regulation Best Execution, in addition to the 
FINRA and MSRB best execution rules, as applicable.  See supra note 109 and 
accompanying text.  To the extent FINRA or the MSRB impose more specific 
requirements than proposed Regulation Best Execution, broker-dealers must continue to 
comply with those requirements, as applicable. 

   
136 
 
FINRA Rule 5310.09 also requires a broker-dealer to determine whether any material 
differences in execution quality exist among the markets trading the security and, if so, modify 
its routing arrangements or justify why it is not modifying its routing arrangements.  While 
proposed Rule 1101(c) does not include “materiality” language or require a broker-dealer to 
justify why it is not modifying its routing arrangements, these concepts are consistent with the 
language of proposed Rule 1101(c).  Proposed Rule 1101(c) states that a broker-dealer would be 
obligated to “revise its best execution policies and procedures, including its order handling 
practices, accordingly” after it has conducted its comparative execution quality analysis.  The 
Commission preliminarily believes that revisions to the broker-dealer’s policies and procedures, 
including its order handling practices, would be appropriate if there were material differences in 
execution quality that were not otherwise justifiable.  Moreover, proposed amendments to Rule 
17a-4 would require a broker-dealer to retain documentation of the results of its execution 
quality review, which could include any justifications for not modifying its policies and 
procedures if a comparative analysis revealed material differences in execution quality.
220
   
MSRB rules do not require broker-dealers to conduct comparative analysis of execution 
quality.
221
  Rather, MSRB Rule G-18.08 states that, when conducting its periodic reviews, a 
broker-dealer must assess whether its policies and procedures are reasonably designed to achieve 
best execution, taking into account the quality of the executions the broker-dealer is obtaining 
under its current policies and procedures, changes in market structure, new entrants, the 
                                                 
220
  For a discussion of recordkeeping requirements of the proposed rules, see infra section 
IV.G.  
221
  See supra note 211. 

   
137 
 
availability of additional pre-trade and post-trade data, and the availability of new technologies, 
and make promptly any necessary modifications to such policies and procedures as may be 
appropriate in light of such reviews.  While MSRB Rule G-18.08 reflects an execution quality 
review by broker-dealers, proposed Rule 1101(c) would impose a specific requirement for 
review of execution quality on at least a quarterly basis, including a comparative analysis 
requirement, for all broker-dealers regardless of whether they are currently subject to MSRB or 
FINRA rules.   
Proposed Rule 1101(c) would require a broker-dealer to review the execution quality of 
customer orders no less frequently than quarterly.
222
  In complying with the proposed rule, a 
broker-dealer should determine the appropriate frequency of review by considering, for example: 
the nature of its business; the asset class transacted; new pools of liquidity, trading protocols, or 
sources of data that have emerged; the availability of technology needed to conduct execution 
quality reviews; and the level of transparency in a particular market.  In doing so, the 
Commission believes that, in many cases, broker-dealers may determine that a more frequent 
review of execution quality than quarterly is appropriate.  For example, market participants 
subject to Rule 605 of Regulation NMS are required to disclose on a monthly basis certain 
                                                 
222
  FINRA also requires a broker-dealer to conduct regular and rigorous reviews of its 
customer execution quality at least quarterly, but has specified that a broker-dealer should 
consider, based on its business, whether more frequent reviews are needed.  See FINRA 
Rule 5310.09; FINRA Regulatory Notice 15-46, at 4.  MSRB Rule G-18 requires a 
broker-dealer to, at a minimum, conduct annual reviews of its policies and procedures for 
determining the best available market for the executions of its customers’ transactions, 
but the broker-dealer should consider a frequency reasonably related to the nature of its 
municipal securities business, including but not limited to its level of sales and trading 
activity.  See MSRB Rule G-18.08(a). 

   
138 
 
execution quality statistics in NMS stocks.  These Rule 605 reports provide a broker-dealer with 
information that it could use to evaluate the execution quality of customer transactions in NMS 
stocks more frequently than quarterly.
223
  In contrast, a broker-dealer may determine that it is 
appropriate to review the execution quality of customer transactions in non-NMS stocks less 
frequently due to the characteristics of those other markets.
224
   
Finally, proposed Rule 1101(c) would require a broker-dealer to document the results of 
its execution quality reviews.
225
  By documenting its execution quality reviews, a broker-dealer 
would maintain and preserve a robust record of its order execution quality over time that could 
assist the broker-dealer to better evaluate the effectiveness of its best execution policies and 
procedures, including its order handling practices, on an ongoing basis.  Similarly, such 
documentation would allow regulators to more effectively oversee the broker-dealer’s efforts to 
meet the best execution standard of proposed Rule 1100 and the requirements of proposed Rules 
1101 and 1102. 
Request for Comment  
                                                 
223
  FINRA has stated that some broker-dealers conduct monthly reviews of execution 
quality, recognizing that market participants are required to publish Rule 605 execution 
quality statistics on a monthly basis.  See FINRA Regulatory Notice 15-46, at 4, 15 n.21.   
224
  FINRA has also stated that orders in the fixed income market may be handled and 
executed differently than in equity and options markets.  Because of these differences, 
FINRA stated that broker-dealers may determine to conduct execution quality reviews of 
such securities under FINRA’s rule less frequently than for equities and options.  See 
FINRA Regulatory Notice 15-46, at 8. 
225
  See proposed amendments to Rule 17a-4; infra section IV.G (describing the 
recordkeeping obligations applicable to any documentation made pursuant to proposed 
Regulation Best Execution). 

   
139 
 
The Commission requests comment on all aspects of proposed Rule 1101(c), and in 
particular: 
99. Should broker-dealers be required to conduct reviews of execution quality of their 
transactions for or with customers at least quarterly, including how such execution 
quality compares with the execution quality that might have been obtained from other 
markets, as required by proposed Rule 1101(c)?  Why or why not?  Should broker-
dealers document the results of their execution quality reviews, as required by proposed 
Rule 1101(c)?  Why or why not? 
100. Should a review of execution quality include factors similar to those identified in 
FINRA rules and guidance, such as price improvement opportunities, differences in price 
disimprovement, likelihood of execution of customer limit orders, speed of execution, 
size of execution, transaction costs, customer needs and expectations, and the existence 
of internalization or payment for order flow arrangements?  Why or why not?  Are there 
other factors that should also be included in a review of execution quality?  If so, please 
explain.  Should these factors be specified in proposed Rule 1101(c)?  Please explain. 
101. Would the proposed documentation requirement improve the utility of the reviews 
of execution quality by a broker-dealer?  Please explain.  Should the proposed rule 
include other specific documentation requirements to supplement the documentation of 
the execution quality reviews?  If so, please explain.   
102. Should proposed Rule 1101(c) apply to broker-dealers that currently rely on their 
executing brokers to conduct such reviews, if they otherwise would not qualify as 
introducing brokers as defined in proposed Rule 1101(d) and discussed in section IV.E 
below?  Please explain.  Would broker-dealers that currently rely on the execution quality 

   
140 
 
reviews of their executing brokers (and do not qualify as introducing brokers as defined 
in proposed Rule 1101(d) and discussed in section IV.E below) have the resources and 
expertise to conduct the reviews required by proposed Rule 1101(c)?  Would such 
broker-dealers have the information necessary to compare the executions received for 
their customers and the customers of other broker-dealers with the execution quality that 
could have been obtained on other markets to which they did not route customer orders?  
Please explain. 
103. Should the Commission require a different frequency for the reviews of execution 
quality?  If so, how frequently should such reviews be required and should the frequency 
be different for different asset classes?  Should the frequency be monthly, semi-annually, 
annually, or another time period?  Please explain. 
104. Should the frequency of such reviews be dependent on any unique characteristics 
of the broker-dealer, its customers, its order flow, or the securities traded?  For example, 
should the frequency standard be at least monthly for reviews of execution quality for 
NMS stocks because broker-dealers and market centers are required to disclose execution 
quality on a monthly basis under Rules 605 of Regulation NMS?  Or does the availability 
of Rule 605 reports suggest that reviews of execution quality in NMS stocks should be 
less frequent?  Please explain.  
105. Should broker-dealers that handle and execute customer municipal bond orders be 
required to conduct reviews of execution quality at least quarterly as required by 
proposed Rule 1101(c)?  Please explain.  Is there a different frequency for these reviews 
that would be more appropriate for the municipal bond market?  If so, please explain.  Is 
there a frequency standard that would be more appropriate for other fixed income 

   
141 
 
markets, such as the corporate bond and government securities markets?  Is it appropriate 
to require that a broker-dealer’s best execution policies and procedures, including its 
order handling practices, be revised based on the outcome of the proposed execution 
quality reviews?  Please explain.  Should there be more specificity concerning when a 
broker-dealer would be required to revise its best execution policies and procedures, 
including its order handling practices?  For example, should the rule specify that best 
execution policies and procedures, including order handling practices, must be revised if 
the broker-dealer identifies material differences in execution quality among the various 
markets and trading venues that trade the applicable security?  Please explain. 
106. Should the proposed requirement that a broker-dealer revise its best execution 
policies and procedures, including its order handling practices, based on its review of 
execution quality apply differently depending on the type of asset class or any unique 
characteristics of the broker-dealer, its customers, its order flow, or the securities traded?  
Please explain.   
107. Do commenters agree with the Commission’s understanding that broker-dealers 
currently conduct certain execution quality reviews and those reviews vary in rigor?  
Please describe the frequency and rigor of any such reviews and whether broker-dealers 
document the results of such reviews. 
108. Do commenters believe that the Commission should provide staggered 
compliance dates for proposed Rule 1101(c) for broker-dealers of different sizes, if the 
Commission adopts proposed Regulation Best Execution?  For example, should the 
Commission provide longer compliance dates for smaller broker-dealers?  If so, should 
the Commission define a smaller broker-dealer as a broker-dealer that qualifies as a 

   
142 
 
“small entity” under the Regulatory Flexibility Act pursuant to 17 CFR 240.0-10(c) for 
this purpose?
226
  Or should the Commission define a smaller broker-dealer in a different 
way?  Please explain. 
E. Proposed Rule 1101(d) – Introducing Brokers 
Proposed Rule 1101(d) would permit a broker-dealer that qualifies as an introducing 
broker to rely on its executing broker to comply with proposed Rules 1101(a), (b), and (c), 
subject to certain review requirements.   
Broker-dealers have different business models, including whether they accept, and the 
extent to which they handle and execute, customer orders.  Certain broker-dealers commit their 
own capital by executing customer transactions on a principal basis, while some broker-dealers 
employ an agency model that requires them to find another buyer or seller in order to execute a 
customer order.  The sizes and resources of broker-dealers also vary, with some broker-dealers 
carrying the accounts of millions of customers, while others carry few customer accounts and 
employ significantly fewer in-house personnel.     
Many broker-dealers do not provide the service of holding customer funds and securities 
and instead enter into agreements with other broker-dealers to provide such services and handle 
and execute their customers’ orders.  Such agreements generally allocate various functions 
among the broker-dealers, including the opening and approval of accounts, acceptance 
of orders, transmission of orders for execution, execution of orders, 
                                                 
226
  See supra note 151 and accompanying text (describing the broker-dealers that qualify as 
small entities under the Regulatory Flexibility Act). 

   
143 
 
extension of credit, receipt and delivery of funds and securities, preparation 
and transmission of confirmations, maintenance of books and records, and 
monitoring of accounts.
227
  Typically, a broker-dealer that does not carry 
customer accounts enters into an agreement with another broker-dealer that 
would require the initial broker-dealer to transmit all of its customer orders 
to the other broker-dealer for order handling and execution.  In this 
circumstance, the second broker-dealer, which accepts the responsibility to 
handle and execute the customer orders, would be subject to the full 
obligations of proposed Regulation Best Execution.  On the other hand, the 
first broker-dealer is not making any decisions or exercising discretion 
regarding the manner in which its customer orders will be handled and 
executed, beyond its determination to engage the services of the second 
broker-dealer, and it would not be subject to the full obligations of proposed 
Regulation Best Execution.   
FINRA Rule 5310.09(c) provides that a broker-dealer that routes its order flow to another 
broker-dealer that has agreed to handle that order flow as agent for the customer can rely on that 
broker-dealer’s regular and rigorous review, as long as the statistical results and rationale of the 
review are fully disclosed to the first broker-dealer and the first broker-dealer periodically 
reviews how the review is conducted, as well as the results of the review.
228
  MSRB Rule G-
                                                 
227
  See FINRA Rule 4311 (establishing standards for carrying agreements between executing 
firms and introducing firms). 
228
  See FINRA Rule 5310.09(c). 

   
144 
 
18.08(b) provides that a broker-dealer that routes its customers’ transactions to another broker-
dealer that has agreed to handle those transactions as agent or riskless principal for the customer 
may rely on that other broker-dealer’s periodic reviews as long as the results and rationale of the 
review are fully disclosed to the first broker-dealer and the first broker-dealer periodically 
reviews how the other broker-dealer’s review is conducted and the results of the review.
229
  As 
discussed in section IV.E.1 below, the exemption under proposed Rule 1101(d) would be 
provided to a narrower group of broker-dealers than contemplated by FINRA and MSRB rules, 
because it would apply only to broker-dealers that meet the proposed definition of “introducing 
broker.”  Accordingly, certain broker-dealers that qualify under the current FINRA and MSRB 
exemptions may not similarly qualify for the exemption under proposed Rule 1101(d), absent a 
change in business practices that would allow them to meet the additional criteria described 
below in section IV.E.1.  Moreover, as discussed in section IV.E.2 below, the exemption under 
proposed Rule 1101(d) would require the introducing broker’s policies and procedures to provide 
for comparisons between the execution quality obtained from its executing broker and the 
execution quality it might have obtained from other executing brokers, which would be a more 
specific policies and procedures obligation for introducing brokers than required under the 
                                                 
229
  See MSRB Rule G-18.08(b).  The MSRB has further interpreted the obligations of 
introducing brokers under this provision.  See MSRB Implementation Guidance on 
MSRB Rule G-18, on Best Execution, at Section II.1 (last updated Feb. 7, 2019) (“Under 
this provision, introducing dealers may rely on the best-execution policies and procedures 
of their clearing firms or other executing dealers, all of which are subject to their own 
best-execution obligations under the rule.  An introducing dealer, however, is not relieved 
of its obligations to establish written policies and procedures of its own.  For example, 
such an introducing dealer’s policies and procedures could provide for the reliance on 
another dealer’s policies and procedures and periodic reviews by the introducing dealer 
of the other dealer’s reviews of its policies and procedures.”). 

   
145 
 
current FINRA and MSRB rules.  Finally, a broker-dealer that qualifies as an introducing broker 
under proposed Rule 1101(d) would be exempt from the requirement to separately comply with 
proposed Rules 1101(a), (b), and (c), while the FINRA and MSRB rules only provide certain 
broker-dealers with exemptions from conducting either the regular and rigorous execution 
quality review under the FINRA rule or the periodic review under the MSRB rule.  
1. Definition of Introducing Broker and Executing Broker  
For purpose of proposed Rule 1101(d), the Commission would define an “introducing 
broker” as a broker-dealer that:  (1) does not carry customer accounts and does not hold customer 
funds or securities; (2) has entered into an arrangement with an unaffiliated broker-dealer that 
has agreed to handle and execute on an agency basis all of the introducing broker’s customer 
orders (“executing broker”); and (3) has not accepted any monetary payment, service, property, 
or other benefit that results in remuneration, compensation, or consideration from the executing 
broker in return for the routing of the introducing broker’s customer orders to the executing 
broker.
230
   Broadly, these proposed conditions are designed to identify those entities that, due to 
                                                 
230
  This proposed definition of “introducing broker” would be used only for purposes of 
proposed Rule 1101(d), and would not affect the use of this term under existing 
Exchange Act rules.  See, e.g., 17 CFR 240.15c3-3 (defining introducing broker as a 
broker-dealer that “clears all transactions with and for customers on a fully disclosed 
basis with a clearing broker or dealer, and who promptly transmits all customer funds and 
securities to the clearing broker or dealer which carries all of the accounts of such 
customers and maintains and preserves such books and records pertaining thereto . . . as 
are customarily made and kept by a clearing broker or dealer”).  While the term 
“introducing broker” is defined differently for purposes of other Commission rules, the 
Commission preliminarily believes the definition in proposed Rule 1101(d) is 
appropriately tailored for application in the best execution context.  As discussed in this 
section, the proposed definition is designed to identify introducing brokers that rely on 
their executing brokers and to ensure that they do not have order handling conflicts of 

   
146 
 
their business models, expertise, and resources, need to be able to rely on their executing 
brokers, and to ensure that these entities do not have order handling conflicts of interest such that 
their reliance on their executing brokers would be appropriate.   
The first proposed condition of this definition (in proposed paragraph (d)(1)) would 
require that an introducing broker not carry customer accounts or hold customer funds or 
securities.  This proposed condition is designed to identify those broker-dealers that do not 
handle or execute customer orders and therefore need to enter into arrangements with other 
broker-dealers to provide those services.  The Commission preliminarily believes that this 
proposed condition would identify broker-dealers that do not exercise any discretion with respect 
to how their customer orders are handled and executed, beyond the selection of the executing 
broker.  Because these introducing brokers do not handle or execute customer orders in a manner 
that would warrant the application of the proposed best execution rules, the Commission 
proposes to permit these broker-dealers to rely on their executing brokers for purposes of 
complying with proposed Rules 1101(a), (b), and (c).  In addition, these introducing brokers may 
not be in a position to implement certain of the proposed best execution rules because they have 
chosen to outsource order handling and execution functions to another broker-dealer.   
The second proposed condition in the definition (in proposed paragraph (d)(2)) would 
require an introducing broker to enter into an arrangement with an unaffiliated broker-dealer that 
has agreed to handle and execute on an agency basis all of the introducing broker’s customer 
orders.  This proposed condition contains several elements.  First, the proposed requirement that 
                                                 
interest in their reliance on their executing brokers.  See also section IV.E.1 (describing 
FINRA Rule 5310.09(c), MSRB Rule G-18.08(b), and the definition of introducing 
broker in proposed Rule 1101(d)). 

   
147 
 
an arrangement be in place for the handling and execution of all customer orders by another 
broker-dealer would help ensure that the introducing broker does not exercise discretion 
concerning the routing and execution of customer orders in a manner that would otherwise 
necessitate the application of all of the provisions of proposed Regulation Best Execution.
231
  
Second, the introducing broker would be required to have an order handling and execution 
arrangement with an unaffiliated broker-dealer.  Because the introducing broker would be 
permitted to rely on the executing broker rather than having policies and procedures that address 
independently many of the operative provisions of proposed Regulation Best Execution 
(including the additional obligations for conflicts of interest with retail customers), the 
introducing broker should not be permitted to be subject to a conflict of interest by selecting an 
affiliated executing broker.  Such conflict of interest could impede the introducing broker’s 
efforts to achieve best execution by providing the introducing broker an incentive to act in 
manner that benefits its own or its affiliate’s interests.  Third, the executing broker that has been 
selected by the introducing broker would be required to agree to handle all of the introducing 
broker’s customer orders on an agency basis.  If an executing broker could trade with the 
introducing broker’s customers in a principal capacity, the introducing broker would effectively 
be making a determination concerning how its customer order should be executed, and the 
introducing broker should be subject to the full requirements of proposed Regulation Best 
Execution.  
                                                 
231
  The broker-dealer that has agreed to handle all of the introducing broker’s customer 
orders on an agency basis would be subject to proposed Regulation Best Execution, 
including proposed Rules 1101(a)-(c). 

   
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There are two principal trading scenarios that, under proposed Rule 1101(d)(2), would be 
considered to be orders handled on an agency basis solely for the purposes of proposed Rule 
1101(d)(2)  :  fractional share trading in NMS stocks and riskless principal trading in corporate 
and municipal bonds and government securities.  The Commission understands that many 
broker-dealers permit their customers to submit orders for fractional shares of a stock.  These 
orders are often the result of a retail customer submitting an order for a security for a certain 
dollar amount, rather than for a specific number of shares.  In order for an executing broker to fill 
the fractional share orders of an introducing broker’s customer buy orders, for example, the 
executing broker may buy a whole share into its inventory and allocate a portion of that share to 
fill the customer’s fractional share order.  This scenario involves a principal trade between the 
executing broker and the customer that is necessary to fill the customer’s fractional share order.  
The Commission preliminarily believes that an executing broker filling the fractional share 
components of an introducing broker’s customer orders in this manner should not disqualify the 
initial broker-dealer from meeting prong (2)   of the definition of an introducing broker, because 
the executing broker is filling the fractional share components on a principal basis solely for the 
purpose of completing transactions that otherwise would be executed on an agency basis.  
Therefore, in this context, the executing broker filling a customer’s fractional share order would 
be considered to be acting on an agency basis.   
In the corporate and municipal bond markets and government securities markets, the 
Commission understands that executing brokers most often execute an introducing broker’s 

   
149 
 
customer orders on a riskless principal basis.
232
  In these transactions, the executing broker does 
not fill a customer order out of its own inventory, but rather finds a counterparty for the customer 
order prior to executing the customer order.
233
  The bond simply flows through the executing 
broker’s account for transaction processing before ultimately being transferred to the appropriate 
customer.  For purposes of proposed Rule 1101(d)(2), riskless principal would be defined as 
proposed under Rule 1101(b)(4)(ii).  In particular, a transaction would be riskless principal if, 
after having received an order to buy from the introducing broker on behalf of its customer, the 
executing broker purchased the security from another person to offset a contemporaneous sale to 
such introducing broker on behalf of a customer or, after having received an order to sell, the 
executing broker sold the security to another person to offset a contemporaneous purchase from 
                                                 
232
  The MSRB best execution rule recognizes that introducing brokers may have a 
relationship with clearing firms that handle and execute customer orders on a riskless 
principal basis.  See, e.g., MSRB Rule G-18.08(b) (“A dealer that routes its customers’ 
transactions to another dealer that has agreed to handle those transactions as agent or 
riskless principal for the customer (e.g., a clearing firm or other executing dealer) may 
rely on that other dealer’s periodic reviews as long as the results and rationale of the 
review are fully disclosed to the dealer and the dealer periodically reviews how the other 
dealer’s review is conducted and the results of the review.”). 
233
  As the Commission has stated, “[t]rading on a riskless principal basis is similar, 
conceptually, to a municipal bond dealer trading on an agency basis.  In these 
transactions, the municipal bond dealer is not putting its capital at risk.  For example, 
when it receives a customer order to buy, the [dealer] will offset the sale to the customer 
by contemporaneously purchasing the security sold to the customer.”  See U.S. Securities 
and Exchange Commission, Report on the Municipal Securities Market (2012), available 
at https://www.sec.gov/news/studies/2012/munireport073112.pdf.  See also 17 CFR 
240.3a5-1(b) (defining the term “riskless principal transaction” for purposes of a bank’s 
exemption from the definition of dealer). 

   
150 
 
such introducing broker on behalf of its customer.
234
  The Commission preliminarily believes 
that this riskless principal transaction scenario in the corporate and municipal bond markets and 
government securities markets should not disqualify the initial broker-dealer from meeting the 
definition of an introducing broker in proposed Rule 1101(d), as the riskless principal trading in 
this context is analogous to the executing broker trading on an agency basis.      
The third proposed condition in the definition of introducing broker (in proposed 
paragraph (d)(3)) is that the introducing broker may not accept any monetary payment, service, 
property, or other benefit that results in remuneration, compensation, or consideration from the 
executing broker in return for the routing of the introducing broker’s customer orders to the 
executing broker.
235
  Similar to the second proposed condition concerning the use of unaffiliated 
                                                 
234
  This riskless principal trading scenario would be limited to these types of transactions in 
the corporate and municipal bond markets and government securities markets and is 
consistent with the concept in MSRB Rule G-18.08(b) and with the Commission’s 
defined term of riskless principal in Exchange Act Rule 3a5-1, which exempts banks 
from the definition of “dealer” under the Exchange Act when acting in a riskless principal 
capacity.  See 17 CFR 240.3a5-1 (defining riskless principal as a transaction in which, 
after having received an order to buy from a customer, the bank purchased the security 
from another person to offset a contemporaneous sale to such customer or, after having 
received an order to sell from a customer, the bank sold the security to another person to 
offset a contemporaneous purchase from such customer).  Furthermore, the Commission 
believes that this definition of a riskless principal trade is a commonly used and 
understood definition of the term.  But see 17 CFR 240.10b-18 (defining a riskless 
principal transaction in the context of a safe harbor for issuers from liability under the 
Exchange Act fraud provisions as a transaction in which a broker or dealer after having 
received an order from an 
issuer to buy its security, buys the security as principal in the 
market at the same price to satisfy the issuer’s buy order, where the issuer’s buy order 
must be effected at the same price per share at which the broker or dealer bought the 
shares to satisfy the issuer’s buy order, exclusive of any explicitly disclosed markup or 
markdown, commission equivalent, or other fee).   
235
  This proposed condition is based on the definition of payment for order flow in Exchange 
Act Rule 10b-10(d)(8), 17 CFR 240.10b-10(d)(8).  See supra note 43
 (stating the 
definition of payment for order flow under Rule 10b-10(d)(8)). 

   
151 
 
executing brokers, the Commission preliminarily believes that this proposed condition is 
appropriate because the introducing broker, which would be exempt from many of the operative 
provisions of proposed Regulation Best Execution, should not be subject to a conflict of interest 
that could influence its selection of a broker-dealer that will handle and execute its customers’ 
orders. 
2. Review of Executing Broker’s Execution Quality 
Proposed Rule 1101(d) would provide that an introducing broker that routes customer 
orders to an executing broker does not need to separately comply with proposed Rules 1101(a), 
(b), and (c) so long as the introducing broker establishes, maintains, and enforces policies and 
procedures that require the introducing broker to regularly review the execution quality obtained 
from such executing broker, compare it with the execution quality it might have obtained from 
other executing brokers, and revise its order handling practices,  accordingly.  The introducing 
broker would also be required to document the results of this review.   
Because proposed Rule 1101(d) would require the introducing broker to establish, 
maintain, and enforce policies and procedures that provide for regular reviews of the execution 
quality obtained from its executing broker, as part of its agreement with the executing broker, an 
introducing broker may wish to consider requiring the executing broker to fully disclose its 
execution quality reviews of the introducing broker’s customer orders to the introducing broker, 
in lieu of conducting its own independent analysis of the execution quality ultimately received 

   
152 
 
from the executing broker.
236
  This aspect of proposed Rule 1101(d) would impose a direct 
obligation on introducing brokers to regularly review the execution quality obtained from their 
executing brokers, in addition to what is required under current FINRA and MSRB rules.
237
   
In addition, because proposed Rule 1101(d) would require the introducing broker’s 
policies and procedures to provide for comparisons of its executing broker’s execution quality 
with the execution quality it might have obtained from other executing brokers, the introducing 
broker would need to obtain execution quality information concerning other executing brokers 
that could handle and execute the introducing broker’s customer orders.
238
  While the 
information concerning the execution quality that might be obtained from other executing 
                                                 
236
  The executing broker’s review of execution quality that the introducing broker relies on 
would be required to be an execution quality review specific to the introducing broker’s 
customer orders.  The Commission preliminarily believes that it would not be appropriate 
for the introducing broker to rely on the executing broker’s execution quality review if 
that review involved the executing broker’s aggregate executions, including those of 
other introducing brokers’ customers. As a result, proposed Rule 1101(d) would require 
the introducing broker to evaluate the execution quality its customers received from the 
executing broker.   
237
 See FINRA Rule 5310.09(c); MSRB Rule G-18.08(b) (providing that an introducing 
broker can “rely on” its executing broker’s execution quality reviews as long as the 
results and rationale of the review are fully disclosed to the introducing broker and the 
introducing broker periodically reviews how the review is conducted and the results of 
the review).  Under these rules, broker-dealers are permitted to rely on the execution 
quality reviews of their executing brokers and are required only to periodically review 
how the review is conducted and the results of the review.  These broker-dealers are not 
required to compare the execution quality they are receiving to the execution quality that 
might have been received from another executing broker.   
238
  The Commission preliminarily believes that other executing brokers would have an 
incentive to provide the introducing broker with accurate and comparable execution 
quality information that the introducing broker could use to evaluate its existing 
arrangement due to their financial interest in potentially providing the introducing broker 
with order handling and execution services. 

   
153 
 
brokers would not include information concerning the execution of the introducing broker’s 
customer orders, this information would nevertheless better inform the introducing broker’s 
decisions concerning the selection of an executing broker.  This aspect of proposed Rule 1101(d) 
would impose a direct obligation on introducing brokers to conduct comparisons of execution 
quality, in addition to what is required under current FINRA and MSRB rules.
239
  While the 
broker-dealer would be afforded discretion in how it evaluates the execution quality that could be 
provided by other executing brokers, the Commission believes that introducing brokers could 
consider the execution quality and order routing disclosures of these executing brokers along 
with the information that these executing brokers might provide to the introducing broker 
directly in connection with this obligation.   
Proposed Rule 1101(d) would also require an introducing broker’s policies and 
procedures to address how it would revise its order handling practices, if its execution quality 
comparison shows that a change is warranted.  This aspect of proposed Rule 1101(d) would 
establish an obligation for an introducing broker to revise its policies and procedures following 
an execution quality comparison, which is not explicitly required under the current FINRA and 
MSRB rules.
240
  An introducing broker may consider it appropriate to change its routing 
                                                 
239
 See supra note 236.    
240
  See FINRA Rule 5310.09(c) (“A member that routes its order flow to another member 
that has agreed to handle that order flow as agent for the customer (e.g., a clearing firm or 
other executing broker-dealer) can rely on that member’s regular and rigorous review as 
long as the statistical results and rationale of the review are fully disclosed to the member 
and the member periodically reviews how the review is conducted, as well as the results 
of the review.”).  See also MSRB Rule G-18.08(b) (“A dealer that routes its customers’ 
transactions to another dealer that has agreed to handle those transactions as agent or 
riskless principal for the customer (e.g., a clearing firm or other executing dealer) may 

   
154 
 
practices to the extent a material difference exists between the execution quality provided by its 
existing executing broker and the execution quality that might have been obtained from other 
executing brokers.  Alternatively, the Commission preliminarily believes that an introducing 
broker could discuss the results of its review with its executing broker and whether it is 
appropriate for the executing broker to modify its order handling and execution practices in order 
to provide better execution quality for the introducing broker’s customers.
241
  If the executing 
broker were to either provide a reasonable explanation for the execution quality disparity 
identified by the introducing broker or agree to modify its order handling and execution practices 
in order to provide better execution quality, it could be appropriate for the introducing broker to 
continue to retain the services of its executing broker.  Should the introducing broker’s regular 
review demonstrate persistent execution quality issues that are not justifiable by the executing 
broker, the introducing broker should consider retaining the services of another executing broker.  
As a result, the Commission preliminarily believes that this regular review process would 
                                                 
rely on that other dealer’s periodic reviews as long as the results and rationale of the 
review are fully disclosed to the dealer and the dealer periodically reviews how the other 
dealer’s review is conducted and the results of the review.”).  These provisions do not 
obligate the broker-dealers that rely on the regular and rigorous review of other broker-
dealer under FINRA Rule 5310.09(c) and MSRB Rule G-18.08(b) to modify the order 
handling arrangements if execution quality analysis merits modification. 
241
  As part of this process, the introducing broker and executing broker could assess why 
execution quality may be different as between the executing broker and other executing 
brokers, and the reason for these differences may inform the introducing broker’s 
decision as to whether to retain the executing broker or change executing brokers.  As 
discussed above with respect to proposed Rule 1101(c), an executing broker would be 
required to revise its best execution policies and procedures, including its order handling 
and routing practices, if warranted by its regular review of the execution quality of the 
introducing broker’s customer orders. 

   
155 
 
promote competition among executing brokers and help ensure that customer orders are executed 
consistently with the proposed best execution standard. 
Moreover, proposed Rule 1101(d) would require an introducing broker to document the 
results of its execution quality review,
242
 which would assist the introducing broker and 
regulators by helping to ensure that the introducing broker maintains and retains a robust record 
of the execution quality its customers receive from its executing broker over time.  This 
documentation should enable the introducing broker to better evaluate the effectiveness of its 
executing broker on an ongoing basis.  This documentation would also help ensure that 
regulators have access to information to effectively oversee the introducing broker’s efforts to 
satisfy its obligations under proposed Rule 1101(d).   
Request for Comment 
The Commission requests comment on proposed Rule 1101(d) relating to the proposed 
definitions of introducing broker and executing broker, and the proposed exemptions for 
introducing brokers, and in particular: 
109. Are the proposed definitions of introducing broker (including the three proposed 
conditions to qualify as an introducing broker) and executing broker appropriate?  If not, 
please explain whether and how the definitions should be more broadly or narrowly 
drawn, including whether certain market participants should be included or excluded 
from the definitions.   
                                                 
242
  See proposed amendments to Rule 17a-4; infra section IV.G (describing the 
recordkeeping obligations applicable to any documentation made pursuant to proposed 
Regulation Best Execution). 

   
156 
 
110. Do commenters believe the use of the term “introducing broker” in proposed 
Regulation Best Execution is appropriate?  Should the Commission use an alternative 
term to describe the types of entities contemplated by proposed Rule 1101(d)?  If so, 
what alternative term would be appropriate?   
111. Does an introducing broker typically exercise any discretion with respect to how 
its customer orders are handled and executed by its executing broker, beyond the 
selection of the executing broker?  If so, should the definition of introducing broker be 
modified in any manner to account for this discretion by the introducing broker?  Please 
describe. 
112. Does an introducing broker typically have multiple executing brokers or does it 
typically have an arrangement with only one executing broker to handle and execute all 
of its customer orders? 
113. Are the proposed conditions concerning the arrangement between the introducing 
broker and its executing broker appropriate?  Please explain. 
114. Is it appropriate to require the executing broker to handle and execute all of the 
introducing broker’s customer orders on an agency basis in order for the introducing 
broker to meet the definition of introducing broker under proposed Rule 1101(d)?  Please 
explain. 
115. Do executing brokers, which can include many clearing firms that provide these 
types of services to other broker-dealers, typically execute transactions to fill an 
introducing broker’s customer orders in a riskless principal capacity?  Do these executing 
brokers often use inventory to fill the introducing broker’s customer orders? 

   
157 
 
116. Would the proposed condition that an executing broker execute customer orders 
on an agency basis harm liquidity for the introducing broker’s customer orders for any 
asset class or classes?  If so, please explain.  For example, is the principal trading desk of 
an executing broker (e.g., clearing firm) in the corporate or municipal bond markets and 
government securities markets an important source of potential liquidity for the 
customers of an introducing broker?   
117. Does the proposed introducing broker definition and the proposed approach 
concerning riskless principal trading appropriately capture the manner in which 
introducing brokers and executing brokers do business in the corporate and municipal 
bond markets and government securities markets?  Please explain. 
118. Should riskless principal transactions by an executing broker disqualify the 
introducing broker from meeting the definition of introducing broker under proposed 
Rule 1101(d)?  Please explain. 
119. Is the description of a riskless principal trade in section IV.E.1 above appropriate?  
Why or why not?   
120. In contrast to the discussion of riskless principal trades in section IV.E.1 above, 
would it be more appropriate to require the two legs of a riskless principal trade to be 
executed at the same price, exclusive of any explicitly disclosed markup or 
markdown, commission equivalent, or other fee?  For example, should a riskless 
principal trade for purposes of proposed Rule 1101(d)(2) be defined to mean:  a 
transaction in which the executing broker, after having received an order from the 
introducing broker on behalf of its customer to buy a security, buys the security from 
another person as principal to offset a contemporaneous sale to such introducing broker 

   
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on behalf of a customer at the same price, or after having received an order to sell, the 
executing broker sold the security to another person to offset a contemporaneous 
purchase from the introducing broker on behalf of its customer at the same price?  Please 
explain.  Would a potential benefit of this alternative definition of riskless principal 
transaction be that the bond transaction between the introducing broker and its customer 
would reflect the entire markup or markdown on the customer’s trade, which would be 
disclosed to the customer pursuant to existing FINRA and MSRB confirmation disclosure 
rules? 
121. Do commenters agree that principal trades by an executing broker to fill fractional 
share orders in NMS stocks and riskless principal trades by an executing broker in fixed 
income securities should be order handling on an agency basis for purposes of proposed 
Rule 1101(d)(2)?  Why or why not?  Are there additional types of principal transactions 
that should also be considered order handling on an agency basis for purposes of 
proposed Rule 1101(d)(2)?  If so, please describe. 
122. Do commenters agree with the proposed requirement that there be no affiliation 
between an introducing broker and its executing broker in order for the introducing 
broker to meet the definition of introducing broker under proposed Rule 1101(d)?  Why 
or why not? 
123. What is the typical relationship between an introducing broker and its executing 
broker for handling and executing customer orders in different asset classes?  
124. The proposal would prohibit a broker-dealer from receiving any payment for 
order flow from its executing broker in order to qualify as an introducing broker under 
proposed Rule 1101(d).  Currently, to what extent do introducing brokers accept payment 

   
159 
 
for order flow for their customer orders from an executing broker?  What are the common 
payment for order flow arrangements between introducing brokers and their executing 
brokers?   
125. Do commenters agree with the proposed requirement that there be no payment for 
order flow between an introducing broker and its executing broker in order for the 
introducing broker to meet the definition of introducing broker under proposed Rule 
1101(d)?  Please explain.  What are the implications for introducing brokers resulting 
from the requirement that they not accept payment for order flow from their executing 
brokers in order to qualify as introducing brokers under proposed Rule 1101(d)?  
126. Should an executing broker be prohibited from accepting payment for order flow 
from other broker-dealers that the executing broker uses to execute the introducing 
broker’s customer orders?  Why or why not? 
127. Do commenters agree that the proposed exemptions for introducing brokers from 
proposed Rule 1101(a), (b), and (c) are appropriate?  Why or why not? 
128. Do commenters believe that the approaches taken by FINRA and the MSRB with 
respect to the definition of introducing broker are preferable to the Commission’s 
proposal?
243
  Please explain.  Would an approach that is more restrictive than the FINRA 
and MSRB approach but less restrictive than the Commission’s proposal be preferable?  
If so, please explain.  
The Commission also seeks comment on the proposed requirement that, to avail itself of 
the exemptions under proposed Rule 1101(d), an introducing broker must establish, maintain, 
                                                 
243
  See supra notes 228-230 and accompanying text.  

   
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and enforce policies and procedures that require it to regularly review the execution quality 
obtained from its executing broker, compare such execution quality with the execution quality it 
might have obtained from other executing brokers, and revise its routing practices accordingly.  
In particular: 
129. How do introducing brokers currently evaluate the execution quality of their 
executing brokers?  How often is this evaluation typically performed?  
130. Would introducing brokers be able to obtain execution quality information 
concerning other executing brokers?  If so, how?  Would executing brokers have an 
incentive to share execution quality information with introducing brokers for which they 
do not handle orders or handle few orders?   
131. Would an introducing broker be able to perform a comparison of execution 
quality received with execution quality that it might have obtained from other executing 
brokers?  Please explain any challenges in making such a comparison and whether any 
challenges depend on the asset class or classes involved.  Please describe any distinctions 
that should be drawn among executing brokers handling and executing orders in various 
asset classes.   
132. Should the Commission require that an introducing broker compare the execution 
quality received with the execution quality it might have obtained from other executing 
brokers only to the extent that such execution quality information is reasonably accessible 
to the introducing broker?  Please explain. 
133. Would introducing brokers have the capacity and resources to independently 
compare the quality of executions received from their executing brokers to the quality of 

   
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executions that they might have received from other executing brokers?  Are introducing 
brokers likely to rely on third parties to facilitate this comparison?  Please explain.   
134. How frequently should an introducing broker be required to perform a 
comparative analysis of execution quality as proposed in Rule 1101(d)?  For example, 
should it be required quarterly, similar to what FINRA requires under FINRA Rule 
5310.09?  Alternatively, should the review be required with a different frequency, such as 
on a monthly, semiannual, or annual basis, instead of quarterly?  Please explain.   
135. Should introducing brokers be required to evaluate the execution quality of a 
minimum number of alternative executing brokers when they compare the execution 
quality received from their own executing brokers?  If so, how many and why? 
136. Would the proposed documentation requirement improve the utility of an 
introducing broker’s execution quality comparison?  Why or why not?  Should the 
Commission require additional documentation to supplement the documentation of the 
introducing broker’s review?  If so, please explain. 
137. Rather than conducting the execution quality review under proposed Rule 
1101(d), should introducing brokers be subject to the regular review of execution quality 
requirement under proposed Rule 1101(c)?  Are there other factors that would make one 
more appropriate for introducing brokers than the other?  Please explain. 
138. Do commenters believe there are any concerns with the proposed requirement that 
an introducing broker’s policies and procedures require it to revise its order handling 
practices to the extent justified by its execution quality reviews?  If so, please explain.  
Should the Commission provide more specificity concerning when order handling 
practices would be required to be revised?  For example, should the Commission specify 

   
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that order handling practices be revised if there are material differences between the 
execution quality received from the executing broker and the execution quality that could 
have been obtained from another executing broker?   
139. How do introducing brokers currently address execution quality concerns relating 
to their executing brokers’ order handling?  Please describe. 
140. Do introducing brokers have a number of executing brokers to choose from when 
determining the firm they will use to handle and execute their customer orders? 
141. Is the approach in FINRA Rule 5310.09(c) and MSRB Rule G-18.08(b) 
preferable to the Commission’s proposal?  Why or why not?  Would some combination 
of the FINRA and MSRB approaches and the Commission’s proposal be preferable to 
either?  Please explain. 
142. Do commenters believe that the Commission should provide staggered 
compliance dates for proposed Rule 1101(d) for broker-dealers of different sizes, if the 
Commission adopts proposed Regulation Best Execution?  For example, should the 
Commission provide longer compliance dates for smaller broker-dealers?  If so, should 
the Commission define a smaller broker-dealer as a broker-dealer that qualifies as a 
“small entity” under the Regulatory Flexibility Act pursuant to 17 CFR 240.0-10(c) for 
this purpose?
244
  Or should the Commission define a smaller broker-dealer in a different 
way?  Please explain. 
                                                 
244
  See supra note 151 and accompanying text (describing the broker-dealers that qualify as 
small entities under the Regulatory Flexibility Act). 

   
163 
 
F. Proposed Rule 1102 – Annual Report  
Proposed Rule 1102 would require a broker-dealer that effects any transaction for or with 
a customer or a customer of another broker-dealer to, no less frequently than annually, review 
and assess the design and overall effectiveness of its best execution policies and procedures, 
including its order handling practices.  Such review and assessment would be required to be 
conducted in accordance with written procedures and would be required to be documented.
245
  
The broker-dealer also would be required to prepare a written report detailing the results of such 
review and assessment, including a description of all deficiencies found and any plan to address 
such deficiencies.  The report would be required to be presented to the board of directors (or 
equivalent governing body) of the broker-dealer.  The proposed annual review requirement is 
designed to require broker-dealers to evaluate whether their best execution policies and 
procedures continue to work as designed and whether changes are needed to ensure their 
continued effectiveness. 
 In assessing the overall effectiveness of its best execution policies and procedures, a 
broker-dealer should consider its policies and procedures holistically, and may utilize its 
execution quality reviews and any documentation with respect to conflicted transactions 
prepared during the course of the review period.
246
  Although proposed Rule 1101(c), as 
                                                 
245
  The Commission believes that broker-dealers currently have written compliance 
procedures reasonably designed to review their business activity, which a broker-dealer 
could update to document the method in which the broker-dealer plans to conduct its 
review pursuant to proposed Rule 1102. 
246
  While a broker-dealer that qualifies as an introducing broker under proposed Rule 
1101(d) would need to conduct a review and prepare a written report pursuant to 
proposed Rule 1102, an introducing broker’s review should appropriately reflect its 

   
164 
 
discussed in section IV.D above, would require a broker-dealer to implement an at least quarterly 
review of the execution quality of its customer transactions, the annual review requirement in 
proposed Rule 1102 would be a broader, more holistic review of the broker-dealer’s policies and 
procedures not focused solely on execution quality.  As part of its annual review, a broker-dealer 
may review the findings of its execution quality reviews in conjunction with its overall review of 
its policies and procedures, to the extent it would assist the broker-dealer in identifying any 
inadequacies and supporting any revisions to its best execution policies and procedures, 
including its order handling practices, as appropriate.
247
  Ongoing changes in order handling 
technology and differing broker-dealer trading models and practices may present a need for a 
broker-dealer to reconsider its best execution policies and procedures in a way that is not 
identified during the course of a broker-dealer’s regular execution quality reviews conducted 
pursuant to proposed Rule 1101(c).  For example, the proposed annual review process may 
encourage the broker-dealer to consider investments in new technologies to improve its overall 
best execution process, despite the fact that the broker-dealer has not identified any issues with 
its existing execution quality.  Accordingly, the Commission believes that the proposed annual 
review requirement, including the associated written report that would be presented to the 
broker-dealer’s board of directors or equivalent governing body, would create a robust internal 
                                                 
obligations under proposed Rule 1101(d), rather than the aspects of proposed Rules 
1101(a), (b), and (c) that would be considered as part of the executing broker’s annual 
review. 
247
  By utilizing its regular reviews of execution quality as part of its annual review, a broker-
dealer may avoid any duplication of efforts to the extent it needs to conduct any 
execution quality analysis in order to assess the overall effectiveness of its best execution 
policies and procedures as required by proposed Rule 1102. 

   
165 
 
compliance process under the oversight of the highest level of a broker-dealer’s internal 
governance to help ensure the broker-dealer maintains robust best execution policies and 
procedures and complies with proposed Regulation Best Execution.  The written report prepared 
pursuant to proposed Rule 1102 would also help regulators better understand the broker-dealer’s 
compliance with proposed Regulation Best Execution.   
FINRA’s best execution rule does not require a periodic review of a broker-dealer’s best 
execution policies and procedures.
248
  However, FINRA Rule 3130(c) requires a broker-dealer to 
have a report that describes its processes to:  establish, maintain, and review its policies and 
procedures reasonably designed to achieve compliance with applicable FINRA rules, MSRB 
rules, and Federal securities laws and regulations; modify such policies and procedures as 
changes and events dictate; and test the effectiveness of such policies and procedures on a 
periodic basis, the timing and extent of which is reasonably designed to ensure continuing 
compliance with FINRA rules, MSRB rules, and Federal securities laws and regulations.  FINRA 
Rule 3130(c) further requires the broker-dealer’s chief executive officer(s) (or equivalent 
officer(s)) to certify to the existence of such processes, and to certify that the report of such 
processes has been submitted to the broker-dealer’s board of directors and audit committee (or 
equivalent bodies).  The Commission understands that, currently, broker-dealers periodically 
review their policies and procedures (including those related to best execution), although the 
frequency of review may vary.  However, because the Commission is proposing its own best 
execution rule, proposed Rule 1102 would help ensure the effectiveness of the broker-dealer’s 
best execution policies and procedures that it adopts pursuant to the proposed rules. 
                                                 
248
  FINRA Rule 5310. 

   
166 
 
MSRB Rule G-18.08(a) requires a broker-dealer to, at a minimum, conduct annual 
reviews of its policies and procedures for determining the best available market for the 
executions of its customers’ transactions.  In conducting these reviews, a dealer must assess 
whether its policies and procedures are reasonably designed to achieve best execution, taking 
into account the quality of the executions the dealer is obtaining under its current policies and 
procedures, changes in market structure, new entrants, the availability of additional pre-trade and 
post-trade data, and the availability of new technologies, and to make promptly any necessary 
modifications to such policies and procedures as may be appropriate in light of such reviews.  As 
described above in connection with the FINRA rules, because the Commission is proposing its 
own best execution rule, proposed Rule 1102 would help ensure the effectiveness of the broker-
dealer’s best execution policies and procedures that it adopts pursuant to the proposed rules.  
Moreover, as compared to MSRB Rule G-18.08(a), proposed Rule 1102 would include a specific 
requirement that a broker-dealer review its order handling practices, require that a report be 
maintained of this annual review, and require that the broker-dealer provide the annual report to 
its governing body.   
Request for Comment 
The Commission requests comment on all aspects of proposed Rule 1102, and in 
particular: 
143. Should a broker-dealer be required to have written procedures for annual (or more 
frequent) reviews of the overall effectiveness of its best execution policies and 
procedures, including its order handling practices, and be required to document such 
review, as proposed?  Why or why not? 

   
167 
 
144. Would the proposed requirement for written procedures for annual (or more 
frequent) reviews help to ensure t he overall effectiveness of a broker-dealer’s best 
execution policies and procedures?  Why or why not? 
145. Should a broker-dealer be required to prepare a written report detailing the results 
of its review, including any plan to address deficiencies, as proposed?  Why or why not?  
Should the Commission require specific information to be included in the written report?  
If so, what specific information should be required? 
146. Should the written report of the review be presented to the broker-dealer’s board 
of directors (or equivalent governing body), as proposed?  Why or why not? 
147. Would the proposed requirement for annual (or more frequent) reviews and for 
presenting written reports of the reviews to the board of directors help to ensure a broker-
dealer’s compliance with proposed Regulation Best Execution?  Why or why not?   
148. Should a broker-dealer’s board of directors (or governing body) also be required 
to approve the best execution policies and procedures that would initially be established 
under proposed Regulation Best Execution?  Please explain. 
149. Do commenters agree with the Commission’s understanding that, currently, 
broker-dealers periodically review their best execution policies and procedures?  Please 
describe the rigor of any such reviews, whether broker-dealers document such reviews, 
and whether broker-dealers present the results of such reviews to their boards of directors 
(or equivalent governing bodies).   
150. Do commenters agree with the Commission’s understanding that such reviews 
vary in frequency among broker-dealers?  Please describe the frequency of such reviews.  

   
168 
 
Does the frequency of review vary depending on whether the broker-dealer is subject to 
the FINRA rules or the MSRB rules?  Please explain.  
151. Should management, a committee, or an expert be designated to conduct the 
annual review and prepare the report?  Should specific experience or expertise be 
required to conduct the annual review and prepare the report?  Would additional 
specificity in the rule promote accountability over the annual review and report and 
ensure that adequate resources are devoted to such review and report?  Why or why not?  
152. Does the annual review raise any particular challenges for smaller broker-dealers? 
If so, what could the Commission do to mitigate those challenges?  
153. Are there any conflicts of interest if the same personnel that designs or 
implements the policies and procedures also conduct the annual reviews?  If so, how can 
those conflicts be mitigated or eliminated?  Should broker-dealers be required to have 
their policies and procedures periodically audited by an unaffiliated third party to assess 
their design and effectiveness?  Why or why not?  If so, should the rule define the term 
“affiliate” to specify the entities that would be eligible to perform such an audit and 
should the Commission use the definition of “affiliate” in proposed Rule 1101(b)(4)(iii) 
for this purpose?  Please explain.  What types of unaffiliated third parties might have the 
necessary specific experience and expertise to review a broker-dealer’s best execution 
policies and procedures?  For example, should an unaffiliated consulting firm, accounting 
firm, or law firm be permitted to provide this service, if required?  Should the rule 
prescribe the types of unaffiliated third parties that would have the requisite experience 
and expertise?  Please explain.   

   
169 
 
154. Do commenters believe that the Commission should provide staggered 
compliance dates for proposed Rule 1102 for broker-dealers of different sizes, if the 
Commission adopts proposed Regulation Best Execution?  For example, should the 
Commission provide longer compliance dates for smaller broker-dealers?  If so, should 
the Commission define a smaller broker-dealer as a broker-dealer that qualifies as a 
“small entity” under the Regulatory Flexibility Act pursuant to 17 CFR 240.0-10(c) for 
this purpose?
249
  Or should the Commission define a smaller broker-dealer in a different 
way?  Please explain. 
G. Recordkeeping Requirements under Rule 17a-4 
In connection with proposed Regulation Best Execution, the Commission is proposing 
new recordkeeping requirements for broker-dealers.  Section 17(a)(1) of the Exchange Act 
requires registered broker-dealers to keep for prescribed periods such records as the Commission 
prescribes as necessary or appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Exchange Act.
250
  Rule 17a-4 under the Exchange 
Act specifies how long broker-dealers must preserve required records and other documents.
251
   
Proposed Regulation Best Execution would require broker-dealers to make the following 
records:  
• Policies and procedures under proposed Rules 1101(a), (b), and (d) and Rule 1102; 
                                                 
249
  See supra note 151 and accompanying text (describing the broker-dealers that qualify as 
small entities under the Regulatory Flexibility Act). 
250
  15 U.S.C. 78q(a)(1). 
251
  17 CFR 240.17a-4.  

   
170 
 
• Documentation of compliance with the best execution standard for conflicted transactions 
under proposed Rule 1101(b);  
• Documentation of payment for order flow arrangements under proposed Rule 1101(b); 
• Documentation of the results of the regular review of execution quality under proposed 
Rule 1101(c);  
• Documentation of the results of the regular review of execution quality by introducing 
brokers under proposed Rule 1101(d);  
• Documentation of the annual review under proposed Rule 1102; and  
• Annual report under proposed Rule 1102.   
Current Rule 17a-4(e)(7) under the Exchange Act would apply to the policies and 
procedures required by proposed Regulation Best Execution.
252
  The Commission proposes to 
amend Rule 17a-4 to add new paragraph (b)(17) to require broker-dealers to preserve all other 
records made pursuant to proposed Rules 1101 and 1102 for a period of not less than three years, 
the first two years in a readily accessible place. 
The Commission preliminarily believes that the preservation of records made pursuant to 
proposed Regulation Best Execution for this time period would assist broker-dealers in ensuring 
that they continue to maintain robust best execution practices for an appropriate amount of time.  
In addition, the preservation and availability of records that support and document broker-
                                                 
252
  Rule 17a-4(e)(7) requires broker-dealers to maintain and preserve in an easily accessible 
place compliance, supervisory, and procedures manuals (and any updates, modifications, 
and revisions thereto) describing the policies and practices of the broker-dealer with 
respect to compliance with applicable laws and rules, and supervision of the activities of 
associated persons until three years after the termination of the use of the manual.  17 
CFR 240.17a-4(e)(7).   

   
171 
 
dealers’ compliance with proposed Regulation Best Execution would also assist the Commission 
and SROs in assessing the broker-dealer’s efforts to comply with proposed Regulation Best 
Execution.  
Request for Comment 
The Commission requests comment on the proposed record preservation requirements 
related to proposed Regulation Best Execution: 
155. Should all records made pursuant to proposed Regulation Best Execution be 
required to be preserved?  Please explain. 
156. Do commenters agree that the policies and procedures required by proposed 
Regulation Best Execution should be subject to Rule 17a-4(e)(7) and preserved until 
three years after the termination of their use?  Please explain.  
157. Do commenters agree that all other records required by proposed Regulation Best 
Execution should be subject to Rule 17a-4(b) and preserved for a period of not less than 
three years, the first two years in a readily accessible place?  Please explain.   
158. Should the Commission impose additional record preservation requirements 
related to proposed Regulation Best Execution?  Why or why not?  If the Commission 
were to impose additional requirements, what specific records should broker-dealers be 
required to preserve?  Please explain.  
V. Economic Analysis 
A. Introduction 
The Commission is mindful of the economic effects that may result from proposed 
Regulation Best Execution, including the benefits, costs, and the effects on efficiency, 

   
172 
 
competition, and capital formation.
253
  This section analyzes the expected economic effects of 
proposed Regulation Best Execution relative to the current baseline, which consists of the current 
market and regulatory framework in existence today. 
A broker-dealer’s duty of best execution predates the Federal securities laws and, as 
noted previously, has “its roots in the common law agency obligations of undivided loyalty and 
reasonable care that an agent owes to his principal.
”254
  In general terms, the Commission 
position is, and has been, that “the duty of best execution requires broker-dealers to execute 
customers’ trades at the most favorable terms reasonably available under the circumstances, i.e., 
at the best reasonably available price.”
255
  FINRA Rule 5310(a) and MSRB Rule G-18(a) codify 
                                                 
253
  Exchange Act Section 3(f) requires the Commission, when it is engaged in rulemaking 
pursuant to the Exchange Act, and is required to consider or determine whether an action 
is necessary or appropriate in the public interest, to consider, in addition to the protection 
of investors, whether the action will promote efficiency, competition, and capital 
formation.  See 15 U.S.C. 78c(f).  In addition, Exchange Act Section 23(a)(2) requires the 
Commission, when making rules pursuant to the Exchange Act, to consider among other 
matters, the impact that any such rule would have on competition, and not to adopt any 
rule that would impose a burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.  See 15 U.S.C. 78w(a)(2). 
254
  Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 270, n. 30 (3rd 
Cir. 1998).  As the Commission explained when adopting rules governing payment for 
order flow almost three decades ago, “[a] broker-dealer's duty to seek to 
obtain best execution of customer orders derives, in part, from the common law agency 
duty of loyalty, which obligates an agent to act exclusively in the principal's best 
interest. Restatement (Second) of Agency section 387 (1958). Thus, when an agent acts 
on behalf of a customer in a transaction, the agent is under a duty to exercise reasonable 
care to obtain the most advantageous terms for the customer. Id. at section 424.” Payment 
For Order Flow Release, supra note 33, at n. 15.   
255
  Regulation NMS Adopting Release, supra note 21, at 37538 (citations omitted). See also, 
Special Study, supra note 10, at 623 (“A broker-dealer acting as an agent for a customer 
in the execution of a transaction assumes the obligations of a fiduciary. . . . A corollary of 
the fiduciary’s duty of loyalty to his principal is his duty to obtain or dispose of property 

   
173 
 
essentially the same requirement that members must “use reasonable diligence to ascertain the 
best market for the subject security and buy or sell [there] so that the resultant price to the 
customer is as favorable as possible under prevailing market conditions.”  
The duty of best execution is a foundational component of the current best execution 
regulatory framework that helps protect investors in a setting of imperfect markets.  The duty 
serves to counteract market failures that arise, for example, when an agent (in this case, a broker 
or broker-dealer) has different incentives than a principal (investor), and the principal, 
particularly the retail investor, is not in a position to monitor the agent.  This is known in 
economics as a principal-agent problem.
256
  A principal-agent problem arises when a broker-
dealer undertakes costly actions to achieve best execution and the principal (investor) cannot 
observe the broker-dealer’s actions.  The broker-dealer in this situation has financial incentives 
to take (or not take) certain actions to reduce its costs or increase its profits.  
The principal-agent problem can be exacerbated by a specific conflict of interest that 
arises when the broker-dealer executes a customer order in a principal capacity.
257
  In these 
instances, the broker-dealer acting as principal on the trade has a financial incentive to maximize 
its gains from the trade, which would be at the expense of the counterparty, here the broker-
                                                 
for his principal at the best price discoverable in the exercise of reasonable diligence.”) 
(citations omitted), available at 
https://www.sechistorical.org/collection/papers/1960/1963_SSMkt_Chapter_07_2.pdf 
256
  See Joseph E. Stiglitz, Principal and Agent, in Allocation, Information and Markets 241 
(John Eatwell et al. eds., 1989).  
257
  For instance, a broker-dealer may decide to act in a principal capacity in a situation where 
there is a  liquidity externality in that the investor’s order lacks a counterparty, though the 
presence of such an externality is not necessary to the broker-dealer’s decision. 

   
174 
 
dealer’s customer, in a zero-sum game.
258
  This conflict of interest should be mitigated because 
the broker-dealer as agent for its customer also has a duty to ensure that the order was executed 
at the most favorable terms reasonably available to the customer under the circumstances.  
However, retail customers typically lack access to the information that would allow them to 
determine independently whether an order received best execution from a broker-dealer.  
Further, obtaining and analyzing such information could be costly for retail customers. 
The Commission has long taken the position that the “scope of [the] duty of best 
execution must evolve as changes occur in the market that give rise to improved executions for 
customer orders . . . [and that] broker-dealers' procedures for seeking to obtain best execution for 
customer orders also must be modified to consider price [improvement] opportunities that 
become ‘reasonably available.’”
259
  Current SRO rules that specifically address broker-dealer 
best execution policies and procedures requirements focus on a retrospective “regular and 
rigorous” review of execution quality.  With limited exceptions, such as those for orders 
involving foreign securities, and securities for which there is limited pricing information or 
quotations available, existing SRO rules do not establish specific standards concerning a broker-
                                                 
258
  “Trading is a zero-sum game in an important accounting sense. In a zero-sum game, the 
total gains of the winners are exactly equal to the total losses of the losers. Trading is a 
zero-sum game, because the combined gains and losses of buyers and sellers always sum 
to zero.”  Larry Harris, Trading and Exchanges: Market Microstructure for Practitioners 
(2002). 
259
  See, e.g., Marc N. Geman, Securities Exchange Act Release No. 43963 (Feb. 14, 2001) 
(Commission opinion) (citing Order Execution Obligations Adopting Release, supra note 
10, 61 FR 48322 - 48323).  

   
175 
 
dealer’s policies and procedures for complying with the best execution obligations in FINRA 
Rule 5310(a) and MSRB Rule G-18(a).
260
    
 The proposal would build on the existing regulatory framework, codify in a Commission 
rule a best execution standard that is consistent with how the Commission and the courts have 
described the duty of best execution, enhance the Commission’s ability to enforce best 
execution, and impose detailed policies and procedures obligations on broker-dealers’ handling 
and execution of customer orders, including documented incremental efforts required for a 
broker-dealer to obtain the most favorable price in conflicted transactions for or with retail 
customers.
261
  These requirements could further help enhance broker-dealers’ ability to maintain 
robust best execution practices, including in situations where broker-dealers have order handling 
conflicts of interest with retail customers.  
The Commission estimates aggregate compliance costs of $165.4 million in one-time 
costs and $128.9 million in annual costs on broker-dealers as they update, or establish, their 
policies and procedures for the handling, execution, and review of customer orders.  To the 
extent that broker-dealers already have policies and procedures that are consistent with the 
                                                 
260
  As discussed supra in note 129 and the accompanying text, FINRA Rule 3110(b)(1)
 
requires broker-dealers to have policies and procedures for compliance with FINRA rules 
and Federal securities laws and regulations.  MSRB Rule G-18.08 requires broker-dealers 
to have policies and procedures for determining the best available market for the 
executions of their customers’ transactions.  MSRB Rule G-28 requires broker-dealers to 
have procedures for compliance with MSRB rules and the Exchange Act and rules 
thereunder.  Unlike these FINRA and MSRB rules, proposed Regulation Best Execution 
would establish specific standards concerning the policies and procedures for complying 
with the proposed best execution standard, as discussed in sections IV.B.1 and 2 supra. 
261
  See supra section IV. 

   
176 
 
proposed rules, aggregate implementation costs would be less than this estimate, and based on 
the Commission’s experience, the Commission preliminarily believes these estimates overstate 
costs broker-dealers would bear in implementing the proposal.
262
  Broker-dealers may also incur 
indirect costs.
263
  Some of these costs could be passed through to customers in the form of higher 
commissions or reduced services.       
The Commission has considered the economic effects of proposed Regulation Best 
Execution and, wherever possible, the Commission has quantified the likely economic effects of 
proposed Regulation Best Execution.  The Commission is providing both a qualitative 
assessment and quantified estimates of the potential economic effects of the proposal where 
feasible.  The Commission has incorporated data and other information to assist it in the analysis 
of the economic effects of proposed Regulation Best Execution.  However, as explained in more 
detail below, because the Commission does not have, and in certain cases does not believe it can 
reasonably obtain, data that may inform the Commission on certain economic effects, the 
Commission is unable to quantify certain economic effects.  Further, even in cases where the 
Commission has some data, quantification is not practicable due to the number and type of 
assumptions necessary to quantify certain economic effects, which render any such 
quantification unreliable.  Our inability to quantify certain costs, benefits, and effects does not 
imply that the Commission believes such costs, benefits, or effects are less significant.  The 
Commission requests that commenters provide relevant data and information to assist the 
Commission in quantifying the economic consequences of proposed Regulation Best Execution. 
                                                 
262
  See infra section V.C.2. 
263
  See infra section V.C.2.b).  

   
177 
 
B. Baseline 
Commission statements and SRO rules, including FINRA Rule 5310 and MSRB Rule G-
18, and related SRO interpretive notices and guidance address broker-dealer best execution 
duties primarily through a broad, principles-based approach.  Differences in security 
characteristics and market structure can cause broker-dealer order handling and execution 
practices to vary significantly across different asset classes, including the role that conflicts of 
interests play in the handling and execution of a broker-dealer’s retail customer orders.  In 
addition, policies related to the handling of customer orders can impact competition among 
broker-dealers, trading venues, and broker-dealers that offer order routing and execution 
services.  The baseline against which the costs, benefits, and the effects on efficiency, 
competition, and capital formation of proposed Regulation Best Execution is measured consists 
of the current regulatory requirements and SRO guidance for broker-dealers concerning 
customer best execution, current broker-dealer best execution review processes, the current 
market structure and broker-dealer practices concerning handling and executing customer orders 
that may be impacted by proposed Regulation Best Execution,
264
 and the structure of the market 
for broker-dealer services. 
                                                 
264
  While proposed Regulation Best Execution would apply to all securities, the Commission 
preliminarily believes that the proposal would not have economic effects on the market 
structure or order handling practices in the markets for securities based swaps, asset-
backed securities, and repurchase and reverse repurchase agreements because these 
markets are mostly dominated by institutional investors that do their own order handling.  
Therefore, the market structure and order handling practices in these markets are not 
discussed in the economic baseline of this release.  

   
178 
 
1. Current Legal and Regulatory Framework 
 Although FINRA and the MSRB have established rules and issued guidance directly 
addressing the duty of best execution that are applicable to their respective members, the 
Commission has never established its own rule governing a broker-dealer’s legal duty of best 
execution.  As described above in section II.A, the duty of best execution that a broker-dealer has 
today was originally derived from an implied representation that a broker-dealer makes to its 
customers when it agrees to engage in certain transactions on their behalf.   The common law 
agency obligations of “undivided loyalty and reasonable care” that an agent owes to its principal 
require that a “broker-dealer seek to obtain for its customer orders the most favorable terms 
reasonably available under the circumstances.”
  265
  Expressed in economic terms, because a 
“client-principal seeks his own economic gain and the purpose of the agency is to help the client-
principal achieve that objective, the broker-dealer[’s best execution obligation], absent 
instructions to the contrary, [means that a broker-dealer] is expected to use reasonable efforts to 
maximize the economic benefit to the client in each transaction.”
266
    
In addition to the duty itself, the current framework consists of examination and 
monitoring programs conducted by the Commission and FINRA
267
 of Commission registrants 
                                                 
265
  Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d at 270.  
266
  See id.     
267
  The MSRB does not conduct its own enforcement or compliance examinations.  MSRB, 
The Role and Jurisdiction of the MSRB, at 2 (2021) (“the SEC and federal bank 
regulators [] share responsibility for enforcement and compliance examinations”), 
available at
 https://www.msrb.org/sites/default/files/2022-09/Role-and-Jurisdiction-of-
MSRB.pdf. 

   
179 
 
and FINRA and MSRB members. Best execution is and has been a priority item in these 
examinations.
268
  In addition, FINRA produces monthly status reports for members, known as 
the best execution Outside-of-the-Inside report card, “detailing the number of transactions 
reported to a FINRA [trade reporting] Facility, in which [a] firm participated that were executed 
Outside-of-the-Inside market in apparent violation of the Best Execution Rule.”
269
 
a) Commission and Court Statements, Agency Guidance, and 
Enforcement Activities 
  In the context of agency rulemaking, adjudication, and Federal court litigation, the 
Commission and various Federal courts of appeal have articulated what the duty of best 
execution means and interpreted how the duty applies in various circumstances.  For example, 
the duty of best execution requires a broker-dealer to “execute customers’ trades at the most 
favorable terms reasonably available under the circumstances, i.e., at the best reasonably 
                                                 
268
  The Division of Exams 2022 priorities note that best execution in fixed-income 
securities, best execution obligations in a zero commission environment, and possible 
effects of conflicts of interest on best execution are focus points of its broker-dealer exam 
program.  Division of Examinations, 2022 Examination Priorities, at 19 and 20, available 
at https://www.sec.gov/files/2022-exam-priorities.pdf.  According to FINRA, 
“[a]ssessing firms’ compliance with their best execution obligations under FINRA Rule 
5310 (Best Execution and Interpositioning) is one of the cornerstones of FINRA’s 
oversight activities.” FINRA, 2022 Report on FINRA’s Examination and Risk 
Monitoring Program, at 2 (Feb. 2022), available at 
https://www.finra.org/sites/default/files/2022-02/2022-report-finras-examination-risk-
monitoring-program.pdf.  
269
  FINRA, Best Execution Outside-of-the-Inside Report Card, available at 
https://www.finra.org/compliance-tools/report-center/equity/best-execution-outside-
inside-report-card. Member firms are told that they should “make no inference . . . that 
FINRA staff has or has not determined that the information contained on the Best 
Execution Outside-of-the-Inside report cards does or does not constitute rule violations.”  
Id.   

   
180 
 
available price.”
270
  When considering what the best reasonably available price means in the 
context of a broker-dealers’ best execution analysis, the Commission has articulated a non-
exhaustive list of factors that may be relevant to broker-dealers’ best execution analysis.  These 
factors include the size of the order, speed of execution, clearing costs, the trading characteristics 
of the security involved, the availability of accurate information affecting choices as to the most 
favorable market center for execution and the availability of technological aids to process such 
information, and the cost and difficulty associated with achieving an execution in a particular 
market center.
271
   
 Other Commission statements address what best execution means in the context of 
various market practices and circumstances.  Interpositioning, which occurs when a broker-
dealer places a third party between itself and the best market for executing a customer trade in a 
manner that results in a customer not receiving the best available market price or paying 
unnecessary expenses, violates the broker-dealer’s duty of best execution.
272
  When a broker-
                                                 
270
  Regulation NMS Adopting Release, supra note 21, at 37538.  See also Order Execution 
and Routing Practice Release, supra note 22, at 75418 (price is a critical concern for 
investors); Geman v. SEC, 334 F.3d 1183, 1186 (10th Cir. 2003) (“[T]he duty of best 
execution requires that a broker-dealer seek to obtain for its customer orders the most 
favorable terms reasonably available under the circumstances.”) (quoting Newton v. 
Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 270 (3d Cir. 1998)); Kurz v. 
Fidelity Management & Research Co., 556 F.3d 639, 640 (7th Cir. 2009) (describing the 
“duty of best execution” as “getting the optimal combination of price, speed, and 
liquidity for a securities trade”). 
271
  See Order Execution and Routing Practice Release, supra note 22, at 75422; Regulation 
NMS Adopting Release, supra note 21, at 37538. 
272
  See supra notes 29-30 listing Commission opinions.  See also SEC v. Ridenour, 913 F.2d 
515 (8th Cir. 1990) (bond salesman’s interpositioning of personal trading between his 
customers’ securities transactions and the market violated the antifraud provisions).   

   
181 
 
dealer receives a limit order, the duty of best execution requires the broker-dealer to account for 
potential material differences in execution quality, such as the likelihood of execution among the 
various securities markets or market centers to which limit orders may be routed.
273
 The 
Commission has also recognized that it may be impractical for a broker-dealer that handles a 
heavy volume of orders to make individual determinations regarding where to route each 
order
274
 and that the duty of best execution requires a broker-dealer to assess periodically the 
quality of competing markets to ensure that its customers’ order flow is directed to the markets 
providing the most beneficial terms.
275
   
 Although the Commission has not established a set of specific minimum data elements 
that a broker-dealer would need to acquire to achieve best execution
276
 and has acknowledged 
that it cannot specify the data elements that may be relevant to every specific situation,
277
 it has 
identified the various types of data needed by broker-dealers to fulfill their duty of best 
execution.  For example, information contained in the public quotation system must be 
considered in seeking best execution of customer orders.
278
  In adopting Rules 605 and 606,
279
 
the Commission recognized that the reports required of market centers would provide statistical 
                                                 
273
  See Order Execution Obligations Adopting Release, supra note 10, at 48323. 
274
  See Payment for Order Flow Release, supra note 33, at 55009. 
275
  See Regulation NMS Adopting Release, supra note 21, at 37516; Payment for Order 
Flow Release, supra note 33, at 55009. 
276
  See MDI Adopting Release, supra note 38, at 18606. 
277
  Id. 
278
  See Order Execution and Routing Practice Release, supra note 22, at 75418. 
279
  17 CFR 242.605, 242.606. 

   
182 
 
disclosures regarding certain factors, such as execution price and speed of execution, relevant to 
a broker-dealer’s order routing decisions and that these public disclosures of execution quality 
should help broker-dealers fulfill their duty of best execution.
280
  More recently, the Commission 
emphasized that broker-dealers should consider the availability of consolidated market data, 
including the various elements of data content and the timeliness, accuracy, and reliability of the 
data in developing and maintaining best execution policies and procedures.
281
  
The Commission has also emphasized the importance of price improvement in 
considering whether a customer order received best execution stating that “notwithstanding any 
ambiguity that may have once existed [], it should now be clear that a firm must consider the 
potential for price improvement in carrying out its best execution obligations.”
282
  Relatedly, the 
Commission has taken the position that simply routing customer order flow for automated 
executions or internalizing customer orders on an automated basis at the best bid or offer does 
not necessarily satisfy a broker-dealer’s duty of best execution for small orders in non-NMS 
stock equity securities (and NMS stocks).
283
  Rather, broker-dealers handling small orders should 
                                                 
280
  See Order Execution and Routing Practice Release, supra note 22, at 75418.  See also, id. 
at 75420 (information provided by these reports is not, by itself, sufficient to support 
conclusions regarding the provision of best execution, and any such conclusions would 
require a more in-depth analysis of the broker-dealer's order routing practices than will be 
available from the disclosures required by the rules).  
281
  See MDI Adopting Release, supra note 38, at 18605-06.  
282
  Marc N. Geman, Exchange Act Release No. 43963 (Feb. 14, 2001) (C’n opinion) (record 
did not support a finding that firm fraudulently violated its duty of best execution), 
affirmed on other grounds, 334 F.3d 1183, 1186 (10th Cir. 2003).  See Order Execution 
Obligations Adopting Release, supra note 10, at 48323.  See also, id. at 48323 n. 357   
283
  See id. at 48323. 

   
183 
 
look for price improvement opportunities when executing these orders.
284
  And the expectation 
of price improvement for customer orders is particularly important when broker-dealers receive 
payment for order flow.
285
  According to the Commission, a broker-dealer’s receipt of payment 
for order flow is not a violation of its duty of best execution as long as it periodically assesses the 
quality of the markets to which it routes packaged order flow.
286
 
An additional component of the best execution baseline for the Commission is 
enforcement mechanisms.  The Commission has broad statutory authority under the Exchange 
Act to bring an injunctive action in Federal district court under Exchange Act Section 21(d)(1) 
whenever any person is engaged or is about to engage in acts or practices constituting a violation 
of the Federal securities laws and rules and regulations thereunder and, among other things, 
FINRA and MSRB rules, including best execution rules.  Exchange Act Section 21(f) directs the 
Commission not to bring an injunctive action against any person for a SRO rule violation “unless 
. . . such self-regulatory organization . . . is unable or unwilling to take appropriate action . . ., or 
(2) such action is otherwise necessary or appropriate in the public interest or for the protection of 
investors.”
287
  The Commission’s authority to obtain monetary sanctions in Federal district court 
                                                 
284
  See id. 
285
  See Payment for Order Flow Release, supra note 33, at 55008.  See Exchange Act Rule 
10b-10, 17 CFR 240.10b-10.  See also supra note 43 (reviewing the definition of payment 
for order flow).   
286
  See Payment for Order Flow Release, supra note 33, at 55009.   
287
  Under Exchange Act Section 21(f), the Commission “shall not bring any action pursuant 
to subsection (d) or (e) of this section against any person for violation of, or to command 
compliance with, the rules of a self-regulatory organization . . . unless it appears to the 
Commission that (1) such self-regulatory organization . . . is unable or unwilling to take 
appropriate action against such person in the public interest and for the protection of 

   
184 
 
actions for FINRA and MSRB rule violations is also not co-extensive with its authority to obtain 
injunctive relief for violations of the Federal securities laws.  For example, while the 
Commission can seek disgorgement and any equitable relief for Federal securities law violations 
and SRO rule violations, the Commission’s authority to obtain civil penalties in a Federal district 
court action under Section 21(d) extends to violations of “any provision of th[e Exchange Act], 
the rules or regulations thereunder, or a cease-and-desist order entered by the Commission . . . 
other than [] a violation subject to a penalty pursuant to [the Exchange Act provision penalizing 
insider trading violations].”
288
  Section 21(d)(3) does not include the language in Section 
21(d)(1) regarding the “rules of a registered securities association” or the “rules of the Municipal 
Securities Rulemaking Board.”   
The Commission’s authority to obtain relief in administrative and cease-and-desist 
proceedings is more limited. The Commission can institute administrative proceedings pursuant 
to Exchange Act Sections 15(b)(4) and 15(b)(6), against broker dealers and their associated 
persons respectively, and pursuant to Exchange Act Sections 15B(c)(2) and 15B(c)(4) against 
municipal securities dealers and their associated persons respectively, for willful violations, and 
willful aiding and abetting violations of, among other things, the federal securities statutes, the 
rules and regulations thereunder, “or the rules of the Municipal Securities Rulemaking Board.”
289
   
                                                 
investors, or (2) such action is otherwise necessary or appropriate in the public interest or 
for the protection of investors.”   
288
  Exchange Act Section 21(d)(3)(A).  
289
  Exchange Act Section 15(b)(4)(D) and (E) and 15(b)(6)(A)(i). Where broker-dealer’s 
best execution-related misconduct has also involved fraud, the Commission may exercise 
its discretion to bring best execution-based fraud charges pursuant to the Exchange Act’s 

   
185 
 
There is no parallel provision for the rules of an SRO or a registered securities association such 
as FINRA.  A cease-and-desist proceeding can be brought only if “any person is violating, has 
violated, or is about to violate any provision of [the Exchange Act], or any rule or regulation 
thereunder.”
290
  There is no parallel provision for the rules of the MSRB
291
 or the rules of a 
federal securities association.
292
 
b) FINRA Rule 5310 Best Execution Rule and Related Information 
As discussed in greater detail in Sections   II.C and IV., FINRA has a rule for its members 
that details their best execution obligations.
293
  Specifically, Rule 5310(a)(1) states that “[i]n any 
                                                 
and the Securities Act’s antifraud provisions. See, e.g., Linkbrokers Derivatives LLC, 
Exchange Act Rel. No. 72,846 (Aug. 14, 2014) (settled Section 15(b) and cease-and-
desist proceeding alleging antifraud violations of Exchange Act Section 15(c)(1)), 
available at 
https://www.sec.gov/litigation/admin/2014/34-72846.pdf.    
290
  Exchange Act Section 21C(a).  
291
  Where the Commission can institute an administrative proceeding under both Sections 
15B(c) and 21C, the Commission can order remedies, including a cease-and-desist order, 
and other sanctions against a municipal securities dealer.  See, e.g., RBC Capital 
Markets, LLC, Exchange Act Rel. No. 93,042 (Sept. 17, 2021) (settled action) available 
at https://www.sec.gov/litigation/admin/2021/34-93042.pdf.  
  
292
  In situations where broker-dealer best execution-related misconduct has involved fraud, 
the Commission can exercise its discretion to bring best execution-based fraud charges 
pursuant to the Exchange Act’s or the Securities Act’s antifraud provisions. See, e.g., 
Robinhood SEC, supra note 69 (settled cease-and-desist proceeding alleging antifraud 
violations of Securities Act Sections 17(a)(2) and 17(a)(3)) 
https://www.sec.gov/litigation/admin/2020/33-10906.pdf
; Patrick R. Burke, Exchange 
Act Rel. No. 76,285 (Oct. 28, 2015) (settled cease-and-desist and Section 15(b) 
proceeding alleging antifraud violations of Exchange Act Section 10(b) and Rule 10b-5 
and Securities Act Section 17(a)), available at  
https://www.sec.gov/litigation/admin/2015/33-9968.pdf.  
293
  Rule 5310, which first became effective in May 2012, consolidated FINRA members' 
best execution requirements that were based largely on NASD Rule 2320 and NASD 
Interpretive Guidance with Respect to Best Execution Requirements, NASD IM-2320, as 

   
186 
 
transaction for or with a customer or customer of another broker-dealer, a member and persons 
associated with a member shall use reasonable diligence to ascertain the best market for the 
subject security and buy or sell in such market so that the resultant price to the customer is as 
favorable as possible under prevailing market conditions.”
294
  FINRA’s rule applies “not only 
where the member acts as agent for the account of its customer but also where transactions are 
                                                 
well as new provisions.  FINRA, Regulatory Notice 12-13, SEC Approves Consolidated 
FINRA Best Execution Rule, available at https://www.finra.org/rules-
guidance/notices/12-13.  As previously noted supra in note 129, in addition to FINRA’s 
best execution rule, FINRA Rule 3110(b)(1)
 
 requires broker-dealers to have procedures 
for compliance with FINRA rules (including its best execution rule) and Federal 
securities laws and regulations.  Separately, FINRA Rules 3130(b) and (c) require the 
chief executive officer (or equivalent officer) of a FINRA member to certify annually that 
the member has in place processes to establish, maintain, review, test and modify written 
compliance policies and written supervisory procedures reasonably designed to achieve 
compliance with applicable FINRA rules, MSRB rules, and Federal securities laws and 
regulations.  See also, FINRA Regulatory Notice 21-12, supra note 174, at 9 (“FINRA 
has also advised Member firms should have effective procedures in place to ensure they 
are fulfilling their best execution obligations during extreme market conditions”).  
294
  FINRA Rule 5310(a)(1), available at https://www.finra.org/rules-
guidance/rulebooks/finra-rules/5310.  FINRA rule 5310 recodified FINRA’s predecessor, 
the NASD, rule and interpretative material (IM) governing best execution and 
interpositioning, NASD Rule 2320 and IM-2320.  FINRA’s most recent regulatory 
guidance on Rule 5310 is contained in Regulatory Notice 15-46, Best Execution: 
Guidance on Best Execution Obligations in Equity, Options and Fixed Income Markets 
(Nov. 2015) (“FINRA Regulatory Notice 15-46”), available at 
https://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_15-
46.pdf; and Regulatory Notice 21-23, Best Execution and Payment for Order Flow (June 
23, 2021) (“FINRA Regulatory Notice 21-23”) available at 
https://www.finra.org/sites/default/files/2021-06/Regulatory-Notice-21-23.pdf.   

   
187 
 
executed as principal”
295
 and cannot be transferred to others.
296
  Interpositioning is expressly 
prohibited.
297
  Like the position taken by the Commission,
298
 FINRA’s rule lists a set of non-
exclusive “factors that will be considered in determining whether a member has used ‘reasonable 
diligence.”  The five factors listed are:  
i. the character of the market for the security (e.g., price, volatility, relative 
liquidity, and pressure on available communications); 
ii. the size and type of transaction; 
iii. the number of markets checked; 
iv. accessibility of the quotation; and 
v. the terms and conditions of the order which result in the transaction, as 
communicated to the member and persons associated with the member.
299
 
 
FINRA’s best execution rule and related guidance
300
 addresses how its members’ 
obligations and these factors are accounted for and considered. For example, for debt securities, 
                                                 
295
  FINRA Rule 5310(e).  This paragraph also states that a broker-dealer’s duty of best 
execution is “distinct from the reasonableness of commission rates, markups, or 
markdowns, which are governed by Rule 2121 and its Supplementary Material.” Id.  
296
  FINRA Rule 5310.09(a). 
297
  FINRA Rule 5310(a)(2).  This subparagraph is one of a number of the rule’s specific 
provisions addressing interpositioning.  For a discussion of the related burdens and 
prohibitions imposed by FINRA in connection with interpositioning, see the discussion of 
FINRA Rules 5310(b), (c), and (d) in Section IV.A., including the text accompanying 
supra notes 149 and150
.   
298
  See Order Execution and Routing Practice Release, supra note 22, at 75422, and the 
accompanying discussion.   
299
  FINRA Rule 5310(a)(1).   
300
  FINRA Rule 5310 includes supplementary material which addresses: i) the execution of 
marketable customer orders; ii) the definition of “market;” iii) debt securities; iv) 
executing brokers; v) the use of another broker, a broker’s broker, to execute a 
customer’s orders; vi) orders involving securities with limited quotation or pricing 

   
188 
 
FINRA Rule 5310.03 explains that the term “quotation” in its “accessibility of the quotation” 
factor “refers to either dollar (or other currency) pricing or yield pricing” and that “[i]n the 
absence of accessibility, members are not relieved from taking reasonable steps and employing 
their market expertise in achieving the best execution of customer orders.”
301
 FINRA Rule 
5310.06 also states that FINRA members “must have written policies and procedures in place 
that address how the member will determine the best inter-dealer market for such a security in 
the absence of pricing information or multiple quotations and must document its compliance 
with those policies and procedures.” 
FINRA Rule 5310.07 also addresses orders involving foreign securities.  “Even though a 
security does not trade in the U.S., members still have an obligation to seek best execution for 
customer orders involving any foreign security.”
  302
  “[A] member that handles customer orders 
involving foreign securities that do not trade in the U.S. must have specific written policies and 
procedures in place regarding its handling of customer orders for these securities that are 
reasonably designed to obtain the most favorable terms available for the customer, taking into 
account differences that may exist between U.S. markets and foreign markets.”
303
  Referencing 
                                                 
information; vii) orders involving foreign securities; viii) customer instructions for order 
handling; and ix) the regular and rigorous review of execution quality. The text of 
FINRA Rule 5310 is available at 
https://www.finra.org/rules-guidance/rulebooks/finra-
rules/5310.  Regulatory Notices 15-46 and 21-23 are FINRA guidance documents for its 
best execution rule.     
301
  FINRA Rule 5310.03.   
302
  FINRA Rule 5310.07.   
303
  Id. 

   
189 
 
two of its factors to be considered, FINRA Rule 5310.07 states that “the character of the 
particular foreign market and the accessibility of quotations in certain foreign markets may vary 
significantly” and that “the determination as to whether a member has satisfied its best execution 
obligations necessarily involves a ‘facts and circumstances’ analysis.”
304
  Further, for customer 
orders involving a foreign security FINRA requires its members to “have specific written 
policies and procedures in place regarding its handling of customer orders for these securities 
that are reasonably designed to obtain the most favorable terms available for the customer.”
305
 
FINRA rules address two situations where a member’s best execution obligation is 
modified or no longer applicable.  If a broker-dealer “receives an unsolicited instruction from a 
customer to route that customer’s order to a particular market for execution, the member is not 
required to make a best execution determination beyond the customer’s specific instruction.”
306
   
FINRA Rule 5310.04 addresses a specific situation where its best execution rule does not apply.  
The rule “does not apply in instances when another broker-dealer is simply executing a customer 
order against the member's quote.”  The rule explains that “[t]he duty to provide best execution 
                                                 
304
  Id.  The rule also states that “best execution obligations also must evolve as changes 
occur in the market that may give rise to improved executions [and] members also must 
regularly review these policies and procedures to assess the quality of executions 
received and update or revise the policies and procedures as necessary.”  
305
  Id. 
306
  FINRA Rule 5310.08.  FINRA does require, however, that the broker-dealer process the 
“order promptly in accordance with [its] terms ... [and] where a customer has directed 
that an order be routed to another specific broker-dealer,” that broker-dealer receiving the 
directed order would be subject to the duty of best execution with respect to the 
customer’s order.  Id.  

   
190 
 
to customer orders received from other broker-dealers arises only when an order is routed from 
the broker-dealer to the member for the purpose of order handling and execution.”
307
 
FINRA Rule 5310 addresses a broker-dealer’s best execution-related obligations to 
determine order execution quality.  FINRA Rule 5310.09(a) requires that “[a] member that 
routes customer orders to other broker-dealers for execution on an automated, non-discretionary 
basis, as well as a member that internalizes customer order flow, must have procedures in place 
to ensure the member periodically conducts regular and rigorous reviews of the quality of the 
executions of its customers' orders if it does not conduct an order-by-order review.”
308
   This 
“regular and rigorous” review must be conducted at a minimum no less frequently than quarterly 
unless, based on a member’s business, “more frequent reviews are needed.”  Reviews are 
                                                 
307
  FINRA Rule 5310.04 (emphasis added). 
308
  FINRA Rule 5310.09(a).  FINRA has stated that there are two situations where an order-
by-order review would satisfy best execution requirements when a “regular and rigorous 
review alone . . . may not” do so.  One involves certain larger-sized security orders.  See 
FINRA Regulatory Notice 15-46, supra note 294, at 3 (“when routing or internally 
executing larger-sized orders in any security, regular and rigorous review alone (as 
opposed to an order-by-order review) may not satisfy best execution requirements, given 
that the execution of larger-size orders “often requires more judgment in terms of market 
timing and capital commitment” (quoting NASD Notice to Members 01-22 at n. 13)).  
The other circumstance involves “any orders that a member firm determines to execute 
internally” which, according to FINRA Regulatory Notice 21-23, “are subject to an 
order-by-order best execution analysis.”  Id., supra note 
294, at 3.  FINRA guidance 
includes commentary that advances in technology make “order-by-order review of 
execution quality [] increasingly possible for a range of orders in equity securities and 
standardized options. Id.  Although the text of FINRA Rule 5310 and its interpretive 
guidance refer to an “order-by-order review” in contrast to the “regular and rigorous 
review” detailed in Rule 5310.09, it is our understanding that FINRA has not directly 
addressed what an “order-by-order review” entails. 

   
191 
 
required to be done on a security-by-security and type-of-order basis.
309
  Execution quality 
reviews must compare customer execution quality to the execution quality of other markets that 
are not used for customer order execution.
310
  However, FINRA Rule 5310.09(c) allows a 
broker-dealer to rely on another broker-dealer’s regular and rigorous review if the broker-dealer 
seeking to rely “routes its order flow to another member that has agreed to handle that order flow 
as agent for the customer (e.g., a clearing firm or other executing broker-dealer)” and “as long as 
the statistical results and rationale of the review are fully disclosed to the member and the 
member periodically reviews how the review is conducted, as well as the results of the 
review.”
311
  Issues associated with payment for order flow are also addressed in FINRA’s best 
execution rule and guidance.  FINRA recently issued best execution guidance that stated that 
“firms that provide payment for order flow for the opportunity to internalize customer orders 
cannot allow such payments to interfere with their best execution obligations.”
312
  For example, 
                                                 
309
  FINRA Rule 5310.09(a). 
310
  “[A] member must determine whether any material differences in execution quality exist 
among the markets trading the security and, if so, modify the member's routing 
arrangements or justify why it is not modifying its routing arrangements.”  FINRA Rule 
5310.09(b).  FINRA has identified eight factors for members to consider in order to 
assure that order flow is directed to markets providing the most beneficial terms for a 
member’s customers’ orders.  These factors are discussed in the text accompanying supra 
note 299.   
311
  FINRA Rule 5310.09(c).   
312
  FINRA Regulatory Notice 21-23, supra note 294, at 4.   

   
192 
 
“inducements such as payment for order flow and internalization may not be taken into account 
in analyzing market quality.”
313
   
 “In other words, ... firms may not negotiate the terms of order routing arrangements for 
those customer orders in a manner that reduces the price improvement opportunities that 
otherwise would be available to those customer orders absent payment for order flow.”
314
 
FINRA publishes reports that include the results of its examination program’s annual 
review of member best execution compliance.  These reports, covering examinations from 2017 
through 2021, include a series of findings and observations on various aspects of Rule 5310.
315
  
In each year, FINRA observed some noncompliance with Rule 5310.  Among the points made in 
each report, FINRA reported observing some firms that did not: 1) assess execution in competing 
markets; 2)  conduct an adequate review on a type-of-order basis; 3) evaluate certain required 
factors when conducting regular and rigorous review; and, in more recent years, 4) consider and 
address potential conflicts of interest in conflicts of interest relating to routing of orders to 
                                                 
313
  Id. FINRA’s guidance stated that “the possibility of obtaining price improvement is a 
heightened consideration when a broker-dealer receives payment for order flow.” Id. 
(citation omitted).  
314
  Id. (citing FINRA Regulatory Notice 15-46, supra note 294, at n.25 (“For example, if a 
firm obtains price improvement at one venue of $0.0005 per share, and it could obtain 
mid-point price improvement at another venue of $0.025 per share, the firm should 
consider the opportunity of such midpoint price improvement on that other venue as part 
of its best execution analysis.”)).  
315
  Each of these reports is available at https://www.finra.org/media-center/reports-studies. 
For 2017 through 2019, the reports are titled “FINRA Report on Examination Findings.”  
More recent reports are titled “Report on FINRA’s Examination and Risk Monitoring 
Program.”   

   
193 
 
affiliated broker-dealers, ATSs, or market centers that provide payment for order flow or other 
routing inducements. 
316
   
c) MSRB Rule G-18 Best Execution Rule and Guidance 
The MSRB’s adopted its best execution rule, Rule G-18, in 2015 which became effective 
on March 21, 2016.
317
  It is generally modeled after and similar to FINRA Rule 5310.
318
  It 
extends the outline of “reasonable diligence” to include “the information reviewed to determine 
the current market for the subject security or similar securities,” provides more granular detail 
regarding transactions in which the broker-dealer acts in a principal capacity, and directs at least 
                                                 
316
  Id.  
317
  The full text of the MSRB rule is available at https://www.msrb.org/Rules-and-
Interpretations/MSRB-Rules/General/Rule-G-18.aspx.  The rule applies to brokers, 
dealers, and municipal securities dealers.  In addition, MSRB Rule G-28 requires broker-
dealers to have procedures for compliance with MSRB rules and the Exchange Act and 
rules thereunder.  As previously noted in supra note 48, for ease of discussion and 
consistency, when discussing the MSRB rule, the release refers to these entities 
collectively as “broker-dealers.”  The MSRB issued “Implementation Guidance on 
MSRB Rule G-18, on Best Execution” on November 20, 2015 (“MSRB 2015 
Guidance”), available at https://www.msrb.org/~/media/Files/MISC/Best-Ex-
Implementation-Guidance.ashx.  An updated version of portions of that guidance from 
February 7, 2019 (“MSRB Notice 2019-05”) is available at https://www.msrb.org/-
/media/Files/Regulatory-Notices/Announcements/2019-05.ashx??n=1.  The MSRB and 
FINRA coordinated their issuance of independent guidance in 2015 with each notice 
including a statement that the guidance being issued was “consistent in all material 
respects with guidance on best execution obligations [being published by the other SRO] 
... except where the rule or context otherwise specifically requires.” MSRB 2015 
Guidance, at n. 1; FINRA Regulatory Notice 15-46, supra note 
294, at n. 1.  The MSRB 
has also issued information for investors available at  
https://www.msrb.org/msrb1/pdfs/Best-Execution-Investors-Perspective.pdf. 
318
  See sections   II. C and IV for detailed discussions of Rule G-18.  The discussion in this 
section of the economic analysis is largely limited to identifying the differences between 
Rule G-18 and FINRA Rule 5310.    

   
194 
 
annual reviews of best execution (versus at least quarterly reviews required by FINRA).  Unlike 
FINRA Rule 5310, MSRB Rule G-48(e) provides an exception from the requirements of Rule G-
18 for all transactions with sophisticated municipal market professionals, defined in MSRB Rule 
D-15.
319
  According to FINRA and the MSRB, there are two instances where “material 
differences” exist between the MSRB’s best execution guidance and FINRA’s.
320
  They involve 
the regular and rigorous review of execution quality required by members,
321
 and the timeliness 
of executions consistent with reasonable diligence.
322
  MSRB Rule G-18.08(a) requires a broker-
dealer to, at a minimum, conduct annual reviews of its policies and procedures for determining 
the best available market for the execution of its customers’ transactions.  MSRB Rule G-
18.08(b) provides that where a broker-dealer routes its customers’ transactions to another broker-
                                                 
319
  MSRB Rule G-48 and paragraph (e) provide that “a broker, dealer, or municipal 
securities dealer’s obligations to a customer that it reasonably concludes is a 
Sophisticated Municipal Market Professional, or SMMP, as defined in Rule D-15, shall 
be modified” such that “[t]he broker, dealer, or municipal securities dealer shall not have 
any obligation under Rule G-18 to use reasonable diligence to ascertain the best market 
for the subject security and buy or sell in that market so that the resultant price to the 
SMMP is as favorable as possible under prevailing market conditions.”  See supra note 
120. 
320
  FINRA Regulatory Notice 15-46, supra note 294, at 12 n. 1; MSRB Notice 2019-05, 
supra note 317, at 4 n.1.  In addition to these “material differences,” the MSRB guidance 
also expressly states that the provisions of Rule G-18 do not apply to transactions in 
municipal fund securities.”  MSRB Rule G-18.09.  The FINRA guidance has no 
comparable position.   
321
  The MSRB, “[i]n adopting Rule G-18, and paragraph .08 of the Supplementary Material 
specifically, [] did not include provisions that are contained in FINRA Rule 5310 
pertaining to “regular and rigorous review of execution quality,” to tailor the rule to the 
characteristics of the municipal securities market.”  MSRB Notice 2019-05, supra note 
317, at 7 n.12.    
322
  FINRA Regulatory Notice 15-46, supra note 294, at 12 n. 1. 

   
195 
 
dealer, and that broker-dealer has agreed to handle those transactions as agent or riskless 
principal for the customer, the routing broker-dealer may rely on the other broker-dealer’s 
periodic reviews as long as the results and rationale of the reviews are fully disclosed to the 
broker-dealer and the broker-dealer periodically reviews how the other broker-dealer’s reviews 
are conducted and the results of such reviews.
323
   
The other material difference between FINRA and MSRB best execution rules can be 
found in MSRB Rule G-18.03.  According to this rule, “[a] dealer must make every effort to 
execute a customer transaction promptly, taking into account prevailing market conditions.  In 
certain market conditions a dealer may need more time to use reasonable diligence to ascertain 
the best market for the subject security.”
324
  FINRA Rule 5310 has no similar provision noting 
the potential need for more time.   
MSRB does not have authority to bring enforcement actions itself.  Rather, FINRA and 
the Commission may enforce MSRB rules.   
2. Best Execution Review Processes 
 Policies and procedures for reviewing the execution quality of customer orders vary 
across broker-dealers.  Under the existing SRO rules and guidance, broker-dealers
325
 that route 
to clearing or executing brokers on an agency basis may rely on the best execution review of 
                                                 
323
  For a discussion of how the MSRB has interpreted the obligations of introducing brokers, 
see supra note 229
.   
324
  MSRB Rule G-18.03.   
325
  These broker-dealers can include introducing brokers as proposed to be defined by this 
rule, but FINRA’s rule applies more generally. 

   
196 
 
their clearing firm or executing brokers.  Other broker-dealers may use third-party transactions 
costs analysis (TCA) services and internal review systems, including best execution committees.   
Currently, broker-dealers review best execution to standards set by FINRA Rule 5310 or 
MSRB Rule G-18, as applicable.
326
  FINRA Rule 5310 requires at least a quarterly review of 
execution quality.  MSRB Rule G-18 requires an annual review of best execution policies and 
procedures that takes into account execution quality obtained under those policies and 
procedures, among other things.  In performing reviews of customers’ order execution quality, 
broker-dealers compare the execution actually achieved to the execution quality in other markets 
that were not used.  Overall, these processes help broker-dealers to evaluate whether or not 
access to a specific market will improve customer execution quality given cost of access.  
FINRA Rule 5310.02 provides a “market” definition and states that broker-dealers must not 
mandate that “certain trading venues have less relevance than others in the course of determining 
a firm’s best execution obligations.”  What constitutes a relevant/material market to access varies 
based on the needs of the individual customer order and estimated changes in their transaction 
costs.  A best execution policy including a documented process of venue selection aids this 
decision. 
Introducing brokers perform best execution reviews by evaluating the execution quality 
achieved by brokers to which they route their customers’ orders.  As discussed above in this 
section , introducing brokers
327
 may rely on the best execution review processes of their routing 
                                                 
326
  See supra Section II. C for a detailed discussion of FINRA and MSRB best execution 
review requirements. 
327
  All broker-dealers who route to executing or clearing brokers on an agency basis may use 
this reliance, per FINRA Rule 5310, for the purposes of best execution. 

   
197 
 
or executing brokers and use these to evaluate the execution quality of orders by comparing 
execution statistics of executing brokers, with which the introducing broker has a relationship.  
The Commission believes this is currently done by comparing execution statistics in aggregate, 
rather than on an order-by-order basis, except where an introducing broker is following FINRA’s 
statements in its regulatory notice regarding order-by-order best execution reviews.
328
   
Introducing brokers typically have pre-arranged agreements with a small number of executing 
brokers, which vary by introducing broker.
329
  This may lead to introducing brokers principally 
relying on execution statistics from these executing brokers to determine whether customers’ 
orders are receiving best execution.  While the FINRA rule requires introducing brokers to 
review the methodology and results of its executing broker’s regular and rigorous review of its 
execution quality on a quarterly basis, it does not specifically require the introducing broker to 
compare the execution quality of its executing broker(s) to what it would have received from 
other executing brokers.
330
   
Executing brokers are able to conduct a more thorough review of execution quality of the 
orders they receive.  Executing brokers review execution quality by comparing execution 
statistics of executions received given particular execution methods, e.g., routing to a particular 
market center or internalization.  The Commission preliminarily believes this review is highly 
                                                 
328
  See supra note 308 for further discussion on FINRA’s rules and guidance related to 
broker-dealers reviewing the execution quality of customer orders.  
329
  See Henry F. Minnerop, The Role and Regulation of Clearing Brokers-Revisited, 75 Bus. 
Lawyer 2201 (Summer 2020), available at 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3663233 (retrieved from Elsevier 
database). 
330
  See FINRA Rule 5310.09(c), Regular and Rigorous Review of Execution Quality. 

   
198 
 
heterogeneous among executing brokers ( i.e., some use third party transaction cost analysis 
(“TCA”) services exclusively while others supplement and verify their own analysis with third 
party TCA statistics), with some brokers performing very rigorous comparisons of executions 
using various methods, and other brokers performing a more cursory review. 
Some brokers may utilize third-party analysis in their execution quality reviews.  In order 
to evaluate their  execution quality, some brokers may send information on their orders to third 
parties TCA services to produce independent order execution quality statistics.  TCA 
components may include, but are not necessarily limited to, fees, taxes, rebates, spreads, delay 
costs, price appreciation, market impact, timing risk, and opportunity costs.  For example, TCA 
service providers in the NMS stock and options markets may produce execution quality reports 
for their clients which contain, in addition to other metrics, information on the percentage of 
trades receiving price improvement, percentage of trades at or within the NBBO, average savings 
per share from price improvement, liquidity multiple (i.e., average size of order execution at or 
better than the NBBO at the time of order routing, divided by average quoted size), execution 
speed, and effective to quoted spread ratios.  In NMS Stocks, broker-dealers may also utilize 
Rule 605 reports to help evaluate execution quality at different market centers, including market 
to which they may not route orders.
331
 
Some broker-dealers use best execution committees (BECs) to evaluate their execution 
quality and establish their best execution policies and procedures.  Order-by-order reviews are 
typically reserved for large orders, which likely leaves the execution quality review of retail 
                                                 
331
 See supra note 223 and accompanying discussion for more information on Rule 605 
reports. 

   
199 
 
orders as a task to be done in aggregate.  BECs meet periodically, as often as monthly, to review 
execution quality of all applicable order types, compare order routing practices, policies, and 
procedures to industry standards, and maintain written documentation for order execution and 
evaluation.  BEC members may consist of senior trading representatives along with members of 
the broker-dealer’s compliance, legal, and operational risk departments. 
3. Description of Markets and Broker-Dealer Order Handling and 
Execution Practices 
 Broker-dealers execute orders from their customers in a variety of ways, which may 
depend on the nature of the market, broker-dealer, or customer, or characteristics of the order 
such as size.  Some broker-dealers may act on a purely agency basis by routing orders to the best 
available quotes set by other broker-dealers or third-party market makers on exchanges and 
ATSs or at other OTC market centers, some broker-dealers may choose to execute the orders on 
a principal basis, and some may do both.  
Certain conflicts of interest may arise in the handling and execution of customer orders 
that exacerbate the principal-agent problem between the customer and broker-dealer.  Common 
types of conflicts of interest that may exacerbate the principal-agent problem can involve:  (1) a 
broker-dealer routing a customer order in exchange for a payment or a lower fee; or (2) a broker-
dealer seeking to transact in a principal capacity with a customer order, which involves trading 
off the spread the broker-dealer can earn on the transaction vs the price the customer must pay; 
or (3) a broker-dealer routing a customer order to a trading venue or broker-dealer with which it 
may have a relationship, such as a broker-dealer routing a customer order to an affiliated ATS.
332
  
                                                 
332
  See supra Section III.A. 

   
200 
 
However, SRO rules address the extent to which certain specific situations presenting conflicts 
of interest are prohibited from influencing a broker-dealer’s duty of best execution.  For example 
FINRA rules and guidance (e.g., FINRA Regulatory Notice 21-23) require that “member firms 
may not let payment for order flow interfere with their duty of best execution.”
333
      
The below sections discuss in more detail the trading environment and broker-dealer 
order handling and execution practices in different asset classes.  They also discuss the role that 
certain conflicts of interest such as PFOF and principal trading play in the handling and 
execution of retail orders in different asset classes. 
a) NMS Securities 
i. NMS Stocks 
a. NMS Stocks Trading Services Overview 
Market centers compete to attract order flow in NMS stocks. At the same time, market 
participants compete to provide liquidity in NMS stocks within market centers. As shown in 
Table 1, in Q1 of 2022, NMS stocks were traded on 16 registered securities exchanges
334
 and 
                                                 
333
  See supra Section III.A.2. 
334
  Most of these 16 registered securities exchanges are owned by three exchange families. 
Currently, CBOE Global Markets owns: Cboe BYX Exchange, Inc., Cboe BZX 
Exchange, Inc. (“Cboe BZX”), Cboe EDGA Exchange, Inc., and Cboe EDGX Exchange, 
Inc. (“Cboe EDGX”); the Nasdaq Inc. owns: Nasdaq BX, Inc. (“Nasdaq BX”), Nasdaq 
PHLX LLC (“Nasdaq Phlx”), and The Nasdaq Stock Market LLC (“Nasdaq”); and the 
Intercontinental Exchange Inc. owns: NYSE, NYSE American LLC (“NYSE 
American”), NYSE Arca, Inc. (“NYSE Arca”), NYSE Chicago, Inc., and NYSE 
National, Inc.  Other registered securities exchanges that trade NMS stocks and do not 
belong to one of these exchange groups include: Investors Exchange LLC (“IEX”), Long-
Term Stock Exchange, Inc., MEMX LLC, and MIAX Pearl, LLC (“MIAX PEARL”). 
Among these exchanges, eight trade only equities and eight trade both equities and 
options.  The Commission has approved BOX Exchange LLC (“BOX”) to trade certain 

   
201 
 
off-exchange at 32 NMS Stock ATSs and at over 230 other FINRA members, including OTC 
market makers.
335
  OTC market markers include 6 wholesalers that internalize the majority of 
individual investor marketable orders.
336
  These numerous market centers match traders with 
counterparties, provide a framework for price negotiation and/or provide liquidity to those 
seeking to trade.  
 Market centers’ primary customers are broker-dealers that route their own orders or their 
customers’ orders for execution.  Market centers may compete with each other for these broker-
dealers’ order flow on a number of dimensions, including execution quality.  They also may 
                                                 
equity securities that would be NMS stocks on a facility, BSTX LLC (“BSTX”), but 
BSTX is not yet operational.  See Securities Exchange Act Release Nos. 94092 (Jan. 27, 
2022), 87 FR 5881 (Feb. 2, 2022) (SR-BOX-2021-06) (approving the trading of equity 
securities on the exchange through a facility of the exchange known as BSTX); 94278 
(Feb. 17, 2022), 87 FR 10401 (Feb. 24, 2022) (SR-BOX-2021-14) (approving the 
establishment of BSTX as a facility of BOX).  BSTX cannot commence operations as a 
facility of BOX until, among other things, the BSTX Third Amended and Restated 
Limited Liability Company Agreement approved by the Commission as rules of BOX is 
adopted. Id. at 10407. 
335
  See Concept Release on Equity Market Structure, Exchange Act Release No. 61358 (Jan. 
14, 2010), 75 FR 3593 (Jan. 21, 2010) at 3598-3560 (for a discussion of the types of 
trading centers); see also Form ATS-N Filings and Information, available at 
https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm.  Some academic studies 
attribute the fragmented nature of this market, in part, to certain provisions of Regulation 
NMS. See, e.g., Maureen O’Hara & Mao Ye, Is Market Fragmentation Harming Market 
Quality?, 100 J. FIN. 459 (2011); Amy Kwan, et.    al., Is Market Fragmentation Harming 
Market Quality?, 115 J. FIN. 330 (2015).  
336
  The six OTC market makers that are classified as wholesalers for purposes of this release 
are the OTC market makers to which the majority of marketable orders originating from 
retail brokers were routed as identified from information from retail broker Rule 
606(a)(1) reports from Q1 2022. Rule 606(a)(1) requires broker-dealers to produce 
quarterly public reports containing information about the venues to which the broker-
dealer regularly routed non-directed orders for execution, including any payment 
relationship between the broker-dealer and the venue, such as any PFOF arrangements. 
See 17 CFR 242.606(a)(1). 

   
202 
 
innovate to differentiate themselves from other trading centers to attract more order flow.  While 
registered exchanges cater to a broader spectrum of investors, ATSs and OTC market makers, 
including wholesalers, tend to focus more on providing trading services to either institutional or 
individual investor orders. 
Table 1: Q1 2022 NMS Stock Share Volume Percentage by Market Center Type 
Market Center Type 
Venue Count 
Percentage of Total Share 
Volume 
Percentage of Off-
Exchange Share Volume 
Exchanges 
16 59.7%  
NMS Stock ATSs 
32 10.2% 25.2% 
Wholesalers 
a 
6 23.9% 59.4% 
Other FINRA Members 
232 6.3% 15.6% 
This table reports for Q1 2022 the percentage of NMS stock share volume executed by market center type and the 
percentage of off-exchange share volume by market centers type. Venue Count lists the number of venues in each 
market center category. Percentage of Total Share Volume is the percentage of all NMS stock share volume (on-
exchange plus off-exchange) executed by the type of market center. Percentage of off-Exchange Share Volume is 
the percentage of off-exchange share volume executed by the type of market center. Exchange share volume and 
total market volume are based on CBOE Market Volume Data on monthly share volume executed on each 
exchange and share volume reported in FINRA Trade Reporting Facilities (TRFs).
b
 NMS Stock ATSs, 
wholesalers   and Other FINRA members   share volume are based on monthly FINRA OTC Transparency data on 
aggregated NMS stock trading volume executed on individual ATSs and over-the-counter at Non-ATS FINRA 
members.
c
 The Percentage of Off-Exchange Share Volume is calculated by dividing the NMS Stock ATS, 
wholesaler and FINRA member share volume from the FINRA Transparency Data by the total TRF share volume 
reported in CBOE Market Volume Data. Percentages do not add up to 100 percent due to rounding.   
a
 See supra note 336 for details regarding how FINRA member OTC market makers are classified as wholesalers 
for purposes of this release. 
b
 Cboe, U.S. Historical Market Volume Data, available at 
https://cboe.com/us/equities/market_statistics/historical_market_volume/. Trade Reporting Facilities (TRFs) are 
facilities through which FINRA members report off-exchange transactions in NMS stocks, as defined in SEC 
Rule 600(b)(47) of Regulation NMS. See generally FINRA, Trade Reporting Facility, available at 
https://www.finra.org/filing-reporting/trade-reporting-facility-trf. 
c
 FINRA OTC (Non-ATS) Transparency Data, Monthly Statistics, available at 
https://otctransparency.finra.org/otctransparency/OtcData; FINRA OTC (ATS Block)Transparency Data, 
Monthly Statistics, available at https://otctransparency.finra.org/otctransparency/AtsBlocksDownload. The 
FINRA OTC (Non-ATS) Transparency Data may not contain all share volume transacted by a wholesaler or 
FINRA member because FINRA aggregates “[s]  ecurity-specific information for firms with ‘de minimis’  volume 
outside of an ATS”   and “publishe[s it]  on a non-attributed basis.” FINRA, OTC (ATS & Non-ATS) 
Transparency, Overview, available at https://www.finra.org/filing-reporting/otc-transparency 
  

   
203 
 
 Table 1 displays NMS stock share volume percentage by market center type for Q1 2022. 
Exchanges execute approximately 60% of total share volume in NMS stocks, while off-exchange 
market centers execute approximately 40%.  The majority of off-exchange share volume is 
executed by wholesalers, who execute almost one quarter of total share volume (23.9%)
337
 and 
about 60% of off-exchange share volume.
338
  NMS Stock ATSs execute approximately 10% of 
total NMS stock share volume and 25% of off-exchange share volume.  Other FINRA members, 
besides wholesalers and ATSs, execute approximately 15% of off-exchange share volume. 
Wholesalers and other OTC market makers also operate single dealer platforms (“SDPs”) where 
                                                 
337
  Of the six wholesalers identified in Q1 2022, two accounted for approximately 66% of 
wholesalers’ total executed share volume of NMS stocks.  This result suggests that just 
two wholesalers account for a very large percentage of order flow coming from 
individual investors. One study finds that the concentration of wholesaler internalization, 
as measured by the Herfindahl-Hirschman Index (HHI) of share volume executed across 
wholesalers, has increased from 2018 to 2021.  See Edwin Hu & Dermot Murphy, 
Competition for Retail Order Flow and Market Quality (Working paper, June 2022), 
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4070056 (retrieved from 
Elsevier database).  
338
  The share volume reported for wholesalers in FINRA OTC Transparency Data includes 
both individual investor orders executed by wholesalers in a principal capacity, as well as 
other orders executed by wholesalers in a principal capacity, such as institutional orders 
executed on their single dealer platforms.  It does not include share volume that they 
executed in a riskless principal capacity or share volume that was routed and executed at 
another market center.  

   
204 
 
they operate as dealers to internalize marketable institutional orders.
339
  One study found that 
SDPs accounted for approximately 10% of off-exchange trading volume in Q1 2022.
340
     
 Exchanges (via their rules) and ATSs determine how orders compete with each other, 
wherein liquidity suppliers set prices and wait for execution at their prices by liquidity 
demanders.  This interaction between liquidity providers and demanders encompasses order-by-
order competition.  Unlike exchanges, for which each exchange’s rules determine competition in 
a non-discretionary fashion, wholesalers execute or route orders in a discretionary fashion.
341
   
While some orders may be routed to a central limit order book against which institutional 
investors may execute (on the discretion of the wholesaler), institutional investors generally 
consider order flow routed to a wholesaler to be “inaccessible.”
342
  
                                                 
339
  Wholesalers and OTC market makers can execute orders itself or instead further route the 
order to other venues.  An SDP always acts as the counterparty to any trade that occurs 
on the SDP.  See, e.g., FINRA, Investor Insights, Where Do Stocks Trade? (Dec. 3, 
2021), available at https://www.finra.org/investors/insights/where-do-stocks-trade .  
340
  See Rosenblatt Securities, US Equity Trading Venue Guide (May 24, 2022), available at 
https://www.rblt.com/market-reports/rosenblatts-2021-us-equity-trading-venue-guide-2. 
SDP trading volume would be included in the share volume percentage estimates for 
wholesalers and other FINRA members in Table 1. 
341
  A study estimates that the volume of individual investor orders executed by wholesalers 
accounted for approximately 16% to 17% of consolidated share volume during Q1 2022.  
See Rosenblatt Securities, An Update on Retail Market Share in US Equities (June 24, 
2022), available at https://www.rblt.com/market-reports/trading-talk-an-update-on-retail-
market-share-in-us-equities.  However, wholesalers are not completely focused on 
individual investor order flow and some do offer services to institutional order flow. 
342
  See, e.g., Jennifer Hadiaris, Cowen Market Structure: Retail Trading — What’s going on, 
what may change, and what can you do about it?, Insights (Mar. 23, 2021), available at 
https://www.cowen.com/insights/retail-trading-whats-going-on-what-may-change-and-
what-can-institutional-traders-do-about-it/ (“Market makers print most of these shares 
internally at their firm, so they trade off-exchange.  One way we have for isolating retail 
volume is to look at the share of volume that trades off-exchange, but not in a dark pool.  

   
205 
 
 As a proxy for expected execution quality, quoted prices are a dimension on which 
exchanges compete to attract order flow.  Specifically, exchanges are required to post the best 
bid and ask prices available on the exchange at that time
343
 and broker-dealers can observe those 
prices and choose to route orders to the exchange posting the best prices at a given point in time.   
However, others who provide trading services, such as ATSs and OTC market makers, do not 
compete on this dimension.
344
  In other words, wholesalers generally do not compete for order 
flow by posting competitive prices the way exchanges do.  They do not display or otherwise 
advertise the prices at which they are willing to internalize individual investor orders at a given 
point in time.  This suggests that wholesalers attract order flow by offering retail brokers more 
than just competitive price improvement.
345
  In particular, wholesalers bundle their market 
access services with execution services, thereby fully vertically integrating order handling and 
execution services for their retail broker customers.  
                                                 
We refer to this as ‘inaccessible liquidity.’  This is because most institutional orders – 
whether they are executed via algos directly or by high touch desks – primarily go to 
exchanges and dark pools.”). 
343
  See Rule 602 of Regulation NMS. 
344
  ATSs typically compete for institutional order flow by offering innovative trading 
features such as distinct trading protocols and segmentation options.  They may also 
compete on fees.  In addition, they could include their ATS access in the broader set of 
bundled services that the broker-dealer operator of the ATS offers to its institutional 
investors.
 
345
  Wholesalers do not compete by quoting price at a given point in time, but instead 
generally attract order flow by offering prices that are on average better than displayed 
prices. 

   
206 
 
b. Rules Addressing Consolidated Market Data 
 In 2020, the Commission adopted a new rule and amended existing rules to establish a 
new infrastructure for consolidated market data (“MDI Rules”),
346
 and the regulatory baseline 
for NMS stocks includes these changes to the current arrangements for consolidated market data.  
However, as discussed in more detail below, the MDI Rules have not been implemented, and so 
they have not yet affected market practice.  As a result, the data used to measure the baseline 
below reflects the regulatory structure in place for consolidated market data prior to the 
implementation of the MDI Rules.  Accordingly, this section first will briefly summarize the 
regulatory structure for consolidated market data prior to the implementation of the MDI Rules.  
It then will discuss the current status of the implementation of the MDI Rules and provide an 
assessment of the potential effects that the implementation of the MDI Rules could have on the 
baseline estimations. 
Regulatory Structure for Consolidated Market Data Prior to the MDI Rules 
 Consolidated market data are made widely available to investors through the national 
market system, a system set forth by Congress in section 11A of the Exchange Act
347
 and 
facilitated by the Commission in Regulation NMS.
348
  Market data are collected by exclusive 
SIPs, who consolidate that information and disseminate an NBBO and last sale information. For 
quotation information, only the 16 exchanges that currently trade NMS stocks provide quotation 
                                                 
346
  See supra note 38, discussing MDI Adopting Release. 
347
  See supra note 13. 
348
  17 CFR 242.600 through 242.614. 

   
207 
 
information to the SIPs for dissemination in consolidated market data.
349
  FINRA has the only 
SRO display-only facility (the ADF).  No broker-dealer, however, currently uses it to display 
quotations in NMS stocks in consolidated market data.  Disseminated quotation information 
includes each exchange's current highest bid and lowest offer and the shares available at those 
prices, as well as the NBBO. 
 For transaction information, currently all of the national securities exchanges that trade 
NMS stocks and FINRA provide real-time transaction information to the SIPs for dissemination 
in consolidated market data.  Such information includes the symbol, price, size, and exchange of 
the transaction, including odd-lot transactions. 
Unimplemented Market Data Infrastructure Rules 
 Among other things, the unimplemented MDI Rules update and expand the content of 
consolidated market data to include: (1) certain odd-lot information;
350
 (2) information about 
certain orders that are outside of an exchange’s best bid and best offer (i.e., certain depth of book 
data);
351
 and (3) information about orders that are participating in opening, closing, and other 
auctions.
352
  The MDI Rules also introduced a four-tiered definition of round lot that is tied to a 
                                                 
349
  See supra note 334. 
350
  See 17 CFR 242.600(b)(59); MDI Adopting Release, supra note 38, 86 FR at 18613.  The 
Commission outlined a phased transition plan for the implementation of the MDI Rules, 
including the implementation of odd-lot order information.  See MDI Adopting Release, 
86 FR at 18698-701. 
351
  See MDI Adopting Release, supra note 38, 86 FR 18596. 
352
  See id. at 18630. 

   
208 
 
stock’s average closing price during the previous month.
353
  For stocks with prices greater than 
$250, a round lot is defined as consisting of between 1 and 40 shares, depending on the tier.
354
   
The MDI Rules also introduce a decentralized consolidation model under which competing 
consolidators, rather than the existing exclusive SIPs, will collect, consolidate, and disseminate 
certain NMS information.
355
 
 In the MDI Adopting Release, the Commission established a transition period for 
implementation of the MDI Rules.
356
  The “first key milestone” for the transition period was to 
be an amendment of the effective national market system plan(s), which “must include the fees 
proposed by the plan(s) for data underlying” consolidated market data (“Proposed Fee 
Amendment”).
357
  The compliance date for the MDI Rules was set with reference to the date that 
the Commission approved the Proposed Fee Amendment.
358
  The end of the transition period 
                                                 
353
 See id. at 18617. 
354
  See id.  The Commission adopted a four-tiered definition of round lot: 100 shares for 
stocks priced $250.00 or less per share, 40 shares for stocks priced $250.01 to $1,000.00 
per share, 10 shares for stocks priced $1,000.01 to $10,000.00 per share, and 1 share for 
stocks priced $10,000.01 or more per share. 
355
  See id. at 18637. 
356
  Id. at 18698-18701. 
357
  Id. at 18699. 
358
  See, e.g., id. at 18700 n. 355 (compliance date for amendment to Rule 603(b) to be 180 
calendar days from the date of the Commission’s approval of the amendments to the 
effective national market system plan(s)). 

   
209 
 
was to be at least two years after the date the Commission approved the Proposed Fee 
Amendment.
359
 
 The MDI Adopting Release did not specify a process for continuing the transition period 
if the Commission disapproved the Proposed Fee Amendment.  On September 21, 2022, the 
Commission disapproved the Proposed Fee Amendment, because the Participants had not 
demonstrated that the proposed fees were fair, reasonable and not unreasonably 
discriminatory.
360
  Accordingly, there currently is no date to begin the at-least-two-year period 
for implementation of the MDI Rules, and there is no date that can be reasonably estimated for 
the implementation of the MDI Rules to be completed.  
 Given that the MDI Rules have not yet been implemented, they have not affected market 
practice and therefore data that would be required for a comprehensive quantitative analysis of a 
baseline that includes the effects of the MDI Rules is not available.  It is possible that the 
baseline (and therefore the economic effects relative to the baseline) could be different once the 
MDI Rules are implemented.  The following discussion reflects the Commission’s assessment of 
the anticipated economic effects of the MDI Rules as described in the MDI Adopting Release.
361
  
                                                 
359
  Id. at 18700-18701 (specifying consecutive periods of 90 days, 90 days, 90 days, 180 
days, 90 days, a period for filing and approval of another national market system plan 
amendment to effectuate the cessation of the operations of the SIPs (with a 300-day 
maximum time for Commission action after filing to approve or disapprove the filing). . 
360
  Securities Exchange Act Release No. 95851 (Sept. 21, 2022) (Order Disapproving the 
Twenty-Fifth Charges Amendment to the Second Restatement of the CTA Plan and 
Sixteenth Charges Amendment to the Restated CQ Plan). 
361
  See MDI Adopting Release, supra note 38, 86 FR 18741-18799. 

   
210 
 
 The Commission anticipated that the new round lot definition will result in narrower 
NBBO spreads for most stocks with prices greater than $250 because, for these stocks, fewer 
odd-lot shares will need to be aggregated together (possibly across multiple price levels)
362
 to 
form a round lot and qualify for the NBBO.
363
  The reduction in spreads will be greater in 
higher-priced stocks because the definition of a round lot for these stocks will include fewer 
shares, such that even fewer odd-lot shares will need to be aggregated together.
364
  This could 
cause statistics that are measured against the NBBO to change because they will be measured 
against the new, narrower NBBO. For example, execution quality statistics on price 
improvement for higher-priced stocks may show a reduction in the number of shares of 
marketable orders that received price improvement because price improvement will be measured 
against a narrower NBBO.  In addition, the Commission anticipated that the NBBO midpoint in 
stocks priced higher than $250 could be different under the MDI Rules than it otherwise would 
                                                 
362
  The calculation of the NBBO includes odd-lots that, when aggregated, are equal to or 
greater than a round lot.  As stated in CFR 242.600(b)(21)(ii), “such aggregation shall 
occur across multiple prices and shall be disseminated at the least aggressive price of all 
such aggregated odd-lots.”  For example, if there is one 50-share bid at $25.10, one 50-
share bid at $25.09, and two 50-share bids at $25.08, the odd-lot aggregation method 
would show a protected 100-share bid at $25.09. 
363
  For example, if there is one 20-share bid at $250.10, one 20-share bid at $250.09, and 
two 50-share bids at $250.08, prior to MDI the NBB would be $250.08, as even 
aggregated together the odd lot volume would not add up to at least a round lot.  After 
MDI, the NBB would be $25.09, as the odd-lot aggregation method would show a 
protected 40-share round lot bid at $25.09. 
364
  See supra note 354. An analysis in the MDI Adopting Release showed that the new round 
lot definition caused a quote to be displayed that improved on the current round lot quote 
26.6% of the time for stocks with prices between $250.01 and $1,000, and 47.7% of the 
time for stocks with prices between $1,000.01 and $10,000.  See MDI Adopting Release, 
supra note 38, 86 FR 18743. 

   
211 
 
be, resulting in changes in the estimates for statistics calculated using the NBBO midpoint, such 
as effective spreads.  In particular, at times when bid odd-lot quotations exist within the current 
NBBO but no odd-lot offer quotations exist (and vice versa), the midpoint of the NBBO resulting 
from the rule will be higher than the current NBBO midpoint.
365
  More broadly, the Commission 
anticipated that the adopted rules will have these effects whenever the new round lot bids do not 
exactly balance the new round lot offers.  However the Commission stated that it does not know 
to what extent or direction such odd-lot imbalances in higher priced stocks currently exist, so it is 
uncertain of the extent or direction of the change.
366
 
 The Commission also anticipated that the MDI Rules could result in a smaller number of 
shares at the NBBO for most stocks in higher-priced round lot tiers.
367
  To the extent that this 
occurs, there could be an increase in the frequency with which marketable orders must walk the 
book to execute.  This would affect statistics that are calculated using consolidated depth 
information, such as measures meant to capture information about whether orders received an 
execution of more than the displayed size at the quote, i.e., “size improvement.” 
 The MDI Rules may also result in a higher number of odd-lot trades, as the inclusion of 
odd-lot quotes that may be priced better than the current NBBO in consolidated market data may 
                                                 
365
  For example, if the NBB is $260 and the NBO is $260.10, the NBBO midpoint is 
$260.05. Under the adopted rules a 40 share buy quotation at $260.02 will increase the 
NBBO midpoint to $260.06.  Using this new midpoint, calculations of effective spread 
will be lower for buy orders, but will be higher for sell orders. 
366
  See MDI Adopting Release, 86 FR 18750. 
367
  However, this effect will depend on how market participants adjust their order 
submissions.  See id. at 18746, for further discussion. 

   
212 
 
attract more trading interest from market participants that previously did not have access to this 
information.
368
  However, the magnitude of this effect depends on the extent to which market 
participants who rely solely on SIP data and lack information on odd-lot quotes choose to receive 
the odd-lot information and trade on it.  The Commission states in the MDI Adopting Release 
that it believes it is not possible to observe this willingness to trade with existing market data.
369
 
 The MDI Rules may have implications for broker-dealers’ order routing practices.  For 
those market participants that rely solely on SIP data for their routing decisions and that choose 
to receive the expanded set of consolidated market data, the Commission anticipated that the 
additional information contained in consolidated market data will allow them to make more 
informed order routing decisions.  This in turn would help facilitate best execution, which would 
reduce transaction costs and increase execution quality.
370
  
 The MDI Rules may also result in differences in the baseline competitive standing among 
different trading venues, for several reasons.  First, for stocks with prices greater than $250, the 
Commission anticipated that the new definition of round lots may affect order flows as market 
participants who rely on consolidated data will be aware of quotes at better prices that are 
currently in odd-lot sizes, and these may not be on the same trading venues as the one that has 
the best 100 share quote.
371
  Similarly, it anticipated that adding information on odd-lot quotes 
                                                 
368
  See id. at 18754. 
369
  See id. 
370
  See id. at 18725. 
371
  See id. at 18744. 

   
213 
 
priced at or better than the NBBO to expanded core data may cause changes to order flow as 
market participants take advantage of newly visible quotes.
372
  However, the Commission stated 
that it was uncertain about the magnitude of both of these effects.
373
  To the extent that it occurs, 
a change in the flow of orders across trading venues may result in differences in the competitive 
baseline in the market for trading services.  
 Second, national securities exchanges and ATSs have a number of order types that are 
based on the NBBO, and so the Commission anticipated that the changes in the NBBO caused by 
the new round lot definitions may affect how these order types perform and could also affect 
other orders with which they interact.
374
  The Commission stated that these interactions may 
affect relative order execution quality among different trading platforms, which may in turn 
affect the competitive standing among different trading venues, with trading venues that 
experience an improvement/decline in execution quality attracting/losing order flow.
375
  
However, the Commission stated that it was uncertain of the magnitude of these effects.
376
 
 Third, the Commission anticipated that, as the NBBO narrows for securities in the 
smaller round lot tiers, it may become more difficult for the retail execution business of 
wholesalers to provide price improvement and other execution quality metrics at levels similar to 
                                                 
372
  See id. at 18754. 
373
  See id. at 18745, 18754. 
374
  See id. at 18748. 
375
  See id. 
376
  See id. 

   
214 
 
those provided under a 100 share round lot definition.
377
  To the extent that wholesalers are held 
to the same price improvement standards by retail brokers in a narrower spread environment, the 
wholesalers’ profits from executing individual investor orders might decline,
378
 and to make up 
for lower revenue per order filled in a narrower spread environment, wholesalers may respond by 
changing how they conduct their business in a way that may affect retail brokers.  However, the 
Commission stated that it was uncertain as to how wholesalers may respond to the change in the 
round lot definition, and, in turn, how retail brokers may respond to those changes, and so was 
uncertain as to the extent of these effects.
379
  If wholesalers do change how they conduct 
business, it may impact wholesalers’ competitive standing in terms of the execution quality 
offered, particularly to individual investor orders.  
 Where implementation of the above-described MDI Rules may affect certain numbers in 
the baseline, the description of the baseline below notes those effects. 
c. Market Access 
 Some broker-dealers that connect directly to one or more exchanges and other trading 
centers offer order routing to smaller broker-dealers that may not directly connect to exchanges.   
This is, in part, driven by the requirement that in order to directly route orders to an exchange, 
                                                 
377
  See id. at 18747. 
378
  Individual investor orders typically feature lower adverse selection than other types of 
orders, such as institutional orders.  It is generally more profitable for any liquidity 
provider, including wholesalers, to execute against orders with lower adverse selection 
risk.  See, e.g., David Easley, Nicholas M. Kiefer & Maureen O’Hara, Cream‐skimming 
or profit‐sharing? The curious role of purchased order flow, 51 J. FIN. 811 (1996). 
379
  See id. at 18748. 

   
215 
 
broker-dealers need to be a member of that exchange.
380
  It is also driven by economies of scale 
in being able to distribute high fixed costs related to exchange connectivity and proprietary 
market data feeds.
381
  Most large broker-dealers connect to multiple exchanges.
382
  These broker-
dealers may use their connections to provide order-routing and execution services, such as access 
to smart order routers (SORs), to smaller broker dealers who may find direct connections to 
exchanges prohibitively expensive.
383
  To this end, such smaller broker-dealers access exchanges 
through intermediaries, i.e., larger broker-dealers, allowing these intermediaries to compete with 
exchanges in the trade execution and order-routing markets.
384
  These intermediaries often 
compete on both the quality of their order execution and the fees they charge.
385
 
                                                 
380
  Membership on an exchange also gives the broker-dealer access to exchange-provided 
order routers that re-route orders to other exchanges at a per-order fee. 
381
  Broker-dealers may choose to incur these costs in order to gain faster access through 
direct exchange connectivity as well as proprietary exchange data feeds, both of which 
may improve order handling and execution capabilities, and thus their competitive 
position.  See Section V.B.3.(e) of Market Data Infrastructure Adopting Release (for 
discussions on broker-dealer competitive trading strategies).   
382
  See MDI Adopting Release, supra note 38, at 86 FR 18740 (for analysis indicating that 
50 firms connected to all but one of the exchanges in a sample of FINRA audit trail data 
from December 2016), available at  https://www.govinfo.gov/content/pkg/FR-2021-04-
09/pdf/2020-28370.pdf. 
383
  The number of broker-dealers providing access is thus limited due to the expenses of 
being an exchange member and ATS subscriber. In addition, membership on an exchange 
also gives the broker-dealer access to exchange-provided order routers that re-route 
orders to other exchanges at a per-order fee.  Thus, membership on one exchange can 
effectively provide access, though not directly, to all exchanges. 
384
  Providing market access can mean rerouting customer orders and it can also involve 
sponsoring access for the broker to send customer orders directly to a market center.   
385
  The types of fees charged by routing brokers can vary, some charge a per-order/share fee 
or a fee that is part of other bundled services they may offer. 

   
216 
 
d. Retail Order Handling in NMS Stocks 
The Commission estimates that in 2021 approximately 1,037 retail brokers originated 
orders from retail investors in NMS stocks.
386
  Retail brokers route most of their customers’ 
marketable order flow to wholesalers.
387
  Wholesalers do not typically directly charge retail 
brokers for their order routing and execution services.  In fact, they may pay some retail brokers 
for the opportunity to handle their order flow with PFOF.  Wholesalers’ vertical integration of 
routing and execution services for the orders of individual investors provides them flexibility 
with regard to their handling of order flow.  They utilize sophisticated algorithmic trading 
technology to deliver their services.
388
  In particular, wholesalers determine which orders to 
internalize (i.e., execute in a principal capacity) and which to execute in a riskless principal or 
                                                 
386
  This number is estimated using CAT data for broker-dealers that originated an order from 
an “Individual Customer” CAT account type in 2021.  See infra note 422 for more info 
CAT account types. 
387
  Commission analysis of broker-dealer Rule 606 report order routing data in infra Table 3 
indicates that retail brokers route over 90% of their marketable orders to wholesalers.  
388
 Wholesalers, similar to other market makers, must establish connections with the 
numerous venues in which they wish to operate and provide liquidity.  They also must 
design smart order routers that can locate and provide liquidity in real time, as well as 
maintain fast data processing capabilities that enable them to respond to market 
conditions while abiding by the relevant trade execution regulations.  Wholesalers also 
face the costs associated with price risk. As wholesalers trade against market participants, 
they take positions at the opposite side, accumulating inventory.  Holding inventory 
exposes wholesaler profits to inventory (price) risk, where the value of inventory, and 
hence, that of the wholesaler’s holdings, may fluctuate as security prices vary.  Scaling 
up the size of the business to ensure steady incoming flow from opposite sides of the 
markets is a common strategy pursued by wholesalers. This strategy enables them to 
execute buy and sell transactions, offsetting order flow from opposite sides, reducing the 
possibility of accumulating prolonged, unwanted inventory.  However, among other 
costs, scaling up requires more comprehensive, efficient connectivity networks, and adds 
to the costs of establishing and maintaining such networks. 

   
217 
 
agency capacity.  Commission analysis indicates that wholesalers internalize over 90% of the 
executed dollar volume from individual investor marketable orders that are routed to them and 
executed.
389
 
One aspect of the wholesaler business model is the segmentation of the order flow of 
individual investors, which typically have lower adverse selection risk than the orders of other 
types of market participants.
390
  Wholesalers are market makers that can identify orders with low 
adverse selection risk.
391
  Through segmentation, wholesalers typically internalize marketable 
orders with lower adverse selection risk and generally execute them at prices better than the 
current NBBO, i.e., because of segmentation, wholesalers are typically able to execute the 
marketable orders of individual investors at better prices than they would receive if they were 
routed to an exchange.  An analysis of marketable NMS stock orders presented below indicates 
that the orders that wholesalers internalize present lower adverse selection risk and receive 
                                                 
389
  See analysis in infra Table 7. 
390
  Wholesalers and other liquidity providers face adverse selection risk when they 
accumulate inventory, for example, by providing liquidity to more informed traders, 
because of the risk of market prices moving away from market makers before they are 
able to unwind their positions.  Wholesalers and other market makers are usually not 
privy to the motives or information of the investors they are trading with.  As such, 
should the liquidity provider trade with an investor possessing short-lived price 
information about the security price, it is exposing its inventory to adverse selection risk. 
Hence, liquidity providers normally choose their trading strategies to minimize their 
interaction with order flow with increased adverse selection risk.  Wholesalers do this by 
attracting marketable orders of individual investors, known to be the order flow with the 
lowest adverse selection risk.  Pursuing this strategy also requires scaling up the part of 
the business that interacts with retail order flow.  
391
  See infra Table 7 and corresponding discussion.  Adverse selection is based on various 
characteristics of the order, including the identity of the originating broker. 

   
218 
 
higher execution quality relative to marketable orders wholesalers receive and execute in a 
riskless principal or agency capacity.
392
  Additional results
393
 show that, relative to orders 
executed on exchanges, orders internalized by wholesalers are associated with lower price 
impacts (i.e., lower adverse selection risk),
394
 lower effective half-spreads (i.e., higher price 
                                                 
392
  See analysis in infra Table 7. 
393
  See infra Table 5 and Table 6 for a comparison of exchange and wholesaler execution 
quality. 
394
  “Price impact” is the extent to which the NBBO midpoint moves against the liquidity 
provider for a marketable order in a short time period after the order execution.  For Rule 
605 reporting, the time period is five minutes after the time of order execution. For the 
analyses of CAT data provided later in this section, the time period is one minute after 
the time of order execution, which was chosen to reflect the increase in trading speed in 
the years since Rule 605 was adopted.  By measuring the difference between the 
transaction price and the prevailing market price for some fixed period of time after the 
transaction (e.g., one minute), price impact measures the extent of adverse selection costs 
faced by a liquidity provider. For example, if a liquidity provider provides liquidity by 
buying shares from a trader who wants to sell, thereby accumulating a positive inventory 
position, if the liquidity provider wants to unwind this inventory position by selling 
shares in the market, it will incur a loss if the price has fallen in the meantime. In this 
case, the price impact measure will be positive, reflecting the liquidity provider’s 
exposure to adverse selection costs.    

   
219 
 
improvement),
395
 and higher realized half-spreads (i.e., higher potential profitability).
396
  
Academic studies have also found that retail orders in NMS stocks benefit from being segmented 
                                                 
395
  The effective half-spread is calculated by comparing the trade execution price to an 
estimate of the stock’s value (i.e., the midpoint of the prevailing NBBO at the time of 
order receipt) and thus captures how much more than the stock’s estimated value a trader 
has to pay for the immediate execution of their order. The effective spread will be smaller 
(or less positive) when it is closer to the NBBO midpoint, reflecting the order receiving a 
greater amount of price improvement.  See, e.g., Bjorn Hagströmer, Bias in the Effective 
Bid-Ask Spread, 142 J. FIN. ECON. 314 (2021). For the remainder of this analysis, we will 
use the term “effective spread” to refer to the “effective half-spread.”  See also results in 
Thomas Ernst & Chester S. Spatt, supra note 77.  Rule 600(b)(8) of Regulation NMS 
defines “average effective spread” as the share-weighted average of effective spreads for 
order executions calculated, for buy orders, as double the amount of difference between 
the execution price and the midpoint of the NBB and NBO at the time of order receipt 
and, for sell orders, as double the amount of difference between the midpoint of the NBB 
and NBO at the time of order receipt and the execution price. 
396
  The realized half-spread is calculated similarly to the effective half-spread, but, instead of 
using the NBBO midpoint at the time of order receipt, the realized spread calculation 
uses the NBBO midpoint a short time period after the execution of a marketable order.  
For Rule 605 reporting, the time period is five minutes after the time of order execution.  
For the analyses of CAT data provided later in this section, the time period is one minute 
after the time of order execution.  The realized half-spread proxies for the potential 
profitability of trading for liquidity providers after accounting for the adverse selection 
risk (i.e., price impact) of the trade.  See, e.g., Securities Exchange Act Release No. 
43590 (Nov. 17, 2000), 65 FR 75423-75424 (Dec. 1, 2000) (Disclosure of Order 
Execution and Routing Practices) (“The smaller the average realized spread, the more 
market prices have moved adversely to the market center's liquidity providers after the 
order was executed, which shrinks the spread ‘realized’ by the liquidity providers. In 
other words, a low average realized spread indicates that the market center was providing 
liquidity even though prices were moving against it for reasons such as news or market 
volatility.”); See also Larry Harris, Trading and Exchanges: Market Microstructure for 
Practitioners at 286 (Oxford University Press 2003) (“Informed traders buy when they 
think that prices will rise and sell otherwise. If they are correct, they profit, and whoever 
is on the other side of their trade loses.  When dealers trade with informed traders, prices 
tend to fall after the dealer buys and rise after the dealer sells.  These price changes make 
it difficult for dealers to complete profitable round-trip trades.  When dealers trade with 
informed traders, their realized spreads are often small or negative.  Dealers therefore 
must be very careful when trading with traders they suspect are well informed.”).  See 
also Joel Hasbrouck, Empirical Market Microstructure: The Institutions, Economics, and 

   
220 
 
and internalized by wholesalers, because wholesalers can offer the segmented retail orders more 
price improvement due to their lower adverse selection risk.
397
  
Segmentation and Routing of Individual Investor Orders in NMS Stocks 
Most individual investor orders are non-directed, so individual investor order routing 
choices are largely made by retail brokers.  Specifically, retail brokers choose how to access the 
market in order to fill their individual investor customers’ orders.  Wholesalers are the dominant 
providers of market access for retail brokers and bundle their market access services with 
execution services.  
                                                 
Econometrics of Securities Trading at 147 (Oxford University Press 2007) (“The 
execution cost based on the pretrade bid-ask midpoint (BAM) is also known as the 
effective cost.  Since 2001, the U.S. SEC has required U.S. equity markets to compute 
effective costs and make summary statistics available on the Web . . . The rule . . . also 
requires computation of the realized cost. . . . The difference between effective and 
realized costs is sometimes used as an estimate of the price impact of the trade. The 
realized cost can also be interpreted as the revenue of the dealer who sold to the customer 
. . . and then covered his position at the subsequent BAM.”).  For the remainder of this 
analysis, we will use the term “realized spread” to refer to the realized half-spread. Rule 
600(b)(9) of Regulation NMS generally defines “average realized spread” as the share-
weighted average of realized spreads for order executions calculated, for buy orders, as 
double the amount of difference between the execution price and the midpoint of the 
NBB and NBO five minutes after the time of order execution and, for sell orders, as 
double the amount of difference between the midpoint of the NBB and NBO five minutes 
after the time of order execution and the execution price.  
397
  See Ernst & Spatt, supra note 77 and Kothari, S. P., So, E., & Johnson, T. Commission 
Savings and Execution Quality for Retail Trades (Working paper, 2021).  See also 
Adams, Kasten, & Kelley, Do investors save when market makers pay? Retail Execution 
costs under PFOF models (Working paper, 2021), available at 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3975667 (retrieved from Elsevier 
database). 

   
221 
 
Retail brokers may route to wholesalers because the cost of sending orders to wholesalers 
is lower than the various alternatives available to their customers for market access.  While some 
broker-dealers have SORs,
398
 exchange memberships, and ATS subscriptions, and are thus able 
to provide market access to retail brokers, other broker-dealers incur costs in handling order flow 
for retail brokers in the form of exchange access fees, ATS access fees, and administrative and 
regulatory costs such as recordkeeping and the risk management controls of Rule 15c3-5.  While 
wholesalers could incur some of these marginal costs as well, they benefit on the margin from 
individual investor order flow because it gives them the option to internalize the most profitable 
of that order flow, i.e., the individual investor orders with the lowest adverse selection risk.
399
  
This ability to capture, identify, and internalize profitable orders from individual investors allows 
wholesalers to provide market access to retail brokers at low explicit cost, either by providing 
PFOF or by not charging retail brokers explicitly for market access.  This service of obtaining 
market access on behalf of retail brokers assists retail brokers by allowing them to avoid routing 
expenses (even in cases where the wholesaler further routes the order instead of internalizing) or 
costly liquidity searches, and may increase retail brokers’ reliance on wholesalers beyond any 
payment they receive for routing their order flow to wholesalers. 
                                                 
398
  Individual investors and professional traders relying on displayed screens to access 
financial markets generally do not have access to these low-latency (algorithmic, high 
speed) technologies. 
399
  See infra Table 7 and corresponding discussion. 

   
222 
 
Indeed, Table 2 shows that retail brokers who accept PFOF (“PFOF brokers”) pay less to 
route their orders to wholesalers than to route them elsewhere.
400
  In fact, they are paid to route 
their order flow to wholesalers for every order type reported in the table.  On average, rates paid 
by wholesalers for both market and marketable limit orders are higher than those paid by 
alternative venues, with wholesalers paying an average of 13 cents per 100 shares for market 
orders and 12.6 cents for marketable limit orders across S&P 500 and non-S&P 500 stocks 
during Q1 2022.  In contrast, exchanges, on average, charged PFOF brokers when they routed 
their marketable order flow to exchanges.  This likely indicates that most of the volume that 
PFOF brokers sent to exchanges was routed to maker-taker exchanges (where fees are assessed 
on marketable orders).
401
  Furthermore, since retail brokers that do not accept PFOF (“non-PFOF 
brokers”) also incur fees when they route marketable orders to exchanges, they are incentivized 
to route their marketable order flow to wholesalers, who do not charge them explicit costs to 
route and execute their orders. 
                                                 
400
  In Table 2, average payment rates reported in Rule 606 reports for PFOF brokers in S&P 
500 stocks and non-S&P 500 stocks in Q1 2022 are broken down by trading venue and 
order type, with rates given in cents per 100 shares. 
401
  Furthermore, wholesaler rates for non-marketable orders are more than double the rates 
for marketable orders, averaging 27.1 cents per hundred shares compared to 13 cents for 
market orders and 12.6 cents for marketable limit orders.  Additionally, Table 2 shows 
that the average payment rates PFOF brokers receive from routing non-marketable limit 
orders to wholesalers is greater than the average rates they receive from routing them to 
exchanges.  This may be driven by wholesalers passing through exchange rebates for 
these orders, for which they may receive higher volume-based tiering rates compared to 
retail brokers, back to broker-dealers. 
 

   
223 
 
Table 2: Average Rule 606 Payment Rates for Q1 2022 to PFOF Brokers by Trading Venue Type 
 
 
Market 
Orders 
Marketable 
Limit Orders 
Non-
Marketable 
Limit Orders 
Other 
Orders 
S&P 500 
Exchange 
-5.9 -23.9 30.9 20.8 
OMM - Wholesaler 
15.2 21.8 41.1 24.1 
Other 
4.5 -0.6 -0.6 7.5 
Non-S&P 
500 
Exchange 
-14.9 -15.3 17.9 16.5 
OMM - Wholesaler 
12.5 11.8 24.6 10.1 
Other 
1.5 -3.7 -4.6 1.5 
Combined 
Exchange 
-12.4 -15.7 19.3 17.1 
OMM - Wholesaler 
13.0 12.6 27.1 11.9 
Other 
1.7 -3.7 -4.5 2.0 
This table shows the average payment rates (in cents per 100 shares) made from different types of trading venues in 
Q1 2022 to 14 retail PFOF brokers from wholesalers based on their Rule 606 reports.  The table breaks out average 
rates from exchanges, wholesalers, and other trading venues for market orders, marketable limit orders, non-
marketable limit orders, and other orders in S&P 500 stocks and non-S&P 500 stocks. Other venues include any 
other venue to which a retail broker routes an order other than a wholesaler or an exchange. The 43 broker-dealers 
were identified from the 54 retail brokers used in the CAT retail analysis (see   infra note 422
). This analysis uses the 
retail broker’s Rule 606 report if it publishes one or the Rule 606 report of its clearing broker if it did not publish a 
Rule 606 report itself (the sample of 43 broker-dealer Rule 606 reports include some broker-dealers that were not 
included in the CAT analysis because some clearing broker Rule 606 reports are included). Some broker-dealers 
reported handling orders only on a not held basis and did not have any Rule 606. 
 
Table 3 confirms that wholesalers dominate the business of providing market access for 
retail brokers and that PFOF is a factor in retail broker routing decisions.
402
  Data from Table 3 
                                                 
402
  Table 3 summarizes order routing decisions of 43 of the most active retail brokers about 
non-directed orders. Table 4 repeats the analysis but separately summarizes routing 
choices for 14 retail brokers who accept PFOF in equity markets and 29 who do not. Note 
that some brokers do not accept PFOF for orders in equities but do accept PFOF for 
orders in options. Consistent with Rule 606, routing statistics are aggregated together in 
Rule 606 reports based on whether the stock is listed in the S&P500 index. Rule 606 
reports collect routing and PFOF statistics based on four different order types for NMS 
stocks: (1) market orders, resulting in immediate execution at the best available price; (2) 
marketable limit orders, resulting in immediate execution at the best price that is not 
worse that the order’s quoted limit price; (3) non-marketable limit orders whose quoted 
limit price less aggressive than the NBBO, often preventing immediate execution; and (4) 
all other orders.  See supra note 336
 for a summary of the requirements of Rule 606(a)(1) 
of Regulation NMS. 

   
224 
 
indicates that orders of individual investors for NMS stocks are primarily routed to wholesalers, 
although, a small fraction of individual investor orders are routed to exchanges and other broker-
dealers providing market access or other market centers (i.e ., ATSs), some of which may be 
affiliated with the broker that received the original order. 
 

   
225 
 
Table 3: Retail Broker Order Routing in NMS Stocks for Q1 2022, Combining PFOF and non-PFOF Brokers  
Panel A: Non S&P 500 Stocks 
Venue Type Market 
Marketable 
Limit 
Non-
marketable 
Limit 
Other 
Total 
Other 
6.0% 4.7% 3.1% 1.5% 3.6% 
Exchange 
0.2% 5.5% 22.5% 0.8% 8.5% 
Wholesaler 
93.9% 89.8% 74.4% 97.6% 87.9% 
Total 
26.5% 12.6% 33.6% 27.3% 100.0% 
Panel B: S&P 500 Stocks 
Venue Type Market 
Marketable 
Limit 
Non-
marketable 
Limit 
Other 
Total 
Other 
6.6% 5.9% 1.8% 1.7% 3.6% 
Exchange 
0.2% 4.6% 25.1% 0.8% 9.1% 
Wholesaler 
93.3% 89.6% 73.1% 97.5% 87.3% 
Total 
30.6% 9.6% 33.5% 26.4% 100.0% 
This table aggregates Rule 606 reports from retail brokers and shows the percentage of market orders, marketable 
limit orders, non-marketable limit orders, and other orders that retail brokers route to different types of venues in Q1 
2022. Other venues include any other venue to which a retail broker routes an order other than a wholesaler or an 
exchange. Order type classifications are based on the order types broker-dealers are required to include in their Rule 
606 reports. 
This table aggregates routing information from 43 broker-dealer Rule 606 reports from Q1 2022. The 43 broker-
dealers were identified from the 54 retail brokers used in the CAT retail analysis (see infra note 422
). This analysis 
uses the retail broker’s Rule 606 report if it publishes one or the Rule 606 report of its clearing broker if it did not 
publish a Rule 606 report itself (the sample of 43 broker-dealer Rule 606 reports include some broker-dealers that 
were not included in the CAT analysis because some clearing broker Rule 606 reports are included). Some broker-
dealers reported handling orders only on a not held basis and did not have any Rule 606 reports. Because Rule 606 
only include percentages of where there order flow is routed and not statistics on the number of orders, the reports 
are aggregated together using a weighting factor based on an estimate of the number of non-directed orders each 
broker-dealer routes each month. The number of orders is estimated by dividing the number of non-directed market 
orders originating from a retail broker in a given month (based on estimates from CAT data) by the percentage of 
market orders as a percent of non-directed orders in the retail broker’s Rule 606 report (the weight for a clearing 
broker consists of the aggregated orders from the introducing brokers in the CAT retail analysis that utilize that 
clearing broker). 
 
 
Table 4: Retail Broker Order Routing in NMS Stocks for Q1 2022 

   
226 
 
Panel A: Non-S&P 500 Stocks 
Non-PFOF Brokers 
Venue 
Type 
Market 
Marketable 
Limit 
Non-
marketable 
Limit 
Other Total 
Other 
24.1% 22.3% 4.2% 41.6% 16.0% 
Exchange 
<0.1% 25.3% 80.8% 19.7% 39.8% 
Wholesaler 
76.0% 52.4% 15.0% 38.8% 44.2% 
Total 
38.4% 12.4% 44.2% 5.0% 100.0% 
PFOF Brokers 
Venue 
Type 
Market 
Marketable 
Limit 
Non-
marketable 
Limit 
Other Total 
Other 
<0.1% 1.2% 2.8% 0.3% 
1.1% 
Exchange 
0.2% 1.5% 5.8% 0.2% 
2.1% 
Wholesaler 
99.7% 97.3% 91.4% 99.5% 
96.8% 
Total 
24.1% 12.7% 31.5% 31.8% 100.0% 
Panel B: S&P 500 Stocks 
Non-PFOF Brokers 
Venue 
Type 
Market 
Marketable 
Limit 
Non-
marketable 
Limit 
Other Total 
Other 
24.8% 27.0% 3.2% 23.4% 
15.4% 
Exchange 
<0.1% 19.6% 83.2% 8.2% 
39.0% 
Wholesaler 
75.2% 53.4% 13.6% 68.3% 
45.6% 
Total 39.0% 9.2% 43.8% 8.0% 100.0% 
PFOF Brokers 
Venue 
Type 
Market 
Marketable 
Limit 
Non-
marketable 
Limit 
Other Total 
Other 
<0.1% 0.5% 1.3% 0.3% 
0.6% 
Exchange 
0.2% 0.9% 3.4% 0.3% 
1.3% 
Wholesaler 
99.8% 98.6% 95.3% 99.5% 
98.2% 
Total 
28.4% 9.7% 30.7% 31.2% 100.0% 
This table aggregates Rule 606 reports from PFOF and non-PFOF retail brokers and separately shows the 
percentage of market orders, marketable limit orders, non-marketable limit orders, and other orders PFOF brokers 
and non-PFOF brokers route to different types of venues in Q1 2022. PFOF brokers are retail brokers that receive 
payments for routing marketable orders to wholesalers. Other venues include any other venue to which a retail 
broker routes an order other than a wholesaler or an exchange. Order type classifications are based on the order 
types broker-dealers are required to include in their Rule 606 reports. 

   
227 
 
This table aggregates routing information from PFOF and non-PFOF broker-dealer Rule 606 reports from Q1 2022. 
Fourteen retail brokers are identified as PFOF brokers that receive payments for routing orders in NMS stocks to 
wholesalers. Twenty-nine non-PFOF brokers are identified as retail brokers that do not receive monetary 
compensation when they route orders in NMS stocks to wholesalers. The 43 broker-dealers were identified from the 
54 retail brokers used in the CAT retail analysis (see infra note 422
). This analysis uses the retail broker’s Rule 606 
report if it publishes one or the Rule 606 report of its clearing broker if it did not publish a Rule 606 report itself 
(the sample of 43 broker-dealer Rule 606 reports include some broker-dealers that were not included in the CAT 
analysis because some clearing broker Rule 606 reports are included). Some broker-dealers reported handling orders 
only on a not held basis and did not have any Rule 606 reports. Because Rule 606 only include percentages of 
where there order flow is routed and not statistics on the number of orders, the reports are aggregated together using 
a weighting factor based on an estimate of the number of non-directed orders each broker-dealer routes each month. 
The number of orders is estimated by dividing the number of non-directed market orders originating from a retail 
broker in a given month (based on estimates from CAT data) by the percentage of market orders as a percent of 
non-directed orders in the retail broker’s Rule 606 report (the weight for a clearing broker consists of the aggregated 
orders from the introducing brokers in the CAT analysis that utilize that clearing broker). 
 
CAT data analysis indicates that about 80% of the share volume and about 74% of the 
dollar volume of individual investor marketable orders that were routed to wholesalers and 
executed comes from PFOF brokers.
403
  Data from Table 4 indicates that, while retail brokers 
who accept PFOF from wholesalers tend to send more of their orders to those wholesalers, 
wholesalers even dominate the market access services for non-PFOF brokers, though non-PFOF 
brokers route a significantly lower fraction (i.e., 75.2% to 76%) of their market orders to 
wholesalers, compared to 99.7% to 99.8% of market orders for PFOF brokers. Moreover, non-
PFOF brokers route 24.1% to 24.8% of their market orders to other non-exchange market 
centers, e.g., ATSs, while PFOF brokers route less than 1% of their market orders to these 
market centers.  However, regardless of whether the retail broker accepts PFOF, the order type, 
or the S&P500 index inclusion of the stock,
404
  Table 3 shows that retail brokers route over 87% 
of their customer orders to wholesalers. 
                                                 
403
  See infra Table 15. 
404
  Rule 606 reports require that broker-dealers separate their disclosure information for S&P 
500 stocks, non-S&P 500 stocks, and options. 

   
228 
 
This result suggests that, while PFOF may be a factor in retail brokers’ routing decisions, 
wholesalers likely also compare favorably to other market access (including retail brokers 
pursuing their own market access) along other dimensions.  The routing behavior in Table 4 
may, in part, reflect a tendency of non-PFOF brokers to route customer orders to market centers 
such as their own ATSs for mid-point execution and the lack of an affiliated ATS for PFOF 
brokers.  However, even broker-dealers with their own ATSs do not route the majority of their 
individual investor order flow to those ATSs and typically do not internalize order flow. Further, 
retail brokers with membership on multiple exchanges primarily route their marketable orders to 
wholesalers.  These results could point to a lower marginal costs of routing to wholesalers 
relative to other routing and execution alternatives.  Table 5 shows that wholesalers appear to 
compare favorably to exchanges in the execution quality of orders routed to them, suggesting 
that execution quality could be another key factor in the decision of retail brokers to route to 
wholesalers.
405
  In particular, marketable orders routed to wholesalers appear to have higher fill 
rates, lower effective spreads, and lower E/Q ratios.
406
  These orders are also more likely to 
receive price improvement and, conditional on receiving price improvement, receive greater 
price improvement when routed to wholesalers as compared to exchanges.  
In addition, wholesalers may provide additional valuable services to retail brokers that 
route order flow to them.  Based on staff experience, the Commission understands that 
wholesalers are more responsive to retail brokers that provide them with order flow, including, 
                                                 
405
  See infra Table 5 and corresponding discussions. 
406
  The E/Q ratio is the ratio of a stock’s effective spread over quoted spread. A lower value 
indicates smaller effective spreads (i.e., trading costs) as a percentage of the quoted 
spread.  

   
229 
 
for example, following customer instructions not to internalize particular orders.  More broadly, 
wholesalers appear to provide retail brokers with a high degree of consistency with regard to 
execution quality.  More specifically, wholesalers receive order flow from retail brokers that 
contains orders that vary with regard to quoted spreads and adverse selection risk.  While 
wholesalers receive order flow from retail brokers that contains variation in quoted spreads and 
adverse selection risk, wholesalers could target an average level of price improvement across this 
heterogeneous order flow, resulting in a relatively consistent degree of execution quality. 
When wholesalers do not internalize an order, they obtain an execution from another 
market center by either routing in an agency capacity or using what is known as a riskless 
principal transaction.  In a riskless principal transaction, after receiving an order from a retail 
broker, a wholesaler may send a principal marketable order similar to the retail broker order to 
an exchange and, upon execution of the principal order at the exchange, execute the original 
retail broker order at the same price.
407
  
Commission analysis shows that wholesalers internalize over 90% of the executed dollar 
value in NMS stocks from the marketable order flow routed to them by retail brokers, which 
amounts to more than 80% of share volume.
408
  Results also show that the marketable NMS 
stock orders wholesalers choose to internalize have less adverse selection risk: orders that 
wholesalers execute in a principal capacity have a price impact of 0.9 bps, compared to a price 
                                                 
407
  See supra note 182 for further discussions on riskless principal transactions. 
408
  See analysis in infra Table 7.  

   
230 
 
impact of 4.6 bps for those executed via other methods.  This is consistent with the dealer 
incentive to hold inventory that is less likely to experience adverse changes in price.
  409 
Fractional Share Orders 
A number of retail brokers allow individual investors to trade and enter orders for 
fractional shares of a security, e.g., an individual investor could submit an order to buy 0.2 shares 
of a stock.
410
  This type of trading has grown dramatically since 2019, with an increasing number 
of broker-dealers offering this functionality.  Evidence suggests that this growth is in great part 
due to the rise in direct retail participation in equity markets.
411
  It is the Commission’s 
understanding that retail or executing brokers generally trade in a principal capacity against their 
customers’ fractional share orders and in turn, send out principal orders that are in a whole 
number of shares (i.e., not containing a fractional share component) for execution to manage 
their inventory risk.     
An analysis using CAT data reveals that more than 46 million fractional share orders 
were executed in March 2022, originating from more than 5 million unique accounts.  Over 31 
million of these orders were for less than 1 share, and they originated from more than 3.3 million 
accounts.  The overwhelming majority (92%) of fractional share orders were attributed to natural 
                                                 
409
  See, e.g., David Easley, et. al. supra note 378. 
410
  Fractional shares often arise from retail brokers allowing individual investors to submit 
orders for a fixed dollar value. 
411
  See, Zhi Da, et. al., Fractional Trading (working paper, November 18, 2021), available at 
https://ssrn.com/abstract=3949697 (retrieved from SSRN Elsevier database). Also see 
Rick Steves, Fractional Shares Experts Weigh In Amid Exploding Retail Trading 
Volumes, FinanceFeeds (Jun. 7, 2021), available at https://financefeeds.com/fractional-
shares-experts-weigh-in-amid-exploding-retail-trading-volumes/, which shows that 
trading volume increased substantially (in one case, more than 1,400%) for brokers after 
they introduced the use of fractional shares.  

   
231 
 
persons, (i.e., individual investors).  While fractional shares orders only represented a small 
fraction (2.1%) of total executed orders, they represent a much higher fraction (15.3%) of 
executions received by individual investors. 
Execution Quality of Individual Investor Marketable Orders 
The wholesaler business model relies on segmentation and internalization of marketable 
order flow of individual investors, which is characterized by low adverse selection risk.  An 
analysis of the execution quality of market and marketable limit orders handled by wholesalers 
retrieved from Rule 605 reports
412
 and presented in Table 5
413
 shows that orders in NMS stocks 
                                                 
412
  Rule 605 requires market centers to make available, on a monthly basis, standardized 
information concerning execution quality for covered orders in NMS stocks that they 
received for execution.  See 17 CFR 242.605. Covered orders are defined in 17 CFR 
242.600(b)(22) to include orders (including immediate-or-cancel orders) received by 
market centers during regular trading hours at a time when a national best bid and 
national best offer is being disseminated, and, if executed, is executed during regular 
trading hours, and excludes orders for which the customer requests special handling for 
execution (such as not held orders).  Rule 605 reports contain a number of execution 
quality metrics for covered orders, including statistics for all non-marketable limit orders 
with limit prices within ten cents of the NBBO at the time of order receipt as well as 
separate statistics for market orders and marketable limit orders.  Under the Rule, the 
information is categorized by individual security, one of five order type categories (see 
17 CFR 242.600(b)(14)), and one of four order size categories, which does not include 
orders for less than 100 shares or orders greater than or equal to 10,000 shares (see 17 
CFR 242.600(b)(11)).  As such, Rule 605 does not require reporting for orders smaller 
than 100 shares, including odd-lot orders. Rule 605 requires market centers to report 
execution quality information for all covered orders that the market center receives for 
execution, including orders that are executed at another venue (i.e., because they are 
effectively rerouted to another trading center by the market center). 
413
  The following filters were applied to the Rule 605 data to remove potential data errors.  
Observations where the total shares in covered orders were less than the sum of the 
canceled shares, share executed at the market center, and share executed away from the 
market center were deleted.  Observations with missing order size code, order type code, 
total covered shares, or total covered orders were deleted. Realized and effective spread 

   
232 
 
handled by wholesalers are associated with lower price impact
414
 compared to those executed on 
exchanges, indicating that orders handled by wholesalers on average have lower adverse 
selection costs.
415
  This lower adverse selection cost allows wholesalers to provide these orders 
with better execution quality, manifested in lower effective spreads
416
 and E/Q ratios compared 
                                                 
values are set to missing values if the total shares executed at and away from the market 
center are zero.  Per share dollar realized spreads, per share dollar effective spreads, and 
per share dollar price improvements were winsorized at 20% of the volume weighted 
average price of the stock for the month as calculated from NYSE Daily TAQ data. 
414
  See supra note 394 and accompanying text for a definition and discussion of price 
impact. Table 5 estimates the average price impact associated with marketable orders 
routed to wholesalers to be 1.2 bps.  This means that for a $10 stock the NBBO midpoint 
would move up (down) by an average of 0.12 cents in the five minutes following the 
execution of marketable buy (sell) order.    
415
  Once implemented, the changes to the current arrangements for consolidated market data 
in the MDI Adopting Release, 86 FR 18621 may impact the numbers in Table 5, 
including by reducing those for realized spread, effective spread, and amount of price 
improvement.  The NBBO will narrow in stocks priced greater than $250 because it will 
be calculated based off a smaller round lot size.  This narrower NBBO will decrease price 
improvement statistics in Rule 605 reports, which is measured against the NBBO.  The 
effects on effective and realized spreads is more uncertain, because they are measured 
against the NBBO midpoint, which may not change if both the NBB and NBO decrease 
by the same amount.  However, if marketable orders are more likely to be submitted 
when there are imbalances on the opposite side of the limit order book (i.e., more 
marketable buy orders are submitted when there is more size on the offer side of the limit 
order book than the bid side), then the NBBO midpoint may change such that it is closer 
to the quote the marketable order executes against, which may decrease the effective and 
realized spreads in stocks above $250 when Market Data Infrastructure is implemented. It 
is uncertain how likely this NBBO midpoint is to change.  It is also uncertain how or to 
what degree these changes would differ between exchange and wholesaler Rule 605 
reports.  If both changed similarly, then there would not be changes in relative differences 
between their reported spread measures. See supra section V.B.3.a).i.b.  
416
  See supra note 395 for a definition and discussion of effective spreads. 

   
233 
 
to exchanges.
417
  The higher realized spreads
418
 associated with orders handled by wholesalers 
observed in Table 5 suggest that wholesalers have an opportunity to earn higher economic profits 
than liquidity suppliers on exchanges after accounting for adverse selection costs (i.e., after 
adjusting for price impact).
419
  This is despite the finding that the orders handled by wholesalers 
eventually execute at better prices than those received by and executed on exchanges, as 
                                                 
417
  The E/Q ratio is the ratio of a stock’s effective spread over quoted spread.  A lower value 
indicates that smaller effective spreads (i.e., trading costs) as a percentage of the quoted 
spread.  
418
  See supra note 396 and accompanying text for a definition and discussion of realized 
spreads as a measure of the economic profits earned by liquidity providers. Realized 
spreads do not measure the actual trading profits that market makers earn from supplying 
liquidity.  In order to estimate the trading profits that market makers earn, we would need 
to know at what times and prices the market maker executed the off-setting position for a 
trade in which it supplied liquidity (e.g., the price at which the market maker later sold 
shares that it bought when it was supplying liquidity). If market makers offset their 
positions at a price and time that is different from the NBBO midpoint at the time lag 
used to compute the realized spread measure (Rule 605 realized spread statistics are 
measured against the NBBO midpoint 5 minutes after the execution takes place), then the 
realized spread measure is an imprecise proxy for the profits market makers earn 
supplying liquidity.  Additionally, realized spread metrics do not take into account any 
transaction rebates or fees, including PFOF, that a market maker might earn or pay, 
which would also affect the profits they earn when supplying liquidity. Furthermore, 
realized spreads also do not account for other costs that market makers may incur as part 
of their business, such as fixed costs for setting up their trading infrastructure and costs 
for connecting to trading venues and receiving market data. 
419
  The execution quality information in Rule 605 combines information about orders 
executed at a market center with information on orders received for execution at a market 
center but executed by another market center; see supra note 412
. As such, the execution 
quality statistics presented in Table 5 include orders that are effectively rerouted by 
wholesalers.  Furthermore, note that Rule 605 does not specifically require market centers 
to prepare separate execution quality reports for their SDPs, and as such these 
calculations reflect all covered market and marketable limit orders in NMS stocks 
received and executed by wholesalers, including those on SDPs.  

   
234 
 
observed by the lower effective spreads shown in Table 5 for marketable orders handled by 
wholesalers.  
Additionally, the results in Table 5 show that approximately 79% of the executed dollar 
volume in marketable orders handled by wholesalers are market orders.  The Commission 
believes that these outcomes reflect the heavy utilization of market orders for NMS stocks by 
individual investors whose orders are primarily handled by wholesalers, contrary to the heavy 
utilization of limit orders by other market participants. 
Table 5 also highlights significantly higher fill rates, i.e., the percentage of the shares in 
an order that execute in a trade, for marketable orders sent to wholesalers as compared to 
exchanges.
420
  Wholesalers execute the vast majority of orders that they receive against their 
own capital, i.e., they internalize the vast majority of orders they receive.
421
  Wholesalers expose 
themselves to inventory risk when internalizing order flow, but mitigate this risk by internalizing 
orders that possess low adverse selection risks. 
 
 
Table 5: Comparison of Rule 605 Execution Quality Statistics Between Exchanges and Wholesalers for NMS Common Stocks 
and ETFs in Q1 2022 
                                                 
420
  Marketable orders may not fully execute if there isn’t sufficient liquidity on the exchange 
to fill the order within its limit price and/or if it contains other instructions that limit their 
execution, such as if they are designated as IOC orders or their instructions not to route 
the order to another exchange. 
421
  See analysis in infra Table 7 and corresponding discussion. 

   
235 
 
 
Combined Marketable 
Orders 
Market Marketable Limit 
 
WH EX WH EX WH EX 
Average Price 
$47.89 $58.14 $56.19 $85.45 $30.66 $58.08 
Share Volume (billion shares) 
106.97 179.49 72.20 0.39 34.77 179.10 
Dollar Volume (billion $) 
$5,122.91 $10,436.02 $4,056.85 $33.53 $1,066.06 $10,402.49 
Fill Rate (%) 
69.32% 25.77% 99.79% 58.08% 34.81% 25.77% 
Effective Spread (bps) 
1.81 2.06 1.47 3.29 3.11 2.06 
Realized Spread (bps) 
0.61 -0.38 0.39 2.40 1.43 -0.39 
Price Impact (bps) 
1.20 2.44 1.08 0.90 1.68 2.45 
E/Q ratio 
0.48 1.01 0.40 1.65 0.83 1.01 
Pct of Shares Price Improved 
83.17% 8.78% 88.99% 15.95% 61.01% 8.75% 
Constrained Amount of Price 
Improvement (bps) 
2.17 1.50 2.33 1.92 1.24 1.50 
This table computes aggregated execution quality statistics for marketable orders covered orders received by exchanges 
and wholesalers from Rule 605 reports for Q1 2022 for NMS common stocks and ETFs. See supra note 412
 for a 
definition of covered orders. Individual wholesaler and exchange Rule 605 reports are aggregated together at the stock-
month level, into two categories, WH and EX, such that aggregate execution quality data is averaged for, a) wholesalers 
(WH) and, b) exchanges (EX), for each stock during each month.  
The following metrics were calculated: Average Price is the stock’s average execution price from the Rule 605 data 
(Dollar Volume/Share Volume), Share Volume is the total executed shares (in billions) from the Rule 605 data. Dollar 
Volume is the total executed dollar volume (in billions), calculated as the executed share volume from the Rule 605 data 
multiplied by the stock’s monthly VWAP price, as derived from NYSE Daily Trade and Quote data (TAQ). Fill Rate is 
the weighted average of the stock-month total executed share volume/total covered shares from the Rule 605 data. 
Effective Spread is the weighted average of the stock-month percentage effective half spread in basis points (bps). 
Realized Spread is the weighted average of the stock-month percentage realized half spread in basis points (bps). Price 
Impact is the weighted average of the stock-month percentage price impact in basis points (bps). E/Q ratio is the 
weighted average of the stock-month ratio of the effective spread/quoted spread. Pct of Shares Price Improved is the 
weighted average of the stock-month ratio of shares executed with price improvement/total executed share volume. 
Conditional Amount of Price Improvement is the weighted average of the stock-month of the amount of percentage 
price improvement in basis points (bps), conditional on the executed share receiving price improvement. 
Aggregated effective and realized percentage spreads are measured in half spreads in order to show the average cost of 
an individual investor order and are calculated by dividing the aggregated Rule 605 reported per share dollar amount by 
twice the stock’s monthly volume weighed average price (VWAP), as derived from NYSE Daily Trade and Quote data 
(TAQ), for trades executed during regular market hours during the month. Percentage price impact is calculated as the 
aggregated Rule 605 reported per share dollar effective spreads minus per share dollar realized spreads divided by twice 
the stock’s monthly volume weighed average price (VWAP), as derived from NYSE Daily Trade and Quote data 
(TAQ). Percentage amount of price improvement is calculated as the aggregated Rule 605 reported per share dollar 
amount of price improvement divided by the stock’s monthly volume weighed average price (VWAP), as derived from 
NYSE Daily Trade and Quote data (TAQ). Percentage spreads and amount of price improvement percentages are 
reported in basis points (bps). The Combined Market and Marketable Limit order type category is constructed for each 
security-month-order size category by combining the market and marketable limit order categories and computing the 
total and share weighted average metrics for the order size category for each security-month. 

   
236 
 
The sample includes NMS common stocks and ETFs that are present in the CRSP 1925 US Stock Database, Ctr. Rsch. 
Sec. Prices, U. Chi. Booth Sch. Bus. (2022). The CRSP 1925 US Indices Database, Ctr. Rsch. Sec. Prices, U. Chi. 
Booth Sch. Bus. (2022), was used to identify if a stock was a member of the S&P 500. The stock did not have to be in 
the CRSP 1925 US Indices Database to be included in the analysis. NMS Common stocks and ETFs are identified, 
respectively, as securities in TAQ with a Security Type Code of ‘A’ and ‘ETF’. For each stock-month-order-type (such 
that aggregate execution quality data is averaged for, a) wholesalers and, b) exchanges, for each stock during each 
month) the per dollar share weighted measures from Rule 605 reports are aggregated together by share-weighting across 
different trading venues and order-size categories within the stock-month-order-type and venue type (i.e. trading venue 
Rule 605 reports for exchanges and wholesalers are aggregated into different categories). Percent values are then 
calculated for each stock month by dividing by the stock’s monthly volume weighed average price (VWAP). These 
percentage stock-month values are averaged together into order-type categories (market orders, marketable limit orders, 
and the combined market and marketable limit order type category, for both wholesalers and exchanges) based on 
weighting by the total dollar trading volume for the wholesaler or exchange category in that stock-month-order type, 
where dollar trading volume is estimated by multiplying the Rule 605 report total executed share volume, i.e., the share 
volume executed at market center + share volume executed away from the market center, for the stock-month-order 
type by the stock’s monthly VWAP). See supra note 
413 for a discussion of filters that were applied to the Rule 605 
data in this analysis. This analysis uses data from prior to the implementation of the MDI Rules and specific numbers 
may be different following the implementation of the MDI Rules. See supra note 415. 
 
To supplement the analyses using Rule 605 data and test for the robustness of the results 
that it generated, CAT data
422
 was analyzed to look at the execution quality of marketable orders 
                                                 
422
 This analysis used CAT data to examine the execution quality of marketable orders in 
NMS Common stocks and ETFs that belonged to accounts with a CAT account type of  
“Individual Customer” and that originated from a broker-dealer MPID that originated 
orders from 10,000 or more unique “Individual Customer” accounts during January 2022.  
The number of unique “Individual Customer” accounts associated with each MPID was 
calculated as the number of unique customer account identifiers with an account 
customer type of  “Individual Customer” that originated at least one order during the 
month of January 2022.  The Commission found that 58 broker-dealer MPIDs associated 
with 54 different broker-dealers originated orders from 10,000 or more unique Individual 
Customer accounts in January 2022. For the Consolidated Audit Trail, account type 
definitions are available in Appendix G to the CAT Reporting Technical Specifications 
for Industry Members (https://catnmsplan.com/
), for the field name 
“accountHolderType.” Account types represent the beneficial owner of the account for 
which an order was received or originated, or to which the shares or contracts are 
allocated. Possible types are: Institutional Customer, Employee, Foreign, Individual 
Customer, Market Making, Firm Agency Average Price, Other Proprietary, and Error.  
An Institutional Customer account is defined by FINRA Rule 4512(c) as a bank, 
investment adviser, or any other person with total assets of at least $50 million.  An 
Individual Customer account means an account that does not meet the definition of an 
“institution” and is also not a proprietary account.  Therefore, the CAT account type 

   
237 
 
of individual investors in NMS Common Stocks and ETFs that were less than $200,000 in value 
and that executed and were handled by wholesalers during Q1 2022 (“CAT retail analysis”).
423
  
This was compared to a sample of CAT data examining the execution quality of executed market 
                                                 
“Individual Customer” includes natural persons as well as corporate entities that do not 
meet the definitions for other account types.  The Commission restricted that analysis to 
MPIDs that originated orders from 10,000 or more “Individual Customer” accounts in 
order to ensure that these MPIDs are likely to be associated with retail brokers to help 
ensure that the sample is more likely to contain marketable orders originating from 
individual investors.  NMS Common stocks and ETFs are identified, respectively, as 
securities in TAQ with a Security Type Code of ‘A’ and ‘ETF’.   
423
  Fractional share orders with share quantity less than one share were excluded from the 
analysis.  The analysis included market and marketable limit orders that originated from 
one the 58 retail broker MPIDs and were received by a market center that was associated 
with one of the six wholesalers CRD numbers (FINRA’s Central Registration Depository 
number) during some point in the order’s lifecycle.  Orders that were received by the 
wholesaler or executed outside of normal market hours were excluded. Orders were also 
excluded if they had certain special handling codes so that execution quality statistics 
would not be skewed by orders being limited in handling by special instructions (e.g., 
pegged orders, stop orders, post only orders). Orders identified in CAT as Market and 
Limit orders with no special handling codes or one of the following special handling 
codes were included in the analysis: NH (not held), CASH (cash), DISQ (display 
quantity), RLO (retail liquidity order), and DNR (do not reduce). These special handling 
codes were identified based on their common use by retail brokers and descriptions of 
their special handling codes.  The marketability of a limit order was determined based on 
the consolidated market data feed NBBO at the time a wholesaler first receives the order.  
Limit orders that were not marketable were excluded.  The dollar value of an order was 
determined by multiplying the order’s number of shares by either its limit price, in the 
case of a limit order, or by the far side quote (i.e., NBO for a market buy order and NBB 
for a market sell) of the consolidated market data feed NBBO at the time the order was 
first received by a wholesaler, in the case of a market order. Orders with dollar values 
greater than or equal to $200,000 were excluded from the analysis. The analysis includes 
NMS Common Stocks and ETFs (identified by security type codes of ‘A’ and ‘ETF’ in 
NYSE TAQ data) that are also present in CRSP data. Price improvement, effective 
spreads, realized spreads, quoted spreads, and price impacts were winsorized if they were 
greater than 20% of a stock’s VWAP during a stock-week. See Table 6 for a detailed 
description of the analysis. 

   
238 
 
and marketable limit orders in NMS Common Stocks and ETFs received by exchanges that were 
less than $200,000 in value over the same time period (“CAT exchange analysis”).
424
   
Table 6 reports the results from CAT data analysis.
 425
  In addition to reporting results for 
all stocks, it also breaks out results based by if a stock is an ETF or is in the S&P 500 or not.   
Generally, the results from this analysis are consistent with results from the analysis of Rule 605 
data from Table 5.  Specifically, wholesalers display lower price impacts (WH Price Impact) and 
                                                 
424
  The Commission analysis used CAT data to examine the execution quality of market and 
marketable limit orders in NMS Common Stocks and ETFs that were under $200,000 in 
value that were received and executed by exchanges during normal market hours in Q1 
2022. The analysis employed filters to clean the data and account for potential data 
errors. The analysis is limited to orders identified in CAT as market and limit orders 
accepted by exchanges. Orders were excluded from the analysis if they had certain 
special handling codes, such as post or add-liquidity only orders, midpoint orders, orders 
that can only execute in opening and closing auctions, orders with a minimum execution 
quantity, pegged orders, or stop order or stop-loss orders. Orders were also required to 
execute in normal trades during normal trading hours to be included in the analysis. 
Normal trades are identified in CAT data by sale conditions “blank, @, E, F, I, S, Y” 
which correspond to regular trades, intermarket sweep orders, odd lot trades, split trades, 
and yellow flag regular trades. For orders submitted to exchanges, the NBBO the 
exchange records seeing at the time of order receipt is used to measure the NBBO and 
NBBO midpoint for calculating statistics that are based on the time of order receipt (e.g., 
effective spreads, price improvement, quoted spreads, etc.). The marketability of 
exchange orders was determined based on the NBBO observed by the exchange at the 
time of order receipt. The dollar value for a market order was calculated as the price of 
the far side NBBO quote (NBO for a market buy order and NBB for a market sell) times 
the shares in the order. The dollar value for a limit order was calculated as the price of the 
limit order times the number of shares in the order. Orders with dollar values greater than 
or equal to $200,000 were excluded from the analysis. The consolidated market data feed 
NBBO was used to calculate statistics that use the NBBO or NBBO one minute after 
execution (e.g., realized spreads, price impacts, etc.). The analysis includes NMS 
Common Stocks and ETFs (identified by security type codes of ‘A’ and ‘ETF’ in NYSE 
TAQ data) that are also present in CRSP data. Price improvement, effective spreads, 
realized spreads, quoted spreads, and price impacts were winsorized if they were greater 
than 20% of a stock’s VWAP during a stock-week. See Table 6 for a detailed description 
of the analysis.  
425
 Certain items in Table 6 may also be affected by the MDI rules once they are 
implemented.  See supra note 415. 

   
239 
 
E/Q ratios ( WH E/Q Ratio), indicating that orders internalized by wholesalers receive better 
execution quality relative to order executed on exchanges ( EX Price Impact and EX E/Q Ratio 
containing the corresponding statistics for exchanges).  Despite this enhanced execution quality, 
realized spreads of wholesalers (WH Realized Spread) exceed those produced by exchanges (EX 
Realized Spread).  
Table 6 also reports some statistics for wholesalers that are not available in Rule 605 
reports, including statistics on midpoint executions (WH Pct Shares Executed at Midpoint) and 
sub-penny trades ( WH Pct of Shares Executed as Subpenny Prices).    In a ll   NMS common stock 
and ETF orders, wholesalers execute approximately 44% of shares at prices at or better than the 
NBBO midpoint ( WH Pct Shares Executed at Midpoint or Better).  However, wholesalers also 
offer less than 0.1 cents price improvement to approximately 18.6% of shares that they execute 
(WH Pct Shares Executed with <0.1 cent Price Improvement).  Wholesalers execute more than 
65% of shares at sub-penny prices ( WH Pct of Shares Executed as Subpenny Prices), with over 
40% of shares being executed at prices with four decimal points (i.e., the fourth decimal place is 
not equal to zero, which is measured by the WH Pct of Shares Executed at Subpenny Prices with 
4 Decimals variable).  
 
Table 6: Wholesaler CAT Analysis of Exchange Individual Investor Order Execution 
Quality for Marketable Orders in NMS Common Stocks and ETFs by Type of Stock 
Panel A: Wholesaler and Exchange Execution Quality 
Variable All SP500 NonSP500 ETF 
Average Price $29.87 $110.31 $10.52 $53.14 
WH Principal Execution Rate 90.44% 93.07% 87.66% 88.12% 
WH Share Volume (billion shares) 87.11 11.63 63.17 12.31 

   
240 
 
EX Share Volume (billion shares) 281.90 66.98 140.82 74.10 
WH Dollar Volume (billion $) $2,601.44 $1,282.62 $664.41 $654.41 
EX Dollar Volume (billion $) $16,194.84 $6,479.89 $3,246.09 $6,468.85 
WH Effective Spread (bps) 2.11 0.67 6.23 0.76 
EX Effective Spread (bps) 3.18 1.52 8.11 1.42 
WH Realized Spread (bps) 0.85 0.42 2.00 0.51 
EX Realized Spread (bps) -1.22 -0.28 -3.90 -0.34 
WH Price Impact (bps) 1.26 0.25 4.22 0.25 
EX Price Impact (bps) 4.40 1.80 12.00 1.75 
WH E/Q Ratio 0.39 0.32 0.50 0.41 
EX E/Q Ratio 1.04 1.01 0.98 1.17 
Panel B: Wholesaler Price Improvement 
Variable All SP500 NonSP500 ETF 
WH Pct Executed with Price 
Improvement 
89.95% 93.33% 85.43% 87.93% 
WH Conditional Amount Price 
Improvement (bps) 
2.54 1.47 6.16 0.99 
WH Pct Shares Executed at Midpoint 
or Better 
44.57% 47.37% 39.76% 43.97% 
WH Pct Shares Executed at Midpoint 31.69% 32.47% 28.46% 33.44% 
WH Pct Shares Executed at NBBO 8.38% 5.86% 10.97% 10.69% 
WH Pct Shares Executed Outside 
NBBO 
1.67% 0.81% 3.61% 1.38% 
WH Pct Shares Executed with <0.1 
cent Price Improvement 
18.64% 16.62% 20.58% 20.64% 
WH Pct of Shares Executed as 
Subpenny Prices 
66.98% 65.10% 64.16% 73.55% 
WH Pct of Shares Executed at 
Subpenny Prices without 
Midpoint Trades 
47.60% 46.82% 47.03% 49.68% 
WH Pct of Shares Executed at 
Subpenny Prices with 4 Decimals 
41.36% 40.80% 41.76% 42.06% 
This table uses CAT data to compare aggregated execution quality statistics for Q1 2022 broken out for 
different security types for executed marketable orders with order size under $200,000 in NMS Common 
Stocks and ETFs received by wholesalers from individual investors to similar orders received by 
exchanges. Aggregated statistics in the table labeled WH are based on analysis of CAT data of executed 
marketable orders in NMS Common Stocks and ETFs from individual investors for under $200,000 in 
value belonging to one of 58 retail broker MPIDs that were handled by one of 6 wholesalers during 
normal market hours in Q1 2022 (see supra note 423 for additional discussions on the CAT data used in 

   
241 
 
the CAT retail analysis). Aggregated statistics in the table labeled EX are based on a corresponding 
analysis of CAT data of executed marketable orders in NMS Common Stocks and ETFs receive by 
exchanges that were under $200,000 in value and received and executed during normal market hours in 
Q1 2022 (see supra note 
424 for additional discussions on the CAT data used in CAT exchange analysis). 
The following metrics are calculated for all stocks and for each of the stock-types. EX indicates 
aggregated statistics for executed marketable orders routed to exchanges and WH indicates aggregated 
statistics for executed marketable orders from individual investors that were routed to wholesalers. 
Average Price is the average execution price. WH Principal Execution Rate is the percentage of dollar 
volume of individual investor trades that a wholesaler executed in a principal capacity. Share Volume is 
the total executed share volume. Dollar Volume is the total executed dollar volume. Effective Spread is 
the weighted average of the percentage effective half spread in basis points (bps) (measured as average 
(execution price – NBBO midpoint at time of order receipt) * average transaction price). Realized Spread 
is the weighted average of the percentage one minute realized spread in bps (measured as average 
(execution price –   NBBO midpoint one minute after execution) * average transaction price). Price Impact 
is the weighted average of the percentage one-minute price impact spread in bps (measured as average 
(NBBO midpoint one minute after execution -  NBBO midpoint at time of order receipt) / average 
transaction price). E/Q Ratio is the weighted average of the ratio of the effective dollar spread divided by 
its quoted spread at the time of order receipt. WH Pct Executed with Price Improvement is the weighted 
average of the percentage of share volume that is routed to wholesalers and executed at a price better than 
the NBBO. WH Conditional Amount Price Improvement is the weighted average amount of percentage 
price improvement given by wholesalers conditional on the order receiving price improvement in bps 
(measured for a marketable buy order as average (NBO at time of order receipt – execution price) and 
measured for a marketable sell order as average (execution price - NBB at time of order receipt) and then 
dividing the difference by the average transaction price). WH Pct Share Executed at Midpoint or Better is 
the weighted average of the percentage of shares that are routed to a wholesaler and executed at prices 
equal to or better than the NBBO midpoint at the time of order receipt. WH Pct Share Executed at 
Midpoint is the weighted average of the percentage of shares that are routed to a wholesaler and executed 
at a price equal to the NBBO midpoint at the time of order receipt. WH Pct Shares Executed at NBBO is 
the weighted average of the percentage of share volume routed to a wholesaler and executed at the 
NBBO at the time of order receipt (executed at the NBB for marketable sell orders and the NBO for 
marketable buy orders). WH Pct Shares Executed Outside NBBO is the weighted average of the 
percentage of share volume routed to wholesalers and executed at prices outside the NBBO at the time of 
order receipt (executed a price less than the NBB for marketable sell orders and a price greater than the 
NBO for marketable buy orders). WH Pct Shares Executed with <0.1 cent Price Improvement is the 
weighted average of the percentage of shares that are executed with an amount of price improvement less 
than 0.1 cents measured against the NBBO at the time of order receipt. WH Pct Shares Executed 
Subpenny Prices is the weighted average of the percentage of shares that execute at a subpenny price (a 
dollar execution price with a non-zero value in the third or fourth decimal place). WH Pct Shares 
Executed at Subpenny without Midpoint Trades is the weighted average of the percentage of shares that 
execute at a subpenny price (an dollar execution price with a non-zero value in the third or fourth decimal 
place), excluding executions with subpenny prices that occur at the NBBO midpoint. WH Pct Shares 
Executed at Subpenny Prices with 4 Decimals is the weighted average of the percentage of shares that 
execute at a subpenny price where there is a dollar execution price with a non-zero value in the fourth 
decimal place. Average transaction prices used in calculating the metrics are calculated as the total dollar 
trading volume divided by the total share trading volume in the category and time period. 
For the wholesaler (WH) CAT metrics used in the sample, the analysis includes marketable orders for 
under $200,000 in value that originate from a customer with a CAT account type of “individual” at one 
of the 58 retail broker MPIDs and are routed to a wholesaler (see supra note 
422 for more info on CAT 
account types and retail broker identification methodology and supra note 423 for more details on how 
the CAT retail analysis sample was constructed). Fractional share orders with share quantity less than one 
share were excluded from the analysis. Orders were also excluded if they had certain special handling 
codes. The marketability of a limit order is determined based on the consolidated market data feed NBBO 
at the time a wholesaler first receives the order.  

   
242 
 
For the exchange (EX) CAT metrics, executed market and marketable limit orders received by exchanges 
during normal market hours were over the same period were used to calculate the exchange execution 
quality statics (see supra note 
424 for more details on how the CAT exchange sample was constructed). 
Exchange orders were filtered if they had certain special handling codes. The marketability of exchange 
orders was determined based on the NBBO observed by the exchange at the time of order receipt.  
The dollar value of an order was determined by multiplying the order’s number of shares by either its 
limit price, in the case of a limit order, or by the far-side quote of the NBBO at the time of order receipt, 
in the case of a market order. The analysis includes NMS Common Stocks and ETFs (identified by 
security type codes of ‘A’ and ‘ETF’ in NYSE TAQ data) that are also present in CRSP data from CRSP 
1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022). The CRSP 1925 US 
Indices Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022), was used to identify if a stock 
was a member of the S&P 500. The stock did not have to be in the CRSP 1925 US Indices Database to be 
included in the analysis. Time of order receipt is defined as the time the wholesaler or exchange first 
receives the order. Wholesaler metrics based on the time of order receipt are measured against the NBBO 
from the consolidated market data feed. Exchange metrics based on time of order receipt are measured 
against the NBBO the exchange reports observing. Realized spreads for both exchange and wholesaler 
metrics are calculated with respect to the NBBO midpoint from the consolidated market data feed 
observed one minute after the time of order execution.  
Separately, for both the exchange and wholesaler samples, total share volume, total dollar volume, 
average transaction price, percentage volume metrics, and share weighted average dollar per share 
spread, price impact, and price improvement metrics were calculated at a stock-week-order size category 
level by aggregating together execution quality statistics calculated for individual orders. The order-size 
categories were defined as orders less than 100 shares, 100-499 shares, 500-1,999 shares, 2,000-4,999, 
5,000-9,999 shares, and 10,000+ shares. For each stock-week-order size category, percentage spread, 
price impact, and price improvement metrics were calculated by dividing the average dollar per share 
metric by the average transaction price calculated for each stock-week-order size category.  E/Q ratios 
were calculated for each stock-week-order size category by dividing the average dollar per share effective 
spread by the average dollar per share quoted spread. 
Exchange sample metrics for E/Q ratios and percentage spread, price impact, and price improvement 
metrics for a for each stock-week-order size category were then merged with the corresponding stock-
week-order size category in the wholesaler sample. Weighted averages for both wholesaler and exchange 
metrics and the wholesaler percentage volume metrics are then calculated for the security type in the 
sample by averaging across stock-week-order size category levels based on their total dollar transaction 
volume during the sample period in the wholesaler CAT sample (i.e., for both exchanges and 
wholesalers, using the stock’s total dollar trading volume in wholesaler executed transactions as the 
weight when averaging the share weighted average stock-week-  size category values). Weighting the 
exchange and wholesaler execution metrics by the same weights helps to ensure the samples are 
comparable across stocks. Total dollar volume and share volume for the exchange and wholesaler 
samples are calculated by summing across all executions in a security type in each sample. The 
wholesaler Principal Execution Rate is calculated for a security type in the wholesaler sample by 
summing the total dollar volume in trades wholesalers executed in a principal capacity across the security 
type in the wholesaler sample and dividing by the total dollar volume in traded in the security type in the 
wholesaler sample. 
This analysis uses data from prior to the implementation of the MDI Rules and specific numbers may be 
different following the implementation of the MDI Rules. See supra note 415
. 
 
  Table 7 uses CAT data to summarize how individual investor marketable NMS stock 
order execution quality varies based on whether the wholesaler executes the order in a principal 

   
243 
 
capacity (i.e., internalizes the order) or effectively reroutes the order (i.e., executes in a riskless 
principal or handles it in an agency capacity).  This analysis supports the interpretation that 
wholesalers identify and tend to internally execute individual investor orders associated with the 
lower adverse selection costs.
426
  Internalized orders have a lower price impact (0.91 bps as 
compared to 4.63 bps for those effectively rerouted, measured by WH Price Impact), and lower 
effective spreads (1.77 compared to 5.36 for other transactions, measured by WH Effective 
Spread).  Wholesalers also earn higher realized spreads on the orders they execute as principal 
(0.86 bps for principal transactions compared to 0.72 bps earned by those providing liquidity for 
the riskless principal or agency transactions, measured by WH Realized Spread), despite 
executing them at lower effective spreads. 
Table 7: Wholesaler CAT Analysis of Individual Investor Order Execution Quality by Wholesaler Execution Capacity 
                                                 
426
  Certain items in Table 7 may also be affected by the MDI Rules once they are 
implemented.  See supra note 415. 

   
244 
 
Variable Internalized Effectively Rerouted 
Average Price 
$33.48 $14.78 
WH Orders (million) 
236.95 34.36 
WH Trades (millions) 
251.32 74.36 
WH Share Volume (billion shares) 
70.28 16.83  
WH Pct of Executed Share Volume 80.68% 19.32% 
WH Dollar Volume (billion $) $2,352.80 $248.64 
WH Pct of Executed Dollar Volume 90.44% 9.56% 
WH Effective Spread (bps) 
1.77 5.36 
WH Realized Spread (bps) 
0.86 0.72 
WH Price Impact (bps) 
0.91 4.63 
WH E/Q Ratio 
0.35 0.70 
WH Pct Executed with Price Improvement 
93.37% 57.65% 
WH Conditional Amount Price Improvement (bps) 
2.45 3.74 
WH Pct Shares Executed at Midpoint or Better 
46.05% 30.65% 
WH Pct Shares Executed at Midpoint 
32.23% 26.53% 
WH Pct Shares Executed at NBBO 
5.51% 35.49% 
WH Pct Shares Executed Outside NBBO 
1.12% 6.86% 
WH Pct Shares Executed with <0.1 cent Price Improvement 
20.38% 2.22% 
The table summarizes execution quality statistics from the CAT retail analysis based on whether the wholesaler 
executed the individual investor NMS stock order in a principal capacity or in another capacity (i.e., in an agency or 
riskless principal capacity). The majority of the other transactions are executed by the wholesaler in a riskless principal 
capacity. See supra Table 6 for additional details on the sample and metrics used in the analysis. Share-weighted 
percentage metrics are averaged together at the individual execution capacity-stock-week-order-size category level for 
the wholesaler sample using the methodology in Table 6. Weighted averages for the metrics are then calculated for 
each execution capacity by averaging across execution capacity-stock-week-order size category levels based on their 
total dollar transaction volume during the sample period in the wholesaler CAT sample. This analysis uses data from 
prior to the implementation of the MDI Rules and specific numbers may be different following the implementation of 
the MDI Rules. See supra note 415. 
 
The analysis in Table 7 presents evidence that wholesalers execute 46% of the shares 
they internalize at prices equal to or better than the midpoint.  However, additional analysis of 
CAT data indicates that there is often midpoint liquidity on exchanges and NMS Stock ATSs 
when wholesalers internalize individual investor orders at prices worse than the midpoint.   
Table 8 uses CAT data from March 2022 to examine the non-displayed liquidity 
available at the NBBO midpoint on exchanges and NMS Stock ATSs at a moment in time when 
a wholesaler internalizes an individual investor marketable order at a price less favorable (to the 

   
245 
 
customer) than the NBBO midpoint.
427
  The results indicate that, on average,
428
 51% of the 
shares internalized by wholesalers are executed at prices less favorable than the NBBO midpoint 
(Wholesaler Pct Exec Shares Worse Than Midpoint).  Out of these individual investors shares 
that were executed at prices less favorable than the midpoint, on average, 75% of these shares 
                                                 
427
  More specifically, the analysis uses CAT data to look at the total shares available at the 
NBBO midpoint that originate from hidden midpoint pegged orders on exchanges and 
NMS Stock ATSs. The analysis compares the size of an individual investor marketable 
order that was internalized in a principal capacity by a wholesaler at a price less favorable 
than the NBBO midpoint (measured at the time the wholesaler received the order) to the 
total shares of midpoint liquidity (originating from midpoint peg orders) at the NBBO 
midpoint on exchanges and NMS Stock ATSs at the time the individual investor order is 
executed in order to hypothetically see how many additional shares could have gotten 
price improvement if they had executed against the hidden liquidity available at the 
NBBO midpoint. A midpoint peg order is a type of hidden order whose price 
automatically adjusts with the NBBO midpoint. The analysis looks at midpoint peg 
orders on exchanges and ATSs during normal market hours (midpoint peg orders with an 
Immediate or Cancel or Fill or Kill modifier are excluded). The total potential shares in 
orders that were available at the NBBO midpoint from midpoint peg orders on exchanges 
and ATSs was calculated each stock day by adding shares when midpoint peg orders 
were received by an exchange or ATS and subtracting shares in these orders that were 
canceled or traded. Shares were also subtracted from the total when a wholesaler 
internalized an individual investor marketable order at a price worse than the NBBO 
midpoint and shares were available at the midpoint on exchanges and ATSs that the order 
could have hypothetically executed against. This ensures that that analysis is not 
overestimating the available midpoint liquidity (i.e., it ensures that we do not estimate 
two individual investor 100 share orders could have executed against the same resting 
100 share midpoint order). The analysis also kept track of the total amount of dollars of 
additional price improvement that individual investors would have received if their orders 
had hypothetically executed against the liquidity available at the NBBO midpoint instead 
of being internalized by the wholesaler. Note that this analysis might underestimate the 
total non-displayed liquidity available at the NBBO midpoint because it only looks at 
orders that pegged to the midpoint and not other orders, such as limit orders with a limit 
price equal to the NBBO midpoint.
 
428
  As discussed in Table 8, percentages were computed at a stock-week level and then 
averaged across stock-weeks by weighting by the total dollar volume the wholesaler 
internalized during that stock-week. 

   
246 
 
could have hypothetically executed at a better price against the non-displayed liquidity resting at 
the NBBO midpoint on exchanges and NMS Stock ATSs. Under the current market structure, 
this liquidity is not displayed, so wholesalers may not have been aware of this liquidity and able 
to execute the individual investor marketable orders against it. Currently, if wholesalers wanted 
to detect this hidden liquidity, they would have had to ping each individual exchange or NMS 
Stock ATS to see if midpoint liquidity was available on that venue.
429
    
Table 8 also estimates that the additional dollar price improvement that these individual 
investor marketable orders would have received if they had executed against the available 
midpoint liquidity instead of being internalized.  The total amount of additional price 
improvement that all of these individual investor orders would have received was about 51% of 
the total dollar price improvement provided by wholesalers to all of the individual investor 
marketable orders that they internalized (i.e., the marketable orders internalized at prices better 
or equal to the midpoint plus marketable orders internalized at prices worse than the 
midpoint).
430
 
In addition, the results in Table 8 also indicate the availability of NBBO midpoint 
liquidity is only slightly lower for less liquid (non-S&P 500 stocks) as liquid (S&P500) stocks.  
That is, while about 57% of the shares in individual investor marketable orders in non-S&P500 
                                                 
429
  Pinging for midpoint liquidity at multiple venues could increase the risk of information 
leakage or that prices may move, possibly resulting in some market participants canceling 
midpoint orders they posted.
 
430
  This estimate of the potential additional price improvement if orders are executed against 
midpoint liquidity only accounts for differences in the potential execution prices of the 
order and does not account for any other differences in costs of executing the order at 
different venues, such as differences in PFOF or access fees and rebates. 

   
247 
 
stocks internalized by wholesalers received executions at less favorable prices than the NBBO 
midpoint, there was nevertheless hidden liquidity available at the NBBO midpoint for about 68% 
of these non-S&P500 shares.  Moreover, the potential additional price improvement that could 
have been gained by if these individual investor orders had executed against this NBBO 
midpoint liquidity is almost 55% of the total price improvement provided by wholesalers in these 
stocks.  
Table 8: Available Midpoint Liquidity When Wholesaler Internalizes a Retail Trade 
Stock Type Price Group 
Liquidity 
Bucket 
Wholesaler Pct Exec 
Shares Worse Than 
Midpoint 
Pct Shares MP 
Price 
Improvement 
Additional Dollar 
Price Improvement Pct 
All All  
51.05% 74.60% 51.05% 
SP500 All  
48.41% 72.32% 41.43% 
SP500 1) <$30  
64.36% 60.08% 50.00% 
SP500 2) $30-$100  
47.82% 60.36% 29.29% 
SP500 3) $100+  
47.69% 75.69% 43.27% 
NonSP500 All  
57.45% 68.10% 54.51% 
NonSP500 1) <$30 Low 
73.30% 49.52% 67.63% 
NonSP500 1) <$30 Medium 
71.30% 60.25% 82.85% 
NonSP500 1) <$30 High 
66.77% 52.18% 59.74% 
NonSP500 2) $30-$100 Low 
63.60% 80.69% 68.88% 
NonSP500 2) $30-$100 Medium 
57.71% 85.24% 61.80% 
NonSP500 2) $30-$100 High 
50.24% 71.79% 44.58% 
NonSP500 3) $100+ Low 
61.62% 84.32% 61.49% 
NonSP500 3) $100+ Medium 
55.40% 93.29% 55.96% 
NonSP500 3) $100+ High 
47.15% 90.99% 45.57% 
ETF All  
49.93% 86.06% 58.28% 
ETF 1) <$30 Low 
66.58% 39.75% 31.61% 
ETF 1) <$30 Medium 
57.95% 54.91% 38.35% 
ETF 1) <$30 High 
62.24% 78.47% 88.70% 
ETF 2) $30-$100 Low 
61.01% 62.00% 41.78% 
ETF 2) $30-$100 Medium 
53.94% 77.54% 46.85% 
ETF 2) $30-$100 High 
49.87% 84.09% 49.56% 
ETF 3) $100+ Low 
52.45% 72.28% 40.13% 
ETF 3) $100+ Medium 
47.51% 87.20% 45.35% 
ETF 3) $100+ High 
46.93% 90.28% 48.33% 
This table summarizes midpoint liquidity available on exchanges and ATSs during March 2022 when a 
wholesaler internalizes an individual investor marketable order less than $200,000 in an NMS common stock or 

   
248 
 
ETF on a principal basis at a price less favorable than the NBBO midpoint (at the time of the wholesaler 
receives the order) from one of the 58 retail broker MPIDs in the CAT retail analysis. Stocks are broken out 
into buckets based on their security type, price, and liquidity. Stock type is based on whether a security is an 
ETF, or a common stock in the S&P 500 or Non-S&P 500. Price buckets are based on a stock’s weekly average 
VWAP price as estimated from TAQ.  Stocks within each security type-price bucket, except S&P 500 stocks, 
are sorted into three equal liquidity buckets based on the stock’s total share trading volume during the week 
estimated using TAQ data. See supra Table 6 for additional details on the sample and CAT analysis of 
wholesaler executions of the orders of individual investors.  
Wholesaler Pct Exec Shares Worse Than Midpoint is the average percentage of individual investor shares that 
wholesalers executed on a principal basis at a price less favorable than the NBBO midpoint (measured at the 
time the wholesaler receives the order). Pct Shares MP Price Improvement is the average percentage of shares 
that the wholesaler executed at a price less favorable than the NBBO midpoint that could have executed at a 
better price against resting liquidity available at the NBBO midpoint on exchanges and NMS Stock ATSs at the 
time the wholesaler executed the order. Additional Dollar Price Improvement Pct is the ratio of the total 
additional dollars of price improvement of the sample period that individual investors whose orders were 
executed at a price less favorable than midpoint would have received if their orders would have executed 
against available midpoint liquidity, divided by the total dollars in price improvement (measured relative to the 
NBB or NBO at the time of order receipt) that wholesalers provided over the sample period when they 
internalized individual investor orders (i.e. the total price improvement for orders wholesalers internalized at 
prices less favorable than the midpoint plus the total price improvement for orders wholesalers internalized at 
prices more favorable than the midpoint). 
Midpoint liquidity is measured based on resting midpoint peg orders on exchanges and NMS Stock ATSs 
during normal market hours identified from CAT data. Midpoint peg orders with an Immediate or Cancel or 
Fill or Kill modifier are excluded. The total potential shares in orders that were available at midpoint on 
exchanges and ATSs at a point in time were calculated keeping a running total each stock day by adding shares 
when midpoint peg orders were received by an exchange or NMS Stock ATS and subtracting shares when 
shares in these midpoint peg orders were canceled or traded. When a wholesaler executes an order at a price 
less favorable than the NBBO midpoint (at the time the wholesaler receives the order), then the executed shares 
are compared to the available resting liquidity at the NBBO midpoint. If the NBBO midpoint at the time the 
order is executed would provide price improvement over the price the wholesaler would have executed the 
order at, then the shares executed by the wholesaler are subtracted from the total resting shares available at the 
NBBO midpoint, up to the lesser of the number of shares executed by the wholesaler or the total resting shares 
available (i.e. the total resting shares will not drop below zero). These are counted as the total shares that would 
have received additional price improvement at the midpoint. This methodology ensures that that analysis is not 
overestimating the available midpoint liquidity (i.e. it ensures that we do not estimate two individual investor 
100 share orders could have executed against the same resting 100 share midpoint order). NBBO midpoints for 
both time of order receipt and time of execution are estimated from the consolidated market data feed. 
The additional dollars of price improvement individual investors whose orders were executed at a price less 
favorable than the midpoint would have received if their orders would have executed against available midpoint 
liquidity was calculated as the difference between the price the wholesaler executed the order at and the NBBO 
midpoint at the time the wholesaler executed the order (i.e., executed price – NBBO midpoint at the time of 
execution for a marketable buy order and midpoint – executed price for a marketable sell order ) times the 
number of shares that would have received the additional price improvement.  
Weighted averages are calculated for the variables Wholesaler Pct Exec Shares Worse Than Midpoint and Pct 
Shares MP Price Improvement using the following methodology. Percentages based on share volume are 
calculate for each stock-week (e.g., total shares executed at a price worse than the midpoint during a stock-
week divided by the total shares of individual investor marketable orders executed by a wholesaler in a 
principal capacity during the stock-week). Weighted averages are then calculated for each stock-type-price-
liquidity bucket by averaging these stock-week percentages over the month by weighting each stock-week by 
the total dollar trade volume internalized by the wholesaler during the stock-week (i.e., using the stock’s total 

   
249 
 
dollar trading volume internalized by the wholesaler as the weight when averaging the stock-week percentage 
values).  
The Additional Dollar Price Improvement Pct is not weighted and is calculated as the ratio of the month’s total 
additional dollar price improvement orders executed at a price less favorable than the NBBO would have 
received if their orders would have executed against available midpoint liquidity, divided by the month’s total 
dollars in price improvement (measured relative the NBBO at the time of order receipt) that wholesalers 
provided when they executed individual investor orders (i.e. the total price improvement for orders wholesalers 
internalized at prices less favorable than the midpoint plus the total price improvement for orders wholesalers 
internalized at prices more favorable than the midpoint. 
 
ii. Listed Options 
a. Options Trading Services Overview 
Registered exchanges are the sole providers of trading services in the market for listed 
options, and the Options Clearing Corporation (OCC) is the sole entity clearing trades for 
exchange-listed options and security futures.
431
  All listed options trading occurs on exchanges.  
Exchanges compete with each other by offering different cost structures to participate on the 
exchange, and offering differing order types to allow customers advanced trading strategies.  
Options exchanges offer the ability to route orders to competing options exchanges in the event 
of a competing option exchange having the best price for a given options order.
432
   
                                                 
431
  See What Is OCC?, The Options Clearing Corporation, available at 
https://www.theocc.com/Company-Information/What-Is-OCC. Listed options can only be 
traded on a registered options exchange.  See By-Laws of The Options Clearing 
Corporation, Article I, Section 1(C)(28) (defining “confirmed trade”) and Article VI, 
Section 1. 
432
  See e.g., Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 
(August 6, 2009) (approving the national market system plan relating to options order 
protection and locked/crossed markets) (File No. 4-546). 

   
250 
 
There are sixteen options exchanges
433
 in the U.S. options market.  Each of the sixteen 
exchanges is operated by one of five exchange groups.
434
  Table 9 presents the market share, as  
measured by contract volume, for each option exchange and each exchange group based on  
OPRA data from 2022/01/01 to 2022/03/31.  Cboe is the exchange with the largest market 
share,
435
 at  close to 15%.  However, on the exchange group level, the Nasdaq group, with its six 
exchanges, has the highest market share.  
Table 9: U.S. Options Exchange Market 
Share 
Group 
Exchange Market Share 
BOX BOX 5.78% 
Cboe 
Cboe 14.81% 
C2 3.66% 
EDGX 4.86% 
BZX 7.91% 
Nasdaq 
Nasdaq 7.93% 
BX 2.01% 
PHLX 10.91% 
GEMX 2.32% 
ISE 5.63% 
MRX 1.69% 
NYSE 
AMEX 6.68% 
Arca 12.54% 
MIAX 
MIAX 5.39% 
PEARL 4.26% 
EMERALD 3.61% 
                                                 
433
  Eight exchanges trade only options.  Eight trade both options and equities. 
434
  Exchange groups are collection of exchanges operated by one parent entity. 
435
  This is in part due to the fact that there are several very liquid Cboe-listed only products 
such as SPX and SPXW. 

   
251 
 
 
There is one ATS in the market for listed options.
436
  As the Commission understands, 
this ATS offers subscribers an RFQ protocol.
437
  A customer may accept the quote the ATS 
returns from the RFQ protocol, after which the order is sent to an exchange for execution. 
Most option exchanges do not provide midpoint liquidity, and marketable orders routed 
to the limit order book can only be executed at the NBBO prices when there is no price 
improvement order present.  The Nasdaq Option Exchange first introduced an order type called 
price improvement order which allows market participants to enter the order at a non-displayed 
limit price within the NBBO spread at 1 cent increments regardless of the tick size of the option 
series.  Marketable customer orders are able interact with the resting price improving orders and 
receive better prices than the prevailing NBBOs.   
b. Retail Order Handling in Options 
The Commission understands the majority of retail orders for options are handled by 
wholesalers.
438
   Rule 606 data from Q1 2022 show that all but one of the top 15 retail options 
brokers routed all of their non-directed
439
 orders from customers to wholesalers.  Some of this 
flow is routed directly to wholesalers, while some goes through a third-party clearing firm, but is 
                                                 
436
  In contrast to the market for NMS Stocks, ATS trades in NMS Options are still executed 
on an exchange. 
437
  See, DASH Financial Technologies, Execution Services: Dash ATS available at  
https://dashfinancial.com/execution-services/dash-ats/. 
438
  See supra section III.A. 
439
  According to the Rule 606 filings for the top 15 retail brokers for listed options, on 
average non-directed orders made up around 99.13% of all retail orders in Q1 of 2022. 

   
252 
 
at some point handled by at least one wholesaler.  Sometimes retail brokers do route to 
exchanges, either directly or through a third-party firm.  
Table 10 summarizes order routing choices of 45 major retail brokers for non-directed 
orders for listed options.  Routing decisions are summarized separately for 23 retail brokers who 
accept PFOF from wholesalers or clearing firms in option markets (PFOF brokers) and those 
who do not (non-PFOF brokers).  Within each category of brokers, routing statistics for each 
order type
440
 is reported separately.    
Similar to results for NMS stocks, the composition of order types differ between non-
PFOF and PFOF brokers.  Market orders and marketable limit orders comprise a smaller 
proportion of orders routed by non-PFOF brokers than PFOF brokers.  For example, market 
orders make up 9.97% and 14.60% of non-directed orders of non-PFOF and PFOF brokers, 
respectively.  Consequently, the non-marketable limit order type and other order type make up 
smaller shares of orders routed by PFOF brokers. 
Non-PFOF brokers route a significantly lower fraction, 46%, of their customer orders to 
wholesalers, compared to over 99% of customer orders that PFOF brokers route to wholesalers.  
Additionally, Non-PFOF brokers also route 17% of customer orders to clearing firms, whereas 
essentially no orders from PFOF brokers are routed in this manner.  Finally, as an alternative to 
the previously mentioned routing choices, Non-PFOF brokers route a significantly higher 
fraction, 38%, of customers’ orders directly to the exchanges than PFOF brokers, which route 
less than 0.1% of the order flow to the exchanges. 
Table 10: Retail Broker Order Routing in Listed Options for March 2022 
                                                 
440
  See supra section V.C.2.e.i. 

   
253 
 
Non-PFOF Retail Brokers 
Venue Type Market 
Marketable 
Limit 
Non-
marketable 
Limit 
Other Total 
Clearing firm 
4.49% 1.46% 10.62% 0.27% 16.84% 
Exchange 
0.01% 0.44% 5.47% 31.70% 37.61% 
Wholesaler 
5.48%     7.88% 47.14% 35.01% 45.55% 
Total 
9.97% 9.25% 51.18% 20.66% 100.00% 
PFOF Retail Brokers 
Venue Type Market 
Marketable 
Limit 
Non-
marketable 
Limit 
Other Total 
Clearing firm 
0.00% 0.00% 0.02% 0.01% 0.04% 
Exchange 
0.00% 0.00% 0.06%  0.01% 0.07% 
Wholesaler 
14.59% 8.19% 44.71% 32.41% 99.90% 
Total 
14.60% 8.20% 44.78% 32.42% 100.00% 
This table shows the percentage of market orders, marketable limit orders, non-
marketable limit orders, and other orders that retail brokers route to different types of 
venues in March 2022.  Other venues include any other venue to which a retail broker 
routes an order other than a wholesaler or an exchange. Twenty-three retail brokers 
are identified as PFOF retail brokers that receive payments for routing orders in listed 
options to wholesalers or clearing firms. Twenty-two n on-PFOF retail brokers are 
identified as retail brokers that do not receive monetary compensation when they 
route orders in listed options to wholesalers.  The reports are aggregated together 
using a weighting factor based on an estimate of the number of orders non-directed 
orders each broker-dealer routes each month.  The number of orders is estimated by 
dividing the number of market orders a retail broker routes according to a CAT 
analysis by the percentage of market orders the retail broker routes for March 2022. 
 
Similar market forces that drive internalization of orders in the equity markets exist in 
option markets as well.
441
  In the options market, internalization
442
 can occur on the limit order 
                                                 
441
  See supra section V.B.3.i.d). 
442
  In contrast to the market for NMS Stocks, NMS options are typically internalized after 
being sent to an exchange.  Broker-dealers wishing to internalize orders are able to use 
the rules of exchanges to internalize some orders completely, through routing to affiliated 
market makers (partial internalization), or through price improvement auctions (partial 
internalization), which offer competition advantages over competing market participants. 

   
254 
 
book or through price improvement auction mechanisms.
443
  Internalization on the limit order 
book requires the wholesalers’ own quotes to be at the NBBOs, and some exchanges develop 
certain features (e.g., specialist model)
444
 to facilitate and improve the internalization rate.  From 
the Consolidated Audit Trail data for March 2022, the Commission estimates that wholesalers 
internalize 70.6% of the single-leg orders routed to the price improvement auctions and 19.1% of 
the single-leg orders routed to the limit order books.
445
  For multi-leg orders, the internalization 
rates are 82.4% and 9.27% respectively.
446
  Combining single-leg and multi-leg orders, the 
Commission estimates wholesalers internalize around 31% of the executed orders routed to the 
option exchange: 73% of orders routed to price improvement auctions and 17% of orders routed 
to the limit order book.
447
 
 
Table 11: Execution Protocol and Allocation of Limit Order 
Book by Options Exchange 
                                                 
443
  Price improvement auctions can be used by institutional broker-dealers to seek price 
improvement opportunities for their institutional clients’ orders as well.  Some exchanges 
have developed auctions for large orders with an “all-or-none” feature. 
444
  “Specialist model” is a general term.  The term to describe a “specialist” varies by 
exchange.  Some exchanges may formally call this “Designated Market Marker,” or other 
similar terms. 
445
        A single-leg order involves buying or selling a single options series. For example, buying 
a call option on XYZ stock with a strike price of $5.00. 
446 
 A multi-leg order involves buying or selling multiple options series simultaneously.  For 
example, buying a call option on XYZ stock with a strike price of $5.00, and, in the same 
order, selling a call option on XYZ stock with a strike price of $10.00. 
 
447
  The internalization rate measure throughout this paragraph is based on the contract 
volume.  A given customer’s order can be partially internalized.  For example, suppose a 
wholesaler routes an order with 10 contracts to a price improvement auction and is 
allocated 7 contracts after the auction concludes, then the wholesaler is deemed as 
internalizing 70% of the order. 

   
255 
 
Group 
Exchange Specialist Auction 
Pro-
Rata 
BOX BOX Y Y Y 
CBOE 
CBOE C2 N N Y 
CBOE Y Y Y 
CBOE BZX N N N 
CBOE EDGX N Y Y 
MIAX 
MIAX Y Y Y 
MIAX 
Emerald 
Y N Y 
MIAX 
PEARL 
N N N 
Nasdaq 
Nasdaq BX Y Y Y 
Nasdaq 
GEMX 
Y Y Y 
Nasdaq ISE Y Y Y 
Nasdaq MRX Y Y Y 
Nasdaq NOM N N N 
Nasdaq 
PHLX 
Y N Y 
NYSE 
NYSE 
American 
Y Y Y 
NYSE Arca N Y N 
 
 To internalize a given customer’s marketable order on the exchange limit order book, the 
wholesaler needs to provide a quote that is at the NBBO.
448
  This form of internalization may not 
yield complete internalization of the order because there could be quotes from other market 
makers, some of whom are quoting at the same price and may have priority over the wholesaler 
(e.g., the other market makers will have priority if the wholesaler joins the NBBO set by other 
                                                 
448
  Internalizing a customer’s non-marketable limit order with a price between the prevailing 
NBBO spread would require the wholesaler to route the customer’s order to the limit 
order book first and then submit an immediate-or-cancel order to fill the limit order. The 
internalization rate may not be 100% since other market makers can react to the limit 
order after the exchange books the book in the limit order book. 

   
256 
 
market makers in a price-time priority exchange or they quote with a larger trading interest than 
the wholesaler in a pro-rata exchange).  Being a specialist enables the wholesaler to further 
internalize more orders more than a pro-rata allocation model would allow.
449
  Some exchanges 
appoint a firm to be the specialist for each equity option class.  According to Table 11, 10 out of 
16 option exchanges adopt the specialist model for quoting and executing single-leg orders on 
the limit order book.  The specialist has greater quoting requirements than other exchange 
members or market makers.  To compensate specialists for continuous provision of two-sided 
quotes to match buyers and sellers, the exchanges reward specialists by allowing the specialist to 
receive a greater allocation (40%+) of incoming orders if they are at the NBBO and/or provide 
them with a guarantee of 100% allocation of orders of 5 contracts or less (the “five-lot rule”).  
Some exchanges allow executing brokers to route customers’ orders in the form of directed 
orders to the affiliated market makers with heightened allocation (40%+) and small order 
guarantees with 100% of the orders of one contract.  According to the table, all exchanges that 
adopted the specialist model are pro-rata exchanges, meaning that trading interests are allocated 
based on the size of the quote in proportion to the total depth on the NBBO.  Therefore, when 
wholesalers are also specialists, wholesalers may receive a disproportionate allocation of the 
customer order, even though, as the specialist, the wholesaler might not be providing the most 
depth at the best prices.  A recent academic study
450
 shows that the execution quality is worse for 
specialists who pay PFOF than the specialists who do not: the realized spreads for the 400 to 500 
                                                 
449
  All the exchanges that appoint specialists are pro-rata exchanges.  In a pro-rata exchange, 
allocations are proportional to the trading interests at the best prices for each options 
series. 
450
  See Ernst & Spatt, supra note 77. 

   
257 
 
share orders, which can be fully internalized by the specialists, are 3 basis points higher when the 
specialists pay PFOF compared to when the specialists do not pay PFOF, suggesting that the 
process is not fully efficient. 
Another way to internalize customer orders without being a specialist is through price 
improvement auctions.  Some option exchanges
451
 provide two-sided price improvement 
mechanisms for both single-leg and multi-leg orders originated from customers.  To start a price 
improvement auction (PIA), the affiliated market maker (“MM”) of an executing broker usually 
submits a two-sided order representing a customer’s order and its own “contra” order, which is 
on the opposite side of the customer’s order, to the exchange.  The PIA usually lasts for 0.1 
seconds, during which time, the exchange would expose and broadcast the customer order to 
other exchange members (competing market participants) for price improvement opportunity 
over the current NBBO price, and the competing market participants then submit responding 
orders to the auction to the exchange.  After the PIA concludes, the allocation of the execution 
will begin with the best price received from the contra order and responding orders and end with 
the price where the remaining volume of the customer’s order will be filled.  In addition to the 
previously mentioned benefits to specialists, option exchanges have developed certain 
arrangements or schedules to give wholesalers advantages to conduct operations on the exchange 
by further facilitat ing the ability of wholesalers to internalize the customer orders they receive 
through the auctions.  Such preferential advantages include, but are not limited to the following: 
(1) asymmetric fee schedule in which initiating MMs pay a much smaller transaction fee than 
                                                 
451
  According to Table 11, 10 out of 16 option exchanges provide price improvement auction 
mechanisms to wholesalers and other executing brokers. 

   
258 
 
competing market participants, (2) price auto-match in which the exchanges allow the PIA 
initiating exchange members to match the best price among the responding orders from the 
competing market participants, and (3) guaranteed allocation in which the initiating exchange 
members are allowed to execute at least 40% of the customer’s order exposed in a PIA.  
Academic studies suggest that the preferential treatment of wholesalers provided by the 
exchanges leads to less than fully competitive liquidity provision in auctions.
452
 
iii. Payment for Order Flow in NMS Securities
453
 
Rule 10b-10(d)(8) defines payment for order flow as any monetary payment, service, 
property, or other benefit that results in remuneration, compensation, or consideration to a broker 
or dealer from any broker or dealer, national securities exchange, registered securities 
association, or exchange member in return for the routing of customer orders by such broker or 
dealer to any broker or dealer, national securities exchange, registered securities association, or 
exchange member for execution.
454
  PFOF includes any payments from a wholesaler to a retail 
broker-dealer in return for order flow.  It also includes any exchange rebates paid to a broker-
                                                 
452
 See supra note 450 and see also Terrance Hendershott, Saad Khan, & Ryan Riordan, 
Option Auctions, (Working paper, May 15, 2022) available at 
https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=4110516 (retrieved from Elsevier 
database). 
453
  See infra section V.B.3.c) for a discussion of PFOF in the market for crypto asset 
securities. 
454
  See supra note 43 for discussion of payment for order flow definition under Rule 10b-
10(d)(8).  In certain circumstances, broker-dealers are required to disclose their PFOF 
arrangements.  For example. Rule 10b-10 requires extensive disclosures in confirmations, 
including specific disclosures about PFOF.  Additionally, Rule 606 reports require the 
disclosure of PFOF arrangements and the average PFOF rates broker-dealers receive on 
non-directed orders in NMS stocks and options for routing orders to a trading venue.  

   
259 
 
dealer in return for sending orders to the exchange.  PFOF has the potential to adversely affect 
routing decisions to the extent it is not directly passed on to the customer.
  455
  However, it is also 
possible that there is a tradeoff between PFOF and execution quality that does not adversely 
affect order routing decisions.     
Studies have found that PFOF may adversely affect order execution quality.  For 
example, one study looked at the effect of exchange rebates in the routing of non-marketable 
limit orders in the equities markets and found evidence that broker-dealers tend to route customer 
orders to the venues that pay high rebates, but offer lower execution quality in the form of lower 
fill rates and longer times to order execution.
456
  Similarly, in the options market, a study
457
 finds 
that some brokers tend to route non-marketable limit orders for listed options to exchanges that 
offer large rebates.  The study’s analysis indicates that non-marketable limit orders routed to 
                                                 
455
  FINRA has stated that obtaining price improvement is a heightened consideration when a 
broker-dealer receives payment for order flow and it is especially important to determine 
that customers are receiving the best price and execution quality opportunities 
notwithstanding the payment for order flow.  See FINRA Regulatory Notice 21-23, supra 
note 294. 
456
  See, e.g.,  Robert H. Battalio, Shane A. Corwin & Robert H. Jennings, Can Brokers Have 
It All? On the Relation Between Make-Take Fees and Limit Order Execution Quality, 71 
J. FIN. 2193 (2016), available at 
https://onlinelibrary.wiley.com/doi/10.1111/jofi.12422/full (“We identify retail brokers 
that seemingly route orders to maximize order flow payments by selling market orders 
and sending limit order to venues paying large liquidity rebates. . . . [W]e document a 
negative relation between limit order execution quality and rebate/fee level. This finding 
suggests that order routing designed to maximize liquidity rebates does not maximize 
limit order execution quality. . . .”). 
457
  See, e.g., Robert Battalio, Todd Griffith & Robert Van Ness, Do (Should) Brokers Route 
Limit Orders to Options Exchanges That Purchase Order Flow?, 56 J. FIN. QUAN. ANAL. 
183 (2020). 

   
260 
 
exchanges that pay higher liquidity rebates receive worse execution quality than non-marketable 
limit orders routed to exchanges that do not offer liquidity rebates. One study finds no relation, 
potentially as a result of low statistical power.
458
  Evidence on the potential adverse effects 
appears stronger in the options market than in the equity market.
459
  Section V.B.3.a).iii.a 
presents Commissions analysis.   
a. PFOF Amounts and Rates 
 Table 12 summarizes information on PFOF payments in NMS Stocks and Options for Q1 
2022 received by 52 retail broker-dealers and aggregated based on the order type and type of 
trading venue.
460
  Wholesalers paid more than $750 million dollars, about 94% of the total PFOF 
payments of approximately $850 million.  Note also that PFOF for options represent the largest 
share of these payments (70%), equal to more than $550 million.  In addition, PFOF for non-
S&P 500 orders was about 24% of total wholesale PFOF disbursements, substantially larger than 
                                                 
458
  See Christopher Schwarz, et. al., The ‘Actual Retail Price’ of Equity Trades (Working 
paper, September 14, 2022) (“Schwarz”), available at 
https://ssrn.com/abstract=4189239 (retrieved from Elsevier database) do not find a 
relationship between the amount of PFOF a retail broker receives and the amount of price 
improvement their customers’ orders receive.  However, see infra note 
466 for a 
discussion comparing the results in Table 16. 
459
  See Ernst & Spatt, supra note 77, at 1 (“We exploit variation in the Designated Market 
Maker (DMM) assignments at option exchanges to show that retail traders receive less 
price improvement, and worse prices, from those DMMs who pay PFOF to brokers.”).  
The paper also finds PFOF amounts from wholesalers in the NMS stock market are small 
(compared to the options market) and that individual investor orders executed at 
wholesalers receive meaning price improvement.     
460
  The PFOF data was aggregated from Rule 606 reports from the 52 retail brokers. The 
order types are based on those included in Rule 606 reports.  Other Trading Venues 
includes any other trading center to which a retail broker routes an order other than a 
wholesaler or an exchange, including ATSs.  See supra note 404 for more details on what 
is included in Rule 606 reports. 

   
261 
 
the 6% share of PFOF paid for S&P 500 orders.  Finally, note that wholesaler PFOF for 
marketable orders (market and marketable limit orders) was equal to 51% of all wholesaler 
PFOF, while PFOF for non-marketable limit orders equaled about 38% of wholesaler PFOF 
disbursements.    
 
Table 12: Aggregated 606 payments for Q1 2022 to Retail Broker-Dealers by venue type, asset class, and 
order type 
 
 
Market 
Orders 
Marketable Limit 
Orders 
Non-Marketable 
Limit Orders Other Orders Total 
Wholesalers 
S&P 500 $20,169,292 $6,861,406 $15,675,087 $4,963,329 $47,669,114 
Non-S&P 
500 
$74,313,900 $45,711,676 $53,253,329 $14,502,924 $187,781,828 
Options $69,221,438 $185,987,581 $235,507,979 $70,361,954 $561,078,951 
Total $163,704,629 $238,560,663 $304,436,395 $89,828,206 $796,529,894 
National 
Securities 
Exchanges 
S&P 500 -$2,883 -$1,600,326 $4,151,796 -$1,058,038 $1,490,549 
Non-S&P 
500 
-$14,624 -$13,794,526 $24,538,646 -$2,224,848 $8,504,649 
Options -$54,106 $4,838,611 $19,019,112 $13,334,942 $37,138,559 
Total -$71,613 -$10,556,240 $47,709,554 $10,052,056 $47,133,756 
Other 
Trading 
Venues 
S&P 500 -$14,335 -$87,299 $514,713 $16,715 $429,794 
Non-S&P 
500 
$41,513 -$1,397,974 $1,736,516 -$5,007 $375,049 
Options $185,367 -$305,579 $4,740,343 $649,611 $5,269,742 
Total $212,545 -$1,790,852 $6,991,572 $661,319 $6,074,585 
 
Grand 
Total 
$163,845,562 $226,213,571 $359,137,521 $100,541,581 $849,738,235 
This table shows the aggregate payments made from different types of venues in Q1 2022 to 52 broker-dealer based 
on their Rule 606 reports.  The table breaks out payments from exchanges, wholesalers, and other trading venues for 
market orders, marketable limit orders, non-marketable limit orders, and other orders in S&P 500 stocks, Non-S&P 
500 stocks and Options. Other Trading Venues includes any other trading center to which a retail broker routes an 
order other than a wholesaler or an exchange, including ATSs.     
 
Table 13, Panel A summarizes the total PFOF dollars paid to the 52 broker-dealers in Q1 
2022 based on their total assets.  The majority of payments, more than 750 million dollars, went 
to broker-dealers with more than 1 billion dollars in assets.  As shown earlier, most of this 
payment came from the options market. 

   
262 
 
Table 13, Panel B summarizes the distribution of total PFOF dollars paid to the 52 
broker-dealers as a percentage of their total revenue in Q1 2022.  On average, the payments 
reported on Rule 606 reports accounted for 21% of the broker-dealer’s total revenue.  However, 
there was considerable variation across broker-dealers.  Rule 606 reported payments accounted 
for less than 5.9% of total revenue for over 50% of the broker-dealers in the sample.  However, 
for the top 10% of broker-dealers by revenue, Rule 606 reported payments accounted for more 
than 74% their total revenue in Q1 2022. 
Table 13: Rule 606 Report Broker-Dealer Sample and Payments by Asset Size and Distribution of Payments as Percent 
of Broker-Dealer Total Revenue 
Panel A: Broker-Dealers and Payments in Rule 606 Sample by Asset Size 
 
Size of Broker-Dealer (Total Assets) 
Variable >50bn 1bn-50bn 
500mn-
1bn 
100mn-
500mn 
10mn-
100mn 
1mn-
10mn <1mn 
Number of Firms in 606 
Sample 
10 20 2 13 7 0 0 
Number of Firms with 
Positive 606 Payments 
5 11 1 5 4 0 0 
606 Total Dollar Payments 
$323,768,783 $437,613,668 $4,122 $72,400,510 $15,951,151 $0 $0 
606 Total Equity Payments 
$112,360,651 $108,639,249 $4,122 $23,525,311 $1,721,651 $0 $0 
606 Total Options Payments 
$211,408,132 $328,974,419 $0 $48,875,200 $14,229,501 $0 $0 
        
     
Panel B: Distribution of Firm Payments Reported in Rule 606 as Percentage of Broker-Dealers' Total Revenue 
Variable Mean Std Dev 
10th 
Pctl 25th Pctl 50th Pctl 
75th 
Pctl 
90th 
Pctl 
606 Total Payments % of 
Total Revenue 
20.94% 32.31% 0.02% 0.08% 5.82% 28.66% 74.29% 
606 Equity Payments % of 
Total Revenue 
6.67% 11.57% 0.00% 0.02% 1.24% 7.70% 16.23% 
606 Options Payments % of 
Total Revenue 
14.28% 27.52% 0.00% 0.02% 2.52% 17.50% 49.96% 
This table summarizes total payments from the Q1 2022 Rule 606 Reports for 52 broker-dealers based on their 
total assets and total revenue.  Panel A shows how many broker-dealers fall within each asset size category and 
the total payments reported on their Rule 606 Reports that they received in the equity and options markets from 
venues to which they routed orders in Q1 2022.  Panel B shows the distribution of the equity and options 
payments as a percentage of a firm’s total revenue for Q1 2022. Total Assets are estimated by Total Assets 
(allowable and non-allowable) from Part II of the FOCUS filings (Form X-17A-5 Part II) from Q4 2021 and 
correspond to balance sheet total assets for the broker-dealer. Total Revenue is reported by each broker-dealer 
during Q1 2022 in their FINRA Supplemental Statement of Income Form.   
 

   
263 
 
From the Rule 606 reports of 15 major retail brokers for listed options, we can infer that 
as of Q4 of 2020, 11 of them had PFOF arrangements with wholesalers, one firm routed the 
orders directly to the exchanges, one firm routed the orders to its parent firm, and the remaining 
two firms routed the orders to wholesalers but did not have PFOF arrangements.  According to 
the Rule 606 reports, wholesalers paid $560 million in PFOF to the 11 retail brokers for non-
directed orders in listed options in Q1 2022. 
Table 14 presents the average payment rates reported in Rule 606 reports for PFOF 
broker-dealers in listed options in Q1 2022.  The statistics are further broken down by trading 
venue and order type, with rates given in cents per 100 shares.
461
  The average PFOF rates are 
negative for the marketable limit orders and other orders routed to exchanges, but the rate is 
positive for non-marketable limit orders suggesting the brokers route most of the non-marketable 
limit orders to the maker-taker exchanges to collect rebates.  According to the table, the average 
PFOF rates paid by clearing firms are smaller but not much smaller than wholesalers across all 
order types suggesting that clearing firms pass majority of the monetary compensation from 
wholesalers to the retail brokers with which they have PFOF arrangements. 
 
Table 14: Average Rule 606 Payment Rates for Q1 2022 to PFOF Broker-Dealers by Venue Type for Listed Options 
Venue Type Market Orders 
Marketable Limit 
Orders  
Non- Marketable 
Limit Orders  
Other Orders 
Exchange 
N/A -43.1 42.6 -59.6 
Clearing firm 
38.4 33 35.2 39.8 
                                                 
461
  The PFOF rate is missing for the market orders routed directly to the options exchanges 
because, according to the rule 606 reports, these brokers neither paid fees nor received 
rebates from exchanges for the market orders in Q1 2022. 

   
264 
 
Wholesaler 
39.9 52.5 51.8 40.4 
This table shows the average payment rates (in cent per 100 shares) made from different types of 
venues in Q1 2022 to 23 broker-dealers that received PFOF from wholesalers based on their Rule 606 
reports. The table breaks out average rates from wholesalers and clearing firms for market orders, 
marketable limit orders, non-marketable limit orders, and other orders in listed options. Twenty-three 
retail brokers are identified as PFOF retail brokers that receive payments for routing orders to 
wholesalers or clearing firms. This analysis uses the retail broker-dealer's Rule 606 report if it 
publishes one or the Rule 606 report of its  clearing broker if the retail broker did not produce a Rule 
606 report itself. The reports are aggregated using a weighting factor equal to the PFOF amount. 
 
b. Empirical Relation between PFOF and Price Improvement  
Although wholesalers provide individual investor orders with price improvement relative 
to exchanges, the magnitude of this price improvement is not uniform across retail brokers.
462
  
Analysis in this section shows that two factors driving variation in the price improvement 
wholesalers provide are the amount of PFOF the wholesaler pays to the retail brokers and the 
average adverse selection risk posed by the customers of the retail broker.
 
 
Commission analysis presented in Table 15 compares average execution quality for 
PFOF and non-PFOF brokers for executed marketable orders of individual investors under 
$200,000 in NMS common stocks and ETF orders that are routed to wholesalers.
463
  Results are 
                                                 
462
  Several recent working papers found that price improvement varies across retail brokers; 
see Schwarz, supra note 458, and Bradford Lynch, Price Improvement and Payment for 
Order Flow: Evidence from A Randomized Controlled Trial (Working paper, June 27, 
2022), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4189658 
(retrieved from Elsevier database) (“Lynch”). These studies only included trades that 
were initiated by the authors, and do not include other trades that were handled by the 
brokers in their samples. In contrast, the Commission’s analysis is based on the data 
reflecting all orders routed by 58 broker-dealer MPIDs. 
463
  Some brokers that do not accept PFOF for orders in equities accept PFOF for orders in 
options.  Certain items in Table 15 may also be affected by MDI Rules once they are 
implemented. See supra note 415
. 

   
265 
 
divided between orders that were executed by the wholesaler on a principal basis (i.e., 
internalized) and those executed via other methods (the majority of which are in a riskless 
principal capacity).   
Table 15: Comparison of PFOF and Non-PFOF Broker Execution Quality in NMS Common Stocks and ETFs 
 
Principal Transactions Other Transactions 
 
Non-PFOF PFOF Non-PFOF PFOF 
Average Price 
$41.79 $31.35 $23.90 $12.47 
Wholesaler (WH) Share Volume (billion shares) 
14.32 55.96 3.40 13.43 
WH Dollar Volume (billion $) 
$598.44 $1,754.36 $81.23 $167.41 
Pct of Executed Dollar Volume 
23.00% 67.44% 3.12% 6.44% 
WH Effective Spread (bps) 
1.50 1.86 4.57 5.75 
WH Realized Spread (bps) 
0.88 0.85 0.83 0.66 
WH Realized Spread Adj PFOF (bps) 
0.88 0.43 0.83 -0.55 
WH Price Impact (bps) 
0.62 1.01 3.74 5.07 
WH E/Q Ratio 
0.30 0.37 0.78 0.67 
WH Pct Executed with Price Improvement 
90.59% 94.32% 46.89% 62.87% 
WH Conditional Amount Price Improvement (bps) 
2.75 2.34 2.31 4.30 
The table summarizes execution quality statistics from the CAT retail analysis in Common Stocks and ETFs based on whether 
the retail broker MPID receives PFOF from wholesalers (PFOF) or does not (Non-PFOF) and whether the wholesaler executed 
the individual investor order in a principal capacity or in another capacity (i.e., in an agency or riskless principal capacity). A 
broker-dealer MPID was determined to be a PFOF broker if the broker-dealer reported receiving PFOF on its Q1 2022 606 
report, or if the report of its clearing broker reported receiving PFOF in the event that the broker did not publish a Rule 606 
report. Broker-dealers or clearing brokers that handled orders on a not held basis and did not disclose PFOF information in their 
Rule 606 report were classified as PFOF brokers if disclosures on their websites indicated they received PFOF. Twenty-two 
MPIDs belonging to 19 retail brokers were classified as receiving PFOF. The majority of the other transactions are executed by 
the wholesaler in a riskless principal capacity.    See supra Table 6 for additional details on the sample and metrics used in the 
analysis. WH Realized Spread Adj PFOF is the estimated realized spread in bps earned by the wholesaler after adjusting the 
realized spread for the estimated PFOF they pay to retail brokers.
a
   Share-weighted percentage metrics are averaged together at 
the individual PFOF-execution capacity-stock-week-order-size category level for the wholesaler sample using the methodology 
in Table 6. Weighted averages for the metrics are then calculated for each PFOF-execution capacity category by averaging 
across execution capacity-stock-week-order size category levels based on their total dollar transaction volume during the sample 
period in the wholesaler CAT sample.  This analysis uses data from prior to the implementation of the MDI Rules and specific 
numbers may be different following the implementation of the MDI Rules. See supra note 415 
a 
 S ee infra note 467 for further details on estimated PFOF retail brokers receive. R ealized spreads for marketable orders routed 
to wholesalers are adjusted for PFOF by subtracting the estimated dollar per share PFOF rate the retail broker receives from the 
average per share dollar realized spread in the execution capacity-stock-week-order type-order size category and then dividing 
by the average transaction price to calculate the percentage metric as discussed in further detail in supra Table 6. 
  
The results in Table 15 show that wholesaler internalized orders (Principal Transactions) 
originating from PFOF brokers are associated with (1) higher effective spreads, (2) higher E/Q 

   
266 
 
ratios, and (3) slightly smaller price improvement on orders that achieved at least some price 
improvement (WH Conditional Amount Price Improvement), relative to wholesaler internalized 
orders originating from non-PFOF brokers. However, the results also show that orders 
internalized from non-PFOF brokers also have lower adverse selection risk and similar realized 
spreads (before PFOF is paid), indicating the lower adverse selection risk could explain 
differences in the observed execution quality. 
Because the results in Table 15 are averages across broker-dealers, they cannot 
disentangle the effects of PFOF on execution quality from differences in the adverse selection 
risk of different broker-dealers.
464
  In order to control for these differences, the Commission 
analyzed the effects of PFOF and differences broker-dealer adverse selection risk on execution 
quality in a regression framework that controls for other factors that could affect the price 
improvement provided by wholesalers.  
 Table 16 displays regression results from Commission CAT retail analysis of NMS 
Common stock and ETF orders,
465
 and shows that the previous results indicating that brokers 
that receive PFOF receive inferior execution quality are robust to the inclusion of controls for 
differences in the type of order flow coming from different broker-dealers.
466
   The regression 
                                                 
464
  They also cannot disentangle the effects of differences in the stocks traded by PFOF and 
non-PFOF brokers.  
465
  Certain items in this Table 16 may also be affected by the amendments in the MDI Rules 
once they are implemented.  See supra note 415. 
466
  Schwarz et. al., supra note 458, did not find a relationship between the amount of PFOF a 
retail broker receives and the amount of price improvement its customers’ orders receive.   
However, they noted that the variation in the magnitude of price improvement they saw 
across retail brokers was significantly greater than the amount of PFOF the retail broker 

   
267 
 
tests whether there is a relationship between execution quality and the amount of PFOF a broker-
dealer receives and includes several individual stock- and market-level controls
467
 as well as the 
                                                 
received, which could indicate their sample was not large enough to observe a 
statistically significant effect. Similarly, when we examine variation in effective spreads 
across retail brokers based on their average price impact (i.e., their average adverse 
selection risk), we observe that the differences between the effective spreads of PFOF 
and non-PFOF brokers as shown in Table 15, infra, are significantly smaller than the 
differences observed across retail brokers based on variation in their average price 
impacts.  Lynch, supra note 
462, compares the execution quality of similar orders routed 
to two different retail brokers that receive different amounts of PFOF from wholesalers. 
The study finds that the retail broker that received a greater amount of PFOF from 
wholesalers (i.e., had a higher per share PFOF rate reported in their Rule 606 reports) 
provided less price improvement compared to a similar order routed to a retail broker that 
received less PFOF.  Importantly, both studies only included trades that were initiated by 
the authors and do not include other trades that were handled by the brokers in their 
samples, preventing them from examining the attributes of a typical retail order handled 
by each broker.  As such, these studies do not observe the variation in price 
improvements that reflect differences in the adverse selection risk associated with the 
order flow of different brokers, and hence, likely conflate the impacts of PFOF with those 
of adverse selection risk.  That is, these studies cannot control for the possibility that a 
wholesaler would offer smaller price improvement to order flows with higher adverse 
selection risk.  In contrast, the Commission relies on CAT data to examine the adverse 
selection risk at the broker level, which is a determinant of the amounts of price 
improvements that a given wholesaler would offer to different brokers.  The regression 
framework in infra Table 16 controls for the adverse selection risk of the retail broker
 and 
finds that is has a negative relationship with the magnitude of price improvement their 
customers’ orders receive.  We also find a negative relationship between the amount of 
PFOF a broker-dealer receives and the magnitude of the price improvement their 
customers’ orders receive after controlling for the retail broker adverse selection risk.  
467
  Broker-dealer cents per 100 shares PFOF rates (dollar PFOF rates) are determined from 
their Q1 2022 Rule 606 reports (see supra Table 2) or the Rule 606 reports of its clearing 
broker reported receiving PFOF in the event that the broker did not publish a Rule 606 
report.  A PFOF rate of 20 cents per 100 shares was used for the introducing broker-
dealers and clearing broker that reported handled orders on a not held basis and did not 
disclose PFOF information in their Rule 606 report but disclosed on their website that 
they received PFOF for their order flow. 20 cents per 100 shares was the PFOF rate that 
the clearing broker that handles orders on a not held basis disclosed on their website that 
they received. Twenty-two MPIDs belonging to 19 retail brokers were classified as 
receiving PFOF. Dollar PFOF rates for each retail broker were merged with the 

   
268 
 
retail broker’s average price impact and size (as measured by percent of executed individual 
investor dollar volume).  Four different measures of execution quality are used for the dependent 
variable, including E/Q ratio, effective spread, realized spread, and price improvement.
468
 
Table 16: Regression Analysis showing Relationship Between Execution Quality and PFOF in NMS 
Common Stocks and ETFs 
  (1) (2) (3) (4) 
VARIABLES 
E/Q 
 Ratio 
Effective spread 
(bps) 
Realized spread 
(bps) 
Amount Price 
Improvement 
(bps) 
          
PFOF Rate 
0.0132*** 0.217*** 0.211*** -0.170*** 
 
[2.82] [6.31] [7.13] [-5.52] 
Stock Share Volume 
0.0379 -0.0462 -0.886* -0.533** 
 
[0.51] [-0.14] [-1.65] [-2.53] 
Stock VWAP 
-0.000028 0.000233 -0.000450 0.000014 
 
[-1.06] [0.61] [-0.78] [0.04] 
Stock Return 
-0.000273 -0.0200* -0.0120 0.00840 
 
[-0.21] [-1.93] [-0.36] [0.84] 
VIX 
0.00968*** 0.0122* 0.0607*** -0.000256 
                                                 
corresponding stock (S&P 500 and non-S&P 500) and order type in the CAT sample.  
For the regressions in Table 16, percentage PFOF rates are estimated in basis points by 
dividing the PFOF cents per 100 share values from Rule 606 reports (after converting 
them to dollar per share values) by the stock-week VWAP for the security in the CAT 
sample. Stock-level controls include average share volume, VWAP, return, average 
effective spread, average realized spread, and average quote volatility during a week.  
Market-level controls include market volatility, market return, and the market’s average 
daily trading volume during week.  
468
  The regression also includes variables to control for differences in execution quality 
across different wholesalers and across different order size categories.  The analysis 
examines trades in Q1 2022 that wholesalers execute in a principal capacity from market 
and marketable limit orders from individual investors that are under $200,000 in value 
and are in NMS Common Stocks and ETFs.  See supra Table 6 for further discussion on 
the sample. The unit of observation for the regression is the average execution quality 
provided to trades that are aggregated together based on having the same stock, week, 
order type, order size category, wholesaler, and retail broker MPID.  The coefficients are 
estimated by weighting each observation by the total dollar volume of trades executed in 
that observation.     

   
269 
 
 
[7.29] [1.79] [2.85] [-0.05] 
Market Return 
-0.00710** 0.00787 0.00686 -0.0150 
 
[-2.02] [0.36] [0.15] [-0.96] 
Market Dollar Volume 
0.0306*** 0.0641*** 0.164*** -0.0390*** 
 
[9.70] [3.44] [3.07] [-2.69] 
Stock Avg Effective 
spread 
0.00700*** 0.122*** -0.0455* 0.00746 
 
[3.34] [6.07] [-1.94] [0.52] 
Stock Avg Realized spread 
-0.00169* -0.00902 0.0730*** -0.00552 
 
[-1.87] [-1.45] [2.98] [-1.48] 
Stock Quote Volatility 
0.457** 2.232 -1.799 4.458** 
 
[2.09] [1.05] [-0.65] [2.03] 
Broker-Dealer Average 
Price Impact 
0.145*** 0.414*** 0.316*** -0.417*** 
 
[14.74] [9.83] [8.50] [-10.21] 
Broker-Dealer Pct Volume 
-2.45e-05 -0.00207* -0.00546*** 0.000124 
 
[-0.07] [-1.76] [-3.77] [0.12] 
Average Trade Qspread 
-0.00720*** 0.517*** 0.378*** 0.392*** 
 
[-10.12] [19.78] [10.84] [21.14] 
     
Wholesaler Fixed Effects Yes Yes Yes Yes 
Order Size Category Fixed 
Effects Yes Yes Yes Yes 
Stock Fixed Effects Yes Yes Yes Yes 
Observations 13,365,122 13,365,122 13,365,122 12,453,440 
Adjusted R-squared 0.279 0.574 0.060 0.594 
This table presents the results of a regression analysis examining the effect of retail brokers receiving PFOF from 
wholesalers on levels of price improvement and the execution quality of their customers’ orders when the 
wholesaler internalizes the order on a principal basis.  
The analysis examines trades in Q1 2022 that wholesalers execute in a principal capacity from market and 
marketable limit orders from individual investors that are under $200,000 in value and are in NMS Common 
stocks and ETFs. See supra Table 6 for further discussion on the CAT retail sample. The unit of observation for 
the regression is the average execution quality provided to trades that are aggregated together based on having the 
same stock, week, order type, order size category, wholesaler, and retail broker MPID. Weighted regression are 
performed based on the total dollar value executed by the wholesaler in that observation (i.e., total shares 
executed for all orders that fit within that stock-week-retail broker-wholesaler-order type-order size category). 
This means that the regression coefficients capture the effect on execution quality on a per-dollar basis.  
Dependent variables include: the average E/Q ratio of the shares traded; the average percentage effective spread 
o
f the shares traded measured in basis points; the average percentage realized spread of the shares traded 
measured in basis points; and the average percentage value of the amount of price improvement measured in 
basis points, conditional on the order being price improved. These variables are from the CAT retail analysis and 
described in supra Table 6.   
Explanatory variables include: PFOF Rate is the retail brokers’ PFOF rates in bps (the per share rates were 
determined from retail broker Rule 606 reports and divided by the VWAP of the executed shares in the sample to 
determine the PFOF rate on a percentage basis, see supra note 467); Broker-Dealer Pct Volume is the retail 

   
270 
 
broker size (in terms of percentage total executed dollar trading volume in the sample); Stock Share Volume is 
the stock’s total traded share volume during the week (from TAQ in billions of shares); Stock VWAP is the 
VWAP of stock trades during the week (from TAQ); Stock Return is the stock’s return during the week (from 
CRSP 1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022)); VIX is the average 
value of the VIX index during the week (from CBOE VIX data); Market Return is the average CRSP value 
weighted market return during the week, Market Dollar Volume is the total market dollar trading volume during 
the week (from CRSP 1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022)); Stock 
Avg Effective spread is the stock’s share weighted average percent effective half spread during the week 
measured in basis points (from TAQ); Stock Avg Realized spread is the stock’s share weighted average percent 
realized half spread during the week measured in basis points (from TAQ); Stock Quote Volatility is the stock’s 
average 1 second quote midpoint volatility measured in basis points (from TAQ); Broker-Dealer Average Price 
Impact is calculated for each Retail Broker MPID’s by share weighting their average percentage price impact half 
spread within an individual NMS common stock or ETF and then averaging across stocks using the weighting of 
the dollar volume the retail broker MPID executed in each security (see supra Table 6 for additional details on 
how the metric is constructed); Average Trade Qspread is the average percentage quoted half spread at the time 
of order submission for orders in that stock-week-retail broker-wholesaler-order type-order size category 
measured in basis points; wholesaler fixed effects (i.e., indicator variables for each wholesaler that control for 
time-invariant execution quality differences related to each wholesaler); order-s ize category fixed effects (i.e., 
indicator variables for each order-size category that control for time-invariant execution quality differences 
related to order-size category); and individual stock fixed effects (i.e., indicator variables for each stock that 
control for time-invariant execution quality differences related to individual stocks). The order size categories 
include less than 100 shares, 100-499 shares, 500-1,999 shares, 2,000-4,999, 5,000-9,999 shares, and 10,000+ 
shares. Brackets include t-statistics for the coefficients based on robust standard errors that are clustered at the 
stock level. ***, **, and * indicate the t-statistics for the coefficients are statistically significant at the 0.01, 0.05, 
and 0.1 levels, respectively.  
This analysis uses data from prior to the implementation of the MDI Rules and specific numbers may be different 
following the implementation of the MDI Rules. See supra note 415 
 
   
Regression results in Table 16 support the conclusion that wholesalers provide worse 
execution quality to brokers that receive more PFOF.  The coefficients on the PFOF Rate 
variable indicates that, all else equal, for the orders wholesalers internalize, execution quality 
declines as the amount of PFOF paid to the retail broker increases. Orders from retail brokers 
that receive a greater amount of PFOF have higher E/Q ratios and effective spreads and receive 
less price improvement.  The regression results (as measured by the coefficient on the PFOF 
Rate variable) indicate that, all else equal, wholesalers earn higher realized spreads on orders for 
which they pay more PFOF.  Note that PFOF is not taken out of the realized spread measure, so 

   
271 
 
the realized spread serves as a proxy for wholesaler’s economic profits before any fees are taken 
out. 
 The regression results in Table 16 also show that the retail broker’s adverse selection risk 
(as measured by the coefficient on the Broker-Dealer Average Price Impact variable) has a 
statistically significant effect on the execution quality wholesalers give on trades they internalize.   
The positive coefficient indicates that wholesalers provide worse execution quality to broker-
dealers whose customers’ orders pose a greater adverse selection risk.      
b) Fixed Income Securities 
i. Corporate Debt Securities 
The market for corporate debt securities (“corporate bonds”) represents a significant part 
of the fixed income market.  In July 2022, the average daily par value dollar volume of corporate 
bond trading was $34.2 billion.
469
  Estimates put the annualized growth rate of the corporate 
bond market at 5.2 percent between 2008 and 2019, a growth rate second only to that of U.S. 
Treasury securities within the fixed income space.
470
  
                                                 
469
  Average daily par value dollar volume is reported by FINRA each month.  See FINRA 
Data, TRACE Monthly Volume Files, available at https://www.finra.org/finra-
data/browse-catalog/trace-volume-reports/trace-monthly-volume-files. The corporate 
bond market has over 58,000 outstanding issues.  Maureen O’Hara and Xing (Alex) 
Zhou, Corporate Bond Trading: Finding the Customers’ Yachts, 48 J. PORTFOLIO 
MGT MKT MICROSTRUCTURE 96, 98 (June 2022), available at https://jpm.pm-
research.com/content/early/2022/06/11/jpm.2022.1.373.  
470
  Vega Economics, Trends in the U.S. Corporate Bond Market Since the Financial Crisis 
(Oct. 12, 2020), available at  https://vegaeconomics.com/trends-in-the-us-corporate-bond-
market-since-the-financial-crisis.  

   
272 
 
Fixed income securities trading venues (e.g., ATSs, non-ATS trading venues (RFQ 
platforms), voice methods) compete on fees and trading protocols that help expose retail 
customer orders to attract order flows from retail broker-dealers.  Corporate bond ATSs are 
primarily used by broker-dealers to trade on behalf of retail customers or to rebalance excess 
inventories.
471
  In September 2021, corporate bond trading on ATSs accounted for 7.7 percent of 
total TRACE-reported corporate bond trading dollar volume (calculated using bond par 
value).
472
  Currently, the Commission understands that there are 12 ATSs with a Form ATS on 
file trading corporate bonds.
473
  Trading protocols offered on corporate bond ATSs include, 
                                                 
471
  See, e.g., Matthew Kozora, Bruce Mizrach, Matthew Peppe, Or Shachar & Jonathan 
Sokobin, Alternative Trading Systems in the Corporate Bond Market, Fed. Res. B. N.Y. 
Staff Report No. 938 (Aug. 2020), available at 
https://www.newyorkfed.org/medialibrary/ sr938.pdf.  See, Louis Craig, Abby Kim & 
Seung Won Woo, Pre-trade Information in the Corporate Bond Market, SEC Division of 
Economic and Risk Analysis White Paper (Oct. 2020), available at 
https://www.sec.gov/files/corporate_bond_white_paper.pdf.  White papers and analyses 
are prepared by SEC staff in the course of rulemaking and other Commission initiatives. 
The U.S. Securities and Exchange Commission disclaims responsibility for any private 
publication or statement of any employee or Commissioner.  White papers express the 
authors’ views and do not necessarily reflect those of the Commission, the 
Commissioners, or other members of the staff.  This staff white paper on corporate bond 
ATSs finds that large dealers (i.e., those in the highest quartile of trading volume and 
number of bonds traded) are more likely to provide corporate bond quotes on ATSs than 
smaller dealers. 
472
  See FINRA, TRACE Monthly Volume Files, available at https://www.finra.org/finra-
data/browse-catalog/trace-volume-reports/trace-monthly-volume-files.  One commenter 
referenced similar numbers for 2020, stating that corporate bond trades (including both 
investment-grade and high-yield bonds) on all ATSs represented 6.4 percent of the trade 
volume and 18.7 percent of the trade count reported to TRACE.  See MarketAxess Letter, 
at 1. 
473
  In addition, a small percentage of corporate bonds are exchange-traded on trading 
systems such as NYSE Bonds and the Nasdaq Bond Exchange.  See generally, 
https://www.nyse.com/markets/bonds.  Trading volume in exchange-traded bonds was 

   
273 
 
among other things, limit order books (LOBs), displayed and non-displayed trading interests, and 
auctions (e.g., RFQ, bids-wanted-in-competition (BWIC), and offers-wanted-in-competition 
(OWIC)).   
Table 17: Estimated Transaction Costs and Trade Price Dispersion across Fixed Income Categories 
  
Panel A: Estimated Effective Spread 
Fixed Income 
Category 
Retail-Sized 
Trades (≤$100k) 
Large-Sized  
Trades (>$100k) 
Difference 
Agency 
0.35 0.15 
0.20 
Asset-Backed 
1.05 0.16 
0.89 
CMO 
2.29 0.53 
1.76 
Corporate 
0.52 0.25 
0.27 
MBS 
0.85 0.20 
0.65 
Municipal 
0.57 0.29 
0.28 
Treasury 
0.07 0.04 
0.03 
    
  
Panel B: Standard Deviation Ratio 
Fixed Income 
Category 
Retail-Sized  
Trades (≤$100k) 
Large-Sized 
 Trades (>$100k) 
Difference 
Agency 
1.66 2.59 
-0.93 
Asset-Backed 
1.63 2.75 
-1.12 
CMO 
4.42 4.16 
0.26 
Corporate 
2.87 1.92 
0.94 
MBS 
1.24 3.78 
-2.54 
Municipal 
4.56 4.99 
-0.43 
Treasury 
1.38 1.11 
0.27 
This table presents summary statistics for trade price dispersion across fixed income categories (agency, 
asset-backed, collateralized mortgage obligations (CMO), corporate, mortgage backed securities (MBS), 
municipal, and treasury). The time period is defined as August 1, 2021 through July 31, 2022.  Estimated 
effective spread and average standard deviation ratio are defined below.  
Estimated effective spreads are computed daily for each bond as the difference between the average (par 
volume-weighted) dealer-to-customer buy price and the average (par volume-weighted) dealer-to-customer 
sell price, and then averaged across bonds using equal weighting. For each trading day, each security must 
have at least one customer purchase and one customer sale to be eligible for the analysis. 
                                                 
reported to be around $19 billion as of January 2020.  See Eric Uhlfelder, A Forgotten 
Investment Worth Considering: Exchange-Traded Bonds, Wall St. J. (Jan. 6, 2020) 
available at https://www.wsj.com/articles/a-forgotten-investment-worth-considering-
exchange-traded-bonds-11578279781.  (Retrieved from Factiva database).   

   
274 
 
The daily standard deviation in prices is calculated for each CUSIP, for customer and interdealer secondary 
markets, by averaging buy and sell order deviations separately. The ratio of standard deviations of customer 
trade prices and interdealer trade prices is then computed for each CUSIP for each day. Next, the standard 
deviation ratios are averaged with weights based on the total number of trades in each day, across all days 
and CUSIPs within each fixed income category. Average Standard Deviation Ratio is defined as: 
퐴퐴퐴퐴퐴퐴퐴퐴퐴퐴퐴퐴퐴퐴 푆푆푆푆
퐴퐴
푆푆푆푆
퐴퐴퐴퐴푆푆 퐷퐷퐴퐴
퐴퐴
퐷퐷
퐴퐴푆푆
퐷퐷퐷퐷푆푆 푅푅퐴퐴
푆푆퐷퐷퐷퐷
=�
휎휎
푖푖푖푖
푐푐
휎휎
푖푖푖푖
푑푑
푖푖푖푖∈Ω
휔휔
푖푖푖푖
  
• 퐷퐷 is the CUSIP, 푗푗 is the date 
• 휔휔
푖푖푖푖
 is a weight based on the number of trades in CUSIP 퐷퐷 on day 푗푗 
• 휎휎
푖푖푖푖
푐푐
 �휎휎
푖푖푖푖
푑푑
� is the standard deviation of customer (interdealer) prices for CUSIP 퐷퐷 on day   
 
The aforementioned changes in bond market structure have fundamentally lowered the 
cost of trading.  Though the corporate bond market remains subject to periodic and security-
specific illiquidity constraints, one recent academic study finds that corporate bond transactions 
costs have decreased by 70% over the past decade.
474
  According to Commission analyses, par 
volume-weighted average effective spreads
475
 calculated in the year ending July 2022 in 
corporate bond markets were approximately 27 basis points.  Liquidity often concentrated in the 
largest and most recently issued bonds.
476
  Additional Commission analyses indicate that the top 
and bottom quartile of corporate bond effective spreads differ by more than 30 bps. 
                                                 
474
  See O’Hara and Zhou, supra note 469. 
475
 Effective spread calculation is defined in Table 17. 
476
  See A Financial System That Creates Economic Opportunities, Capital Markets, U.S. 
Department of the Treasury, October 2017, available at  https://www.treasury.gov/press-
center/press-releases/documents/a-financial-system-capital-markets-final-final.pdf 
(“Treasury Report”) at 85. 

   
275 
 
Effective spreads for retail-sized trades are nearly twice as wide as larger size trades (see 
Panel A of Table 17).
477
  The Commission estimates that effective spreads on riskless principal 
transactions are approximately 12 bps lower for retail-sized corporate bond trades, but the 
difference between large size trade effective spreads remains wide at 26 bps. 
The standard deviation ratio statistics of Panel B in Table 17 show dispersion in the 
execution quality for corporate bond trades.  The standard deviation ratio statistics compare 
interdealer trade execution prices to those of customers within a given bond-trading day.  Even 
for large trades, a standard deviation ratio of 1.92 suggests that for every dollar of price 
dispersion in the interdealer market customers see almost twice the dispersion in prices.  For 
retail trades, this difference increases to 2.87 suggesting an even wider range of price execution 
quality outcomes.
478
    
ii. Municipal Securities 
The market for municipal securities (“municipal bonds”) represents another important 
part of the fixed income market.  Unlike in the markets for other fixed income securities, which 
                                                 
477
  Neither FINRA TRACE nor MSRB RTRS data provide explicit identification of trades as 
“retail” in fixed income markets.  We use the widely held convention of retail “size” 
trades of being under $100,000 consistent with studies including Lawrence Harris & 
Anindya Mehta, Riskless Principal Trades in Corporate Bond Markets (Aug. 26, 2020), 
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3681652 (retrieved from 
Elsevier database) and Griffin, supra note 66, in the corporate and municipal bond 
markets, respectively. 
478
  Commission analyses for corporate debt securities trades with no remuneration/markups 
show the dispersion of customer execution prices was 65% greater than that of interdealer 
trades, suggesting that price dispersion in customer trades may not solely be driven by 
disparate markups.  

   
276 
 
are mostly owned by institutional investors, retail investors play a prominent role in the 
ownership of municipal bonds, with 40 percent of municipal bonds held by households and 
nonprofits as of Q1 2022.
479
  This is largely due to the tax-exempt status of most municipal 
bonds, which makes them attractive to households but less attractive to institutional investors 
such as pension funds, whose holdings are already tax-deferred or tax exempt.  Municipal bond 
markets also tend to be highly localized, as investors that are located in geographic proximity to 
an issuer are more likely to be informed about that issuer, and tax benefits are often conferred on 
investors that are located in the same state as the issuer.
480
  Daily trading volumes in the 
municipal bond market averaged around $9 billion during the 2021 calendar year.
481
  Average 
trade sizes in this market tend to be smaller than in other fixed income markets: in July 2022, 81 
percent of trades were for $100,000 or less, reflecting the higher presence of retail investors in 
this market.
482
 
Municipal securities trading venues (e.g., ATSs, non-ATS trading venues (RFQ 
platforms), voice methods) compete on fees and trading protocols that help expose retail 
                                                 
479
  See, John Bagley, Marcelo Vieira & Ted Hamlin, Trends in Municipal Securities 
Ownership, at 6, Munic. Sec. Rulemaking Bd (June 2022), available at 
https://www.msrb.org/sites/default/files/Trends-in-Municipal-Securities-Ownership.pdf.  
Data used by this paper is largely from the Federal Reserve’s Financial Accounts of the 
United States.  Id., at 2.  See also infra note 495 and accompanying text. 
480
  See, Paul Schultz, The market for new issues of municipal bonds: The roles of 
transparency and limited access to retail investors, 106 J. FIN. ECON. 492, 492 (2012). 
481
  See Municipal Securities Rulemaking Board, Muni Facts, available at 
https://www.msrb.org/News-and-Events/Muni-Facts. 
482
  See Municipal Securities Rulemaking Board, Municipal Trade Statistics, available at 
https://emma.msrb.org/MunicipalTradeStatistics/ByTradeCharacteristic.aspx.  

   
277 
 
customer orders in order to attract order flows from retail broker-dealers.  ATSs play an 
increasingly important role in the municipal bond market.  Between August 2016 and April 
2021, an estimated 56.4 percent of municipal bond interdealer trades (26 percent in terms of par 
volume) were executed on ATSs.
483
  Municipal bond ATSs are primarily used by broker-dealers 
to execute trades on behalf of retail customers or to rebalance excess inventories.  ATSs may 
help to reduce search costs.  Indeed, one study finds that dealers are more likely to access ATS 
systems for trades that are more difficult to price and that face substantial search costs, such as 
smaller size trades and trades involving municipal bonds with complex features.
484
  Accordingly, 
90 percent of quotes on municipal bond ATSs are offer quotes.
485
  On the other hand, the vast 
majority of RFQs on municipal bond ATSs are requests for bids, reflecting that RFQ protocols 
are more likely to be used when customers want to sell.  Similar to the case of corporate bond 
markets, RFQs may instead be preferred by traders that want to limit information leakage, such 
as in case of large size trades.  At least 43.6 percent of interdealer trades (74.1 percent in terms of 
par volume) in the municipal bond market take place via trading methods that are not ATSs, with 
                                                 
483
  See Simon Z. Wu, Characteristics of Municipal Securities Trading on Alternative 
Trading Systems and Broker’s Broker Platforms, Municipal Securities Rulemaking Board 
(Aug. 2021), (“Wu (2021)”), available at https://msrb.org/sites/default/files/MSRB-
Trading-on-Alternative-Trading-Systems.pdf.  See also Letter from Edward J. Sisk, 
Chair, Municipal Securities Rulemaking Board, dated March 1, 2021 (“MSRB Letter”), 
stating that MSRB trade data shows that ATSs were involved in 21 percent of all trades 
and 55 percent of all inter-dealer trades in the municipal bond market. 
484
  See Wu (2021), supra note 483.  
485
  See Simon Z. Wu, John Bagley, & Marcelo Vieira, Municipal Securities Pre-Trade 
Market Activity: What Has Changed Since 2015?, Municipal Securities Rulemaking 
Board (2020), available at https://www.sec.gov/spotlight/fixed-income-advisory-
committee/msrb-staff-analysis-of-municipal-securities-pre-trade-data.pdf. 

   
278 
 
38.3 percent taking place on interdealer platforms and 5.3 percent on broker’s broker 
platforms.
486
   
Transaction costs in the municipal bond market have typically been large compared to 
other markets, and academic studies have attributed these large transaction costs to a lack of 
price transparency and subsequent information asymmetry between dealers and customers.
487
  
One MSRB staff report suggests that a movement away from voice trading and towards 
electronic trading may have helped reduce transaction costs for customer trades by 51 percent 
between 2005 and 2018.
488
  The Commission estimates that effective spreads for retail-sized 
trades remain approximately 23 basis points higher than that of larger municipal bond trades. 
Commission estimates in Panel B of Table 17 show average execution price standard 
deviation ratios, however, which suggest much higher price dispersion for customers in the 
municipal bond market relative to other fixed income market segments.  For retail-sized trades in 
municipal securities, the Commission estimates retail-size trades have more than four times the 
amount of price dispersion as dealers experience.  One recent academic specifically examines 
execution quality in the market for municipal bonds.
489
  Consistent with the Commission 
                                                 
486
  See Wu (2021), supra note 483. 
487
  See, e.g., Lawrence E. Harris, & Michael S. Piwowar, Secondary Trading Costs in the 
Municipal Bond Market, 61 J. Fin. 1361 (2006). 
488
  See Simon Z. Wu, Transaction Costs for Customer Trades in the Municipal Bond 
Market: What is Driving the Decline?, Municipal Securities Rulemaking Board (July 
2018), at 15, available at https://www.msrb.org/sites/default/files/Transaction-Costs-for-
Customer-Trades-in-the-Municipal-Bond-Market.pdf.  
489
  See, e.g., Griffin, supra note 66. 

   
279 
 
analysis in Table 17, the study examines bond prices for the same bond on the same trading day 
and finds significant dispersion in execution quality.  Furthermore, the study finds differences in 
execution quality discrepancies within each broker-dealer in the same bond trading day.
490
  
iii. Government Securities 
The market for U.S. government securities is large both in terms of the outstanding debt 
amount and trading volume.  According to the Treasury Department, the total amount 
outstanding for marketable Treasury securities was approximately $23.4 trillion.
491
  The 
Financial Accounts of the United States Z.1 released by the Federal Reserve Board shows that 
the amount outstanding for Agency- and GSE-Backed Securities is about $10.9 trillion, as of the 
end of Q1 2022.
492
  According to data published by SIFMA, in September 2021, the average 
daily trading volume in government securities was about $850.1 billion, which is roughly 95 
percent of all fixed income securities trading volume in the U.S.
493
  This includes $582.1 billion 
                                                 
490
  The study finds that the range of differences in dealer fixed effects from the worst to best 
dealer markup is consistently 2% and retail-sized trades have, controlling for bond 
characteristics, 75 bps higher markups relative to larger trades.  Furthermore, the study 
summarizes by stating that municipal bond “markup differences represent different prices 
for the same security from the same dealer at essentially the same time, which would 
seem to be a clear failure of pricing fairness according to MSRB regulations and 
guidance.” 
491
  See Monthly Statement of the Public Debt of the United States, dated July 31, 2020, 
available at https://fiscaldata.treasury.gov/datasets/monthly-statement-public-
debt/summary-of-treasury-securities-outstanding. 
492
  See Financial Accounts of the United States Z.1, First Quarter 2022, at 177, available at 
https://www.federalreserve.gov/releases/z1/20220609/z1.pdf. 
493
  See SIFMA Fixed Income Trading Volume, available at  
https://www.sifma.org/resources/research/us-fixed-income-securities-statistics/.  The 
stated figures include Treasury Securities, Agency MBS, and Federal Agency Securities.   

   
280 
 
average daily trading volume in U.S. Treasury securities, $265.7 billion in Agency MBSs, and 
$2.4 billion in other Agency securities.  
Government securities are traded through a diverse set of venues, including ATSs, RFQs, 
and bilateral protocols, such as voice methods.  Government securities trading venues (e.g., 
ATSs, non-ATS trading venues (RFQ platforms), voice methods) compete on fees and trading 
protocols that help expose retail customer orders in order to attract order flows from retail 
broker-dealers.  Currently, government securities ATSs account for a significant percentage of 
all U.S. Treasury securities trading activity reported to TRACE.
494
  The Commission estimates 
that ATSs account for approximately 37.8% percent of U.S. Treasury securities trading volume 
from April 2021 through March 2022.  Broker-dealers utilize ATSs to source liquidity in 
government securities, including the liquidity needed to efficiently fill customer orders outside 
                                                 
494
  TRACE aggregation and analysis methods follow those used by Treasury market 
regulators and FINRA, including adjustments for multiple trade reports for a single 
transaction and counting only one trade report for an ATS or IDB.  The regulatory 
version of TRACE was used in the analysis.  A “Give-Up” ID is reported when a 
principal to a transaction delegates another participant to report a trade on its 
behalf.  When a “Give-Up” ID is reported, the corresponding reporting or contra- party is 
replaced with the “Give-Up” ID.  This ensures that trades are attributed to the principals 
to each transaction.  System control numbers are used to link corrected, canceled, and 
reversed trade messages with original new trade messages.  In these cases, only corrected 
trades are kept and all cancellation and reversal messages and their corresponding new 
trade messages are removed.  Special care must be taken when counting market 
volume.  When a FINRA registered broker directly purchases from another FINRA 
member, two trade messages are created.  If those FINRA registered brokers transact 
through an inter-dealer broker (IDB), four trade messages are created, two for the IDB 
and one for each member.  In both cases, the volume from only one report is needed.  To 
ensure that double counting of transactions does not occur, only the following trade 
messages are summed to calculate market volume: sales to non-IDB members, sales to 
identified customers, such as banks, hedge funds, asset managers, and PTFs, and 
purchases from and sales to customers and affiliates.  Any trade in which the contra-party 
is an IDB is excluded.  Thus, in the case of trades involving IDBs, only the IDBs’ sale 
message is added to overall volume. 

   
281 
 
ATSs.  The Commission understands that this means some portion of broker-dealer transactions 
on government securities ATSs are associated with the dealers’ activity in filling customer 
orders. 
 Effective spreads for Treasuries in Table 17 are the lowest among all of the presented 
fixed income securities categories.  Effective spreads for retail-sized trades are only 3 bps higher 
relative to larger trades.  Agency securities exhibit relatively higher effective spreads in 
comparison to U.S. Treasury securities but remain the second least costly fixed income securities 
category in terms of transaction costs.  There is less dispersion in execution quality for U.S. 
Treasury securities trades.  Price dispersion in large size customer trades is small relative to that 
of interdealer trades (1.11) but is somewhat larger, albeit at an overall level less than other fixed 
income securities categories, for retail-sized trades (1.38).  
iv. Market Access 
 With respect to fixed income securities trading, executing brokers provide market access 
to other broker-dealers including retail broker-dealers that qualify as introducing brokers under 
the FINRA/MSRB rules.  The Commission understands executing broker-dealers that provide 
market access to retail introducing brokers under the FINRA and MSRB rules do not engage in 
conflicted transactions as defined under the proposal.  Furthermore, the Commission understands 
that these executing brokers would consider factors, such as contemporaneous trade prices (e.g., 
interdealer prices), quotes, trade prices and quotes of similar fixed income securities, yield curve, 
matrix prices, and different types of trading protocols (e.g., RFQs and BWICs) in handling 
orders from other retail broker-dealers and also supply execution quality statistics to their 
customers.  These executing brokers compete on the basis of fees, efficiency in order handling 

   
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procedures, and efficiency in the selection of trading venues or counterparties, which determine 
overall execution quality. 
v. Retail Order Handling and Execution 
 Retail investors transacting in fixed income securities most often trade municipal 
securities, and to a smaller extent, corporate debt securities and U.S. Treasury securities. As of 
2021, household holdings of municipal securities hovered above 40 percent
495
 of outstanding 
municipal securities,
496
 but this share has been declining.
497
  Households owned only roughly 
one percent of outstanding corporate debt securities in 2021.
498
  U.S. Treasury securities have 
slightly higher household participation, at approximately three percent.  Households own a 
similar amount of U.S. agency securities, also at approximately two percent.
499
  In general, retail 
investors do not trade in the market for other fixed income securities, such as asset-backed 
securities, although broker-dealers offer trading services for these fixed income securities to their 
retail customers. 
                                                 
495
  See Financial Accounts of the United States Z.1, Fourth Quarter 2021, available at 
https://www.federalreserve.gov/releases/z1/20220310/z1.pdf. 
496
  In the Z.1 Financial Accounts of the United States, estimates for the ‘household’ sector 
include non-profits and domestic hedge funds.  See Financial Accounts of the United 
States Z.1, Technical Q&As (September 23, 2022), available at 
https://www.federalreserve.gov/releases/z1/z1_technical_qa.htm. 
497
  See Heather Gillers, Municipal Bonds Increasingly Held by Funds, Not Individuals, Wall 
St. J. (Jun. 29, 2022).  Available at  https://www.wsj.com/articles/municipal-bonds-
increasingly-held-by-funds-instead-of-individuals-11656408601. 
498
  See id. 
499
  See id. 

   
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The Commission understands that retail investors generally use one broker-dealer for 
fixed income securities trading services.  Broker-dealers execute retail customer orders mostly 
on a principal basis (e.g., riskless principal trades, internalized trades).  Broker-dealers may 
execute against resting orders (e.g., limit orders displayed on ATSs), conduct 
RFQs/BWICs/OWICs,
500
 and utilize voice methods (e.g., telephone) in handling retail customer 
orders.  For executing small or medium size retail customer orders, a broker-dealer may utilize 
limit orders or RFQs, while it might utilize voice methods for executing large retail customer 
orders or orders on illiquid fixed income securities.  Only a few broker-dealers offer a trading 
service to represent a retail customer order in a limit order book.  The Commission does not 
know the number of trading venues (e.g., ATSs, RFQ platforms, broker’s broker platforms, 
single dealer platforms) to which broker-dealers maintain access/connection for executing retail 
customer orders.  The Commission also does not know the number of broker-dealers that access 
or connect to these venues through each type of interface (e.g., via application programming 
interface (API), graphical user interface (GUI)).  Furthermore, the Commission does not know 
how broadly broker-dealers expose retail customer orders, for example, via RFQs or limit order 
books for the purpose of riskless principal transactions and internalization.   
The Commission understands that retail customer order handling practices for fixed 
income securities vary across retail broker-dealers offering different types of trading services and 
between the sides of the market (customer buy order vs. customer sell order).  Some broker-
                                                 
500
  Bid wanted in competition (BWIC) is a request for bids on a single security or a list of 
securities, submitted by a market participant (a broker-dealer or an institutional investor) 
to a number of broker-dealers.  Offer wanted in competition (OWIC) is a request for 
offers on a single security or a list of securities, submitted by a market participant (a 
broker-dealer or an institutional investor) to a number of broker-dealers. 

   
284 
 
dealers offer self-directed trading to their retail customers, whereas for some broker-dealers, the 
firm’s brokers handle retail customer orders, and some offer both self-directed and broker-
assisted trading services.  Furthermore, some broker-dealers make only internal inventory, only 
external inventory (for brokers that do not carry inventory), or both internal and external 
inventory of fixed income securities available for retail customer trading.  The Commission 
understands that some broker-dealers whose primary service is not focused on fixed income 
securities trading outsource fixed income securities execution services to another broker (i.e., 
executing broker).  The Commission does not know how many executing brokers perform fixed 
income securities trading services on behalf of these brokers.  The Commission understands that 
executing brokers maintain access to multiple trading venues (e.g., ATSs, RFQ platforms, 
broker’s broker platforms, single dealer platforms) and generally handle orders from other 
broker-dealers, for which they provide execution services, on agency or riskless principal basis.   
Some broker-d
ealers ingest offer quotes from internal inventory and/or trading venues 
(e.g., ATSs, electronic venues) and then display them to their self-directed retail customers or the 
firm’s brokers who handle retail customer orders.  These offer quotes displayed to self-directed 
retail customers typically embed markup.  Self-directed retail customers are able to submit buy 
orders to execute against offer quotes displayed on their systems.  The Commission understands 
that some broker-dealers do not assess the competitiveness of ingested quotes or filter out quotes 
that may not be reflective of the prevailing market before displaying them to self-directed retail 
customers.  Furthermore, the Commission does not have information about how orders submitted 
by self-directed retail customers are handled: the Commission does not know how a broker-
dealer ensures the displayed quote, against which a self-directed retail customer submitted an 
order to execute, is reflective of the current market.  For a broker-assisted customer buy trade, a 

   
285 
 
broker handling a retail customer order would follow order handling procedures based on the 
FINRA/MSRB best execution rules.  The broker may consider, among other things, prices, such 
as trade prices, trade prices of similar fixed income securities, internal and/or external offer 
quotes, offer quotes of similar fixed income securities, matrix prices, and prices derived from 
yield curve, as well as trading protocols, such as limit order, RFQ, and OWIC, in handling the 
retail customer buy order.  The Commission understands that broker-dealers that carry inventory 
of fixed income securities may internalize retail customer buy orders by executing them against 
internal inventory after charging a markup.  Broker-dealers may use offer quotes resting on 
trading venues and/or offer responses to RFQ/OWIC as reference prices to match or improve 
(via last-look practice) for the purpose of internalization.   
 Only a few retail broker-dealers display external and/or internal bid quotes of fixed 
income securities to their self-directed retail customers or the firm’s brokers who handle retail 
customer orders.  To the extent that these retail broker-dealers display external and/or internal 
bid quotes of fixed income securities to their self-directed retail customers, self-directed retail 
customers are able to submit sell orders to execute against bid quotes displayed on their systems.  
For a broker-assisted customer sell trade, a broker handling a retail customer order would 
typically conduct RFQ or BWIC to collect multiple bids.  A broker would also consider other 
pricing sources, such as trade prices, trade prices of similar fixed income securities, bid quotes of 
similar fixed income securities, matrix prices, and prices derived from yield curve in handling 
the retail customer sell order.  For broker-dealers that carry inventory of fixed income securities, 
these broker-dealers may internalize customer sell orders by buying the bond from their 
customer into inventory after charging a markdown to have an opportunity to resell the bond to 
another customer (earning the bid-ask spread and markup when the broker-dealer resells the 

   
286 
 
bond to another customer).  In conducting RFQs or BWICs for the purpose of internalization, the 
Commission understands that some broker-dealers may use last-look to apply trade desk spreads 
(in the form of markdown) to external bids but not to internal bids, which results in more 
favorable comparisons for the internal bids, to win RFQs/BWICs.
501
 
vi. Principal Trading 
With respect to fixed income securities trading, principal transactions
502
 with retail 
customers, in which broker-dealers engage, include riskless principal
503
 and internalized 
trades.  With limited transparency in the fixed income securities markets, an internalized trade 
may represent conflicts of interest between a broker-dealer and its retail customer because the 
retail customer may not be able to assess broker-dealer compensation (e.g., markup/markdown).  
Provided that transaction costs of riskless principal transactions are disclosed on a post-trade 
basis in customer confirmations, these riskless principal transactions represent potentially fewer 
conflicts of interest compared to internalization.  When the transaction costs of riskless principal 
transactions are disclosed on a pre-trade basis via a markup/markdown schedule, there would be 
even fewer conflicts of interest between retail customers and broker-dealers handling their 
                                                 
501
  See infra Section V.C.1.b for the discussion of last look practices and application of trade 
desk spreads. 
502
  Principal transactions with retail customers would be subject to the requirements of the 
proposed rule 1101(b).  See also supra section IV.E. 
503
  These riskless principal trades would include retail customer self-directed trades.  Some 
broker-dealers execute self-directed trades of retail customers on a riskless principal basis 
and charge markups/markdowns for their trading services.  Retail customer self-directed 
trades would not be considered unsolicited instructions from customers under FINRA 
Rule 5310.08. 

   
287 
 
orders.
504
  A significant portion of customer trades are executed on a principal basis.  Table 18 
shows that 87% and 80% of the corporate debt securities and municipal securities customer par 
volume trades, respectively, are executed on a principal basis.  Furthermore, Table 18 shows that 
riskless principal transactions represent 31% and 48% of principal trades in the corporate debt 
securities and municipal securities markets, respectively.
505
  An academic study has found a 
persistent increase in the frequency of riskless principal trades in the corporate debt securities 
market since 2014.
506
 
Table 18: Fixed Income Dealer Trading Capacity and Trade Size 
Panel A: Corporate Debt Securities 
    
  Total       Par  
Corporate Trade   
Distinct   Trade Par Volume Volume 
Bond Size Type MPIDs Trades Percent (in billions) Percent 
Dealer 
Buy 
Retail 
Trades 
(≤$100k) 
Agency 
          446           782,685  7.9%              11.82  0.2% 
Principal 
          465        1,466,145  14.8%              42.63  0.6% 
Riskless Principal 
          474           553,908  5.6%              12.39  0.2% 
Large 
Trades 
(>$100k) 
Agency 
          241           163,505  1.6%            201.03  2.7% 
Principal 
          413        1,596,162  16.1%         3,164.41  43.3% 
Riskless Principal 
          392           183,391  1.8%            235.28  3.2% 
Dealer 
Sell 
Retail 
Trades 
(≤$100k) 
Agency 
          338        1,052,845  10.6%              18.40  0.3% 
Principal 
          460        1,341,692  13.5%              47.88  0.7% 
Riskless Principal 
          475           704,699  7.1%              19.71  0.3% 
                                                 
504
  Some broker-dealers disclose a markup/markdown schedule broken out by trade size on a 
pre-trade basis for retail customer self-directed trading on customer facing websites.  
505
  Principal trading represents a relatively smaller proportion of retail-sized customer trades 
in the U.S. Treasury securities market. Commission analyses show trades executed in an 
agency capacity represent approximately 36.7% of all retail-sized U.S. Treasury 
securities trades. The commission estimates that riskless principal trades represent 7.9% 
of principal trades in the U.S. Treasury securities market, whereas the share of riskless 
principal trades for retail-sized trades is 10.2%. 
506
 See O’Hara and Zhou, supra note 469. The study suggests that implementation of the 
Volcker Rule in 2014 led to a large increase in riskless principal capacity trading, 
particularly among bank broker-dealers who are subject to proprietary trading restrictions 
under the rule. 

   
288 
 
Large 
Trades 
(>$100k) 
Agency 
          475           172,630  1.7%            213.28  2.9% 
Principal 
          458        1,698,176  17.1%         3,140.93  43.0% 
Riskless Principal 
          474           209,196  2.1%            203.39  2.8% 
Total     
       9,925,034  100%              7,311  100% 
Panel B: Municipal Securities 
      Total       Par  
Municipal Trade   
Distinct   Trade Par Volume Volume 
Bond Size Type MPIDs Trades Percent (in billions) Percent 
Dealer 
Buy 
Retail 
Trades 
(≤$100k) 
Agency 
          331           263,505  5.1%                 6.49  0.3% 
Principal 
          325           737,050  14.4%              24.56  1.2% 
Riskless 
Principal 
          458           847,353  16.5%              24.80  1.2% 
Large 
Trades 
(>$100k) 
Agency 
          188             19,119  0.4%                 7.16  0.4% 
Principal 
          284           244,097  4.8%            458.28  22.5% 
Riskless 
Principal 
          354           138,851  2.7%            194.91  9.6% 
Dealer 
Sell 
Retail 
Trades 
(≤$100k) 
Agency 
          237           319,597  6.2%                 9.28  0.5% 
Principal 
          339        1,037,384  20.2%              35.86  1.8% 
Riskless 
Principal 
          365           817,050  15.9%              24.16  1.2% 
Large 
Trades 
(>$100k) 
Agency 
          365             34,090  0.7%              16.04  0.8% 
Principal 
          384           558,594  10.9%         1,115.44  54.7% 
Riskless 
Principal 
          440           119,447  2.3%            123.77  6.1% 
Total     
       5,136,137  100%              2,041  100% 
This table presents summary statistics for dealer trading capacity across corporate (using FINRA TRACE data) and municipal 
(MSRB RTRS) fixed income categories from April 1, 2021 through March 31, 2022.  We drop all interdealer trades keeping only 
customer trades from TRACE and RTRS main data files. We then collapse this file by Buy/Sell indicator, 
Agency/Principal/Riskless Principal indicator and Trade size bucket. The table reports the total distinct MPIDs in each group the 
total trade count (with percentage), total Par volume (with percentage), the weighted markup of riskless principal trades, and 
unweighted markup of riskless principal trades. Riskless principal trade indicators are not provided in the main data but are 
inferred using trade pairs matched by MPID and trade size over a 15-minute window.
 
 
The Commission understands that there may be conflicts of interest in handling retail 
customer orders in fixed income securities markets, which could result in retail customers not 
receiving the most favorable prices under prevailing market conditions.  A broker-dealer that 

   
289 
 
submits an RFQ
507
 on behalf of a retail customer typically has the option of selecting potential 
counterparties, from which it is requesting prices, on behalf of its customer.  Applying 
counterparty filtering or limiting the number of counterparties in RFQs could result in less 
competitive prices for retail customer orders.
508
  An academic study links competitiveness (i.e., 
the number of bids and difference between winning and second best bid) directly to price 
improvement.
509
 Another market practice is price matching using the best response to RFQ via 
“last look” or “pennying” for the purpose of internalization rather than customer benefit.
510
  Such 
practice would discourage market participants from submitting competitive prices because 
responders to RFQs are not compensated for submitting competitive quotes (i.e., selected to 
trade). 
                                                 
507
  The Commission understands that, in general, responding to RFQs is a manual process.  
Recently, some market participants (e.g., large broker-dealers) automated responses to 
RFQs for small order sizes.     
508
  While filtering practices might be conducted by broker-dealer for order execution 
efficiency purposes (i.e., evaluating only counterparties who provide firm indications), a 
broker-dealer must evaluate any efficiency gains directly against filtering quotes that may 
be more favorable to the end customer. Filtering counterparties to reduce information 
leakages is likely to produce little benefit for retail trades.    
509
  See Terrence J. Hendershott, Dmitry Livdan & Norman Schuerhoff, All-to-All Liquidity 
in Corporate Bonds, Swiss Finance Institute Research Paper No. 21-43 (October 27, 
2021), available at https://ssrn.com/abstract=3895270 or 
https://dx.doi.org/10.2139/ssrn.3895270. 
510
  The Commission understands that such practice is more common in RFQs on the bid side 
of the market. 

   
290 
 
c) Crypto Asset Securities 
As discussed Section III.A.3, crypto asset securities, also called digital asset securities, 
refer to a range of assets that are issued and/or transferred using distributed ledger technology 
and that meet the definition of a security.
511
  The Commission has provided a statement 
regarding broker-dealers engaging in custody and transactions of crypto asset securities.
512
  
Broker-dealers transacting in crypto asset securities would be subject to the requirements of this 
proposal.
513
 
Because transaction data and other information on the crypto asset securities market is 
limited,
514
 the Commission does not have a complete understanding of market participants’ 
                                                 
511
  See, e.g., Report of Investigation Pursuant to Section 21(a) of the Securities Exchange 
Act of 1934: The DAO, Exchange Act Release No. 81207 (July 25, 2017). See SEC v. 
W. J. Howey Co., 328 U.S. 293 (1946). See Framework for “Investment Contract” 
Analysis of Digital Assets, available at https://www.sec.gov/corpfin/framework-
investment-contract-analysis-digital-assets.  
512
  See supra III.A.3.  Since 2013, the Commission has brought a significant number of 
enforcement actions against issuers of crypto asset securities and crypto asset security 
market participants. Such enforcement investigations and actions have been brought for, 
among other things, violations of the registration requirements of the Securities Act of 
1933 for offers and sales of crypto assets to the public as securities, violations of the 
exchange registration requirements of the Securities Exchange Act of 1934 for operating 
trading platforms for digital assets that are securities, and violations of the anti-fraud and 
other provisions of Federal securities laws.  See, e.g., Crypto Assets and Cyber 
Enforcement Actions, available at https://www.sec.gov/spotlight/cybersecurity-
enforcement-actions for more information about these enforcement actions. 
513
  See supra section III.A.3 for criteria of applicability to crypto asset securities. 
514
 See, e.g., FSOC Report, supra note 95, at 119, which notes that the digital asset 
“ecosystem is characterized by opacity that creates challenges for the assessment of 
financial stability risks. Collection and sharing of data, as appropriate, could help reduce 
this opacity.” See also Raphael Auer et al., supra at note 95 (discussing data gaps in the 
crypto market). 

   
291 
 
current practices with respect to order handling and best execution for crypto asset securities, 
including the extent to which current practices in the market for crypto asset securities are 
consistent with FINRA Rule 5310.
515
   
Most known, off-chain trading activity for crypto asset securities occurs on online, 
openly accessible centralized platforms.  These platforms are typically vertically integrated, 
combining account holding and trading services.  The prevalence of vertically integrated trading 
platforms distinguishes the crypto asset securities market from other asset markets.  These 
platforms often operate using a centralized limit order book, similar to exchanges for stocks and 
futures, but the volume is not audited or verified in any known manner.
516
  Some platforms that 
trade crypto asset securities are domiciled and operated outside the U.S.
517
  To trade on a 
centralized crypto asset securities platform, the only prerequisites for a retail investor are to sign 
up for an account with a location-accessible platform and link his or her bank account or digital 
asset wallet.
518
 
     
                                                 
515
  As noted in supra Section III.A.3, circumstances have made it difficult for the 
Commission to have a full picture of the current market for crypto assets.  
516
  See, for example, Le Pennec, G., Fiedler, I., and Ante, L.,  Wash trading at 
cryptocurrency exchanges, 43 Finance Research Letters 101982 (2021). 
517
  Some platforms that purport to be located outside of US nevertheless seek to cater to US 
customers, among other ways, by complying with certain requirements set by the CFTC 
and FinCEN.  As of August 30, 2022, only three of the top 25 trading platforms 
(according to CoinMarketCap) have registered FINRA entities.  See CoinMarketCap’s 
Top Cryptocurrency Spot Exchanges, available at 
https://coinmarketcap.com/rankings/exchanges/ for further exchange level information. 
518
  A digital asset wallet is a software, algorithm, or storage medium to store the public and 
private keys of the digital asset transactions.  See, for example the definition of wallet in 

   
292 
 
The Commission understands that retail customers represent approximately 30% of 
trading in crypto asset securities at the largest centralized trading platforms.
519
  Instead of trading 
directly on centralized platforms, some retail customers may choose to place crypto asset 
securities orders with retail businesses, which could be affiliates of SEC registrants, fintech 
firms, or even payment applications.
520
  Those businesses typically route the order flow to 
unregistered third-party wholesalers, proprietary traders, or market makers for execution.  Some 
of them provide zero or low commissions for trading crypto assets, and obtain all or a significant 
portion of their compensation through payments from the wholesalers for directed order flow.  
The Commission is not certain how these orders are handled ( i.e., internalized, routed to 
centralized platforms, etc.), given the lack of reporting in the crypto asset securities market.  It is 
possible that crypto asset wholesalers internalize most of the order flow they purchased within 
their own proprietary trading desks and they may route any remaining order flow perceived to be 
from informed traders to a lit (i.e., transparent order book driven) venue.  
 The Commission lacks knowledge on the prevalence of broker-dealer activity in this 
market and the routing behavior of broker-dealers in this market.  The Commission likewise has 
                                                 
Cryptocurrencies glossary,  Fidelity Investments, available at  
https://www.fidelity.ca/en/investor/cryptocurrencies-glossary/ 
519
  This estimate comes from two different sources: (1) disclosures from Coinbase’s 2021 
10-K filings; and (2) a direct statement made by Binance US’s CEO at the 2022 
Georgetown Financial Market Quality Conference.  
520
  Payment apps allow individuals and businesses to transfer funds outside of the traditional 
banking and payment processing systems. Many of these fintech or payment app entities 
are not registered with the Commission in any capacity.  Thus, this activity is not visible 
to the Commission.   

   
293 
 
limited information about the pervasiveness of payment for order flow in the crypto asset 
securities market.
521
 
d) Non-NMS Stock Equity Securities 
 Non-NMS stock equity securities trade in a market that appears to be a hybrid of the 
NMS securities market and the fixed income market.  The non-NMS stock equities market is 
informally referred to as the “OTC market.”  The securities traded in the non-NMS stock equities 
market are typically unregistered equities; however, many non-NMS equities traded were 
formerly registered and formerly exchange listed.  Analogous to the fixed income market, there 
are some securities which are very liquid, and also many securities that are difficult to trade.  For 
FINRA members, non-NMS stock equities trading is subject to FINRA Rule 5310 for execution 
standards; however, there are other standards that also affect this market (i.e., state law and/or 
platform/venue requirements).  Academic studies have found that differences in regulation can 
impact market quality.
522
  Trading in non-NMS stock equities primarily takes place via dealer-to-
dealer trades or on one of several ATSs that specialize in non-NMS stock equities.  In the 
interdealer market, broker-dealers interact directly with one another to fill customer orders or 
manage inventory.  ATSs in the non-NMS stock equities market offer opportunities for broker-
dealers to interact in either a traditional limit order book or in a negotiation feature somewhat 
                                                 
521
  The Commission understands PFOF rates from wholesalers for crypto assets are 
significantly higher than the PFOF rates from wholesalers for NMS securities.  
522
  See, e.g., Ulf Brüggemann, Aditya Kaul, Christian Leuz & Ingrid M. Werner, The 
Twilight Zone: OTC Regulatory Regimes and Market Quality, 31 Rev. Fin. Stud. 898 
(March 2018), available at https://doi.org/10.1093/rfs/hhx102. The authors find that 
increased regulation of OTC trading improves market quality in US OTC stocks. 

   
294 
 
similar to RFQs in fixed income markets.  Some ATSs in this market allow direct participation 
by any client, including retail clients; however, as the Commission understands, most ATSs are 
accessible only by dealers.  
From the perspective of order handling, retail orders are processed in a manner very 
similar to NMS stocks.  Retail broker-dealers that offer the ability
523
 to trade in the non-NMS 
stock equities market typically route an order to a wholesaler, who may internalize the order, or 
if the broker-dealer is directly connected to a non-NMS stock equities liquidity source, such as 
an ATS, may trade in a principal capacity with the customer.  Orders that are not routed to 
wholesalers or internalized directly by the retail broker-dealer may be routed to an ATS to 
expose the order.  From the Commission’s analysis of non-NMS stock equities trades in March 
2022, 63.2 % of non-institutional trades were traded in a principal capacity.  As noted in this 
section, some ATSs allow direct participation of any trader who registers and connects to their 
platform.  Thus, some retail investors may be able to access liquidity without the aid of a broker-
dealer in this market. In terms of pricing orders, non-NMS stock equities are not protected by a 
trade-through rule.  Thus, pricing could be highly variable from one trade to the next in a given 
security.  The non-NMS stock equities market is not required by regulation to report individual 
trades for public dissemination.  This market frequently lacks quotes entirely, or lacks displayed 
quotes that are frequently updated.  Despite this lack of mandated transparency, the largest
524
 
                                                 
523
  This ability often costs a premium compared to trading in NMS stocks. Many brokers 
will still charge commissions for trades in this market. 
524
  See ATS Transparency Data Quarterly Statistics, FINRA.org, available at 
https://www.finra.org/filing-reporting/otc-transparency/ats-quarterly-statistics. This ATS 
is largest by number of OTC Stocks traded in Q2 2022. FINRA posts records on a 

   
295 
 
ATS serving this market offers pre-trade and post-trade information (e.g., quotes, transaction 
prices).
525
  
e) Institutional Customer Order Handling 
 The Commission understands that institutional investors generally use multiple broker-
dealers for NMS stock and options trading services.  Institutional broker-dealers typically engage 
in order splitting when handling large institutional customer orders, often utilizing SORs to break 
up large, institutional “parent” orders into multiple smaller “child” orders.
526
  It is the 
Commission’s understanding that when an institutional customer gives a large order to be 
executed on behalf of one account (e.g., a single mutual fund or pension fund), it expects the 
broker-dealer that handles and executes such large order to do so in a manner that ensures best 
execution is provided to the “parent” order.  In other words, to the extent that a parent order is 
split into smaller “child” orders, the institutional customer expects the best execution analysis to 
evaluate whether the parent order was executed at the most favorable price possible under 
                                                 
quarterly basis listing ATSs trading OTC Stocks and the share volume traded on the 
ATS. 
525
  See Anna-Louise Jackson, What is the OTC Market?, Forbes Advisor (Jun. 9, 2022), 
available at https://www.forbes.com/advisor/investing/otc-market/.  See generally, OTC 
Markets Group, Inc. and OTC Link ATS, available at https://www.otcmarkets.com/. 
526
  The small-sized and mid-sized institutional customer orders for options are typically 
routed to electronic order routing platforms.  These platforms allow order entry and 
provide smart routers and order and position management.  Furthermore, these platforms 
offer customized execution algorithms on an order-by-order basis.  See also Tyler Beason 
& Sunil Wahal, The Anatomy of Trading Algorithms, (working paper Jan. 21, 
2021), available at https://ssrn.com/abstract=3497001 (retrieved from SSRN Elsevier 
database) for a discussion of institutional investor parent and child order handling in 
NMS stocks.   

   
296 
 
prevailing market conditions according to customer instructions. 
527
  A significant portion of 
institutional customer orders in NMS stocks and options is not held.
528
  The Commission 
understands that institutional customer orders handled on a not held basis may sometimes be 
executed based on customer-specified standards that may prioritize outcomes other than 
execution prices, such as reducing the price impact of an order or matching volume weighted 
average price (VWAP) over a certain time horizon.  An academic study looked at order routing 
by institutional brokers in the equity markets and found that institutional brokers who route more 
orders to affiliated ATSs are associated with lower execution quality in the form of lower fill 
rates and higher implementation shortfall costs than institution brokers that route more orders to 
non-affiliated ATSs.
529
 
 With respect to fixed income securities trading, the Commission understands that 
institutional investors, such as mutual funds, pension funds, insurance companies, and banks, in 
general directly trade with market participants (e.g., broker-dealers) by accessing RFQs, 
platform-wide RFQs, firm quotes, and indicative quotes on trading venues.  Institutional 
investors generally trade large blocks of fixed income securities via voice with broker-dealers.  
                                                 
527
 See supra note 169. 
528
  An analysis in the Rule 606 Adopting Release 83 FR 58338 (Jan 2019), studied orders 
submitted from customer accounts of 120 randomly selected NMS stocks listed on NYSE 
during the sample period between December 5, 2016 and December 9, 2016, consisting 
of 40 large-cap stocks, 40 mid-cap stocks, and 40 small-cap stocks.  The analysis found 
that among the orders received from the institutional accounts, about 69% of total shares 
and close to 39% of total number of orders in the sample are not held orders, whereas 
among the orders received from the individual accounts, about 19% of total shares and 
about 12% of total number of orders in the sample are not held orders.  See Rule 606 
Adopting Release, 83 FR 58393. 
529
  See Anand, supra note 91. 

   
297 
 
Furthermore, the Commission understands that institutional investors generally use multiple 
broker-dealers for trading services.  Based on customers’ instructions, broker-dealers may 
represent institutional customer orders by posting firm quotes on many-to-many and one-to-
many platforms, or conduct RFQs on behalf of institutional customers.   
 Institutional investors may utilize third-party vendors to conduct transaction cost analysis 
and evaluate the performance of their broker-dealers based on those reports.  If an institutional 
investor uses multiple brokers-dealers, it may direct more orders to broker-dealers that have 
better performance.  This may reduce the switching costs for institutional investors related to 
changing broker-dealers and increase competition among broker-dealers to attract institutional 
orders. 
4. Broker-Dealer Services and Revenue 
A small subset of broker-dealers hold most customer accounts and control a significant 
portion of broker-dealer assets. Table 19 shows statistics on broker-dealer customers and total 
assets.  Based on FOCUS data as of Q2 2022, there were approximately 3,498 broker-dealers, 
162 of which carry their own customer accounts.  These broker-dealers reported carrying over 
240 million public customer accounts.  Of the total population of these broker-dealers, 
approximately 2,440 reported retail customer activity.
530
  Of the broker-dealers that reported 
retail customer activity, 144 reported carrying their own customer accounts.
531
  A small set of 23 
                                                 
530
  See item 8080 on FOCUS Report Form X-17A-5 Schedule I for additional information 
on the number of reported public customer accounts. 
531
  Retail sales activity is identified from Form BR, which categorizes retail activity broadly 
(by marking the “sales” box) or narrowly (by marking the “retail” or “institutional” boxes 
as types of sales activity).  We use the broad definition of sales as we believe that many 

   
298 
 
broker-dealers report more than 50 billion dollars in total assets and 119 report between 1 billion 
and 50 billion in assets.  The majority of broker-dealers have less than 10 million dollars in 
assets, with 1,613 having less than 1 million dollars in assets.  However, most customer accounts 
are concentrated in the 142 large broker-dealers with 1 billion dollars or more in assets: 119 of 
them are from the category of broker-dealers with assets greater than 1 billion dollars and less 
than 50 billion dollars and 23 of them are from the category of broker-dealers with assets greater 
than 50 billion dollars.  Ninety eight broker-dealers carry non-customer accounts for other 
broker-dealers.  The majority of these, 66, are large broker-dealers with 1 billion dollars or more 
in assets.  On average, they carry accounts for over 50 other broker-dealers.   
Table 19: Number of Broker-Dealers and Customer Accounts by Asset Size 
Panel A: All Broker-Dealers 
 
Size of Broker-Dealer (Total Assets) 
Variable >50bn 1bn-50bn 
500mn-
1bn 
100mn-
500mn 
10mn-
100mn 
1mn-
10mn <1mn Total 
Number of Broker-Dealers 
23 119 30 136 523 1,054 1,613 3,498 
Number of Broker-Dealers 
Registered as Investment 
Advisers 
11 22 4 35 95 179 134 480 
Number of Broker-Dealers 
with Investment Adviser 
Affiliate 
19 74 17 87 274 401 445 1,317 
Number of Broker-Dealers 
Carrying Own Customer 
Accounts 
19 59 8 22 26 21 7 162 
Total Number of Public 
Customer Accounts 
75,834,917 153,216,558 6,045,929 3,555,383 606,606 887,833 6,668 240,153,894 
Total Number of Omnibus 
Accounts 
421,583 525 12 4 33 19 0 422,176 
Number of Broker-Dealers 
Carrying Non-Customer 
Accounts 
18 48 7 9 11 5 0 98 
                                                 
firms will just mark “sales” if they have both retail and institutional activity. However, 
we note that this may capture some broker-dealers that do not have retail activity, 
although we are unable to estimate that frequency. 

   
299 
 
Avg Number Other Broker-
Dealers Carrying 
Customer Accounts For 
Fully Disclosed Basis 
57.5 50.7 30.5 9.0 2.5 1.0 
 
  
Avg Number Other Broker-
Dealers Carrying 
Accounts for Omnibus 
Basis 
19.2 26.3 15.3 3.5 2.5   1.0   
         
Panel B: Retail Broker-Dealers 
 
Size of Broker-Dealer (Total Assets) 
Variable >50bn 1bn-50bn 
500mn-
1bn 
100mn-
500mn 
10mn-
100mn 
1mn-
10mn <1mn Total 
Number of Retail Broker-
Dealers 
19 76 21 109 393 750 1,072 2,440 
Number of Broker-Dealers 
Registered as Investment 
Advisers 
11 21 4 34 92 171 128 461 
Number of Broker-Dealers 
with Investment Adviser 
Affiliate 
17 56 12 76 228 331 350 1,070 
Number of Broker-Dealers 
Carrying Own Customer 
Accounts 
18 51 7 20 22 19 7 144 
Total Number of Public 
Customer Accounts 
75,829,888 142,899,902 6,012,125 2,641,879 606,447 880,021 6,668 228,876,930 
Total Number of Omnibus 
Accounts 
421,583 524 12 1 33 15 0 422,168 
Number of Broker-Dealers 
Carrying Non-Customer 
Accounts 
17 44 7 8 8 5 0 89 
Avg Number Other Broker-
Dealers Carrying 
Customer Accounts For 
Fully Disclosed Basis 
60.9 55.4 30.5 8.0 2.0 1.0 
 
  
Avg Number Other Broker-
Dealers Carrying 
Accounts for Omnibus 
Basis 
19.2 28.5 15.3 2.0 2.5 
  
1.0 
  

   
300 
 
This table summarizes the number broker-dealers (Panel A) and retail broker-dealers (Panel B), their investment adviser status, 
their customer account carrying status, and the number of customer and omnibus accounts they carry broken out into groups 
based on their total assets.  The number of Broker-dealers comprises the broker-dealers that had a valid FOCUS Report for Q2 
2022 and a valid Form Custody and Form BD for Q2 2022.  Total Assets are estimated by Total Assets (allowable and non-
allowable) from Part II/IIA of the FOCUS filings (Form X-17A-5 Part II/IIA) from Q4 2021 and correspond to balance sheet 
total assets for the broker-dealer. The numbers of public and omnibus accounts are from FOCUS Schedule I from Q4 2021.  
Broker-dealer registration as an investment adviser is from Form Custody from Q2 2022 and includes broker-dealers that are 
registered as an investment adviser with the Commission or with a state.  Broker-dealers carrying customer accounts and non-
customer accounts is identified from Form Custody from Q2 2022.  Average number of other broker-dealer carrying accounts 
on a fully disclosed or omnibus basis is the average number of other broker-dealers for which a broker-dealer carrying non-
customer accounts holds accounts for and it is determined from Form Custody from Q2 2022. Retail brokers are identified 
based on retail sales activity from Form BR in Q2 2022, which categorizes retail activity broadly (by marking the “sales” box) 
or narrowly (by marking the “retail” or “institutional” boxes as types of sales activity). We use the broad definition of sales as 
we believe that many firms will just mark “sales” if they have both retail and institutional activity. However, we note that this 
may capture some broker-dealers that do not have retail activity, although we are unable to estimate how often it does so. 
 
A small number of broker-dealers with more than 1 billion dollars in revenue account for 
the majority of broker-dealer assets, revenue, and expenses. Table 20 shows statistics on total 
assets, total revenues, total expenses, and net income based on broker-dealer asset size.  The top 
23 brokers, each with assets over $50 billion, have more than 3.8 trillion dollars in assets out of a 
total of 5.4 trillion dollars across all broker-dealers.  The top 142 brokers account for the 
majority of revenue, earning over 71 billion dollars in Q2 2022 out of total of 97 billion dollars 
for all broker-dealers.  Similarly, the top 142 broker-dealers accounted for the majority of 
expenses and net income.   
  
 
Table 20: Assets, Revenue and Expenses of Broker-Dealers by Asset Size 
  
Size of Broker-Dealer (Total Assets) 
Variable Statistic >50bn 1bn-50bn 500mn-1bn 
100mn-
500mn 
10mn-
100mn 
1mn-
10mn <1mn 
Total Number of Broker-
Dealers 
23 119 30 136 523 1,054 1,613 
Total Assets 
($1,000s) 
Mean 
$168,631,851 $12,226,934 $737,161 $207,753 $34,340 $3,580 $299 
Median 
$85,750,282 $6,628,584 $737,598 $181,812 $25,645 $2,757 $207 
Total 
$3,878,532,5
70 
$1,455,005,108 $22,114,818 $28,254,392 $17,959,877 $3,773,694 $481,530 

   
301 
 
Total 
Revenue 
($1,000s) 
Mean 
$1,495,923 $315,344 $84,500 $76,247 $17,310 $2,622 $378 
Median 
$841,321 $81,517 $25,232 $30,703 $7,638 $1,396 $99 
Total 
$34,406,232 $37,525,938 $2,535,011 $10,369,565 $9,036,076 $2,695,264 $508,546 
Total 
Expenses 
($1,000s) 
Mean 
$1,263,904 $283,825 $75,088 $66,749 $15,760 $2,349 $293 
Median 
$973,919 $67,638 $22,577 $25,153 $6,213 $1,064 $78 
Total 
$29,069,788 $33,775,125 $2,252,648 $9,077,875 $8,242,340 $2,473,435 $470,898 
Net Income 
($1,000s) 
Mean 
$219,406 $30,564 $12,941 $9,243 $1,470 $206 $24 
Median 
$33,372 $5,377 $4,553 $3,032 $417 $29 -$6 
Total 
$5,046,337 $3,637,137 $388,236 $1,257,046 $769,031 $217,453 $37,856 
This table estimates average, median and total values for broker-dealer assets, total revenue, total expenses, and net income 
broken out into groups based on their total assets.  Number of Broker-dealers is based on the broker-dealers that had a valid 
FOCUS Report for Q2 2022. Statistics for Total Assets (allowable and non-allowable), Total Revenue, Total Expenses, and 
Net Income (after federal income taxes) are computed from the corresponding items in Part II and Part IIA of the FOCUS 
filings (Form X-17A-5 Part II/IIA) from Q2 2022.  
 
 From the perspective of the number of individual customer accounts, the broker-dealer 
market appears to be somewhat concentrated, with the top four brokers handling about 106 
million accounts, equal to 44% of the industry, while the top eight firms have about 159 million 
accounts, or 66% of the industry. From the perspective of total assets, the level of concentration 
is slighter lower, with the top four brokerages having a total of around $2.1 trillion, equal to 39% 
of all assets held by broker-dealers, and the top eight firms about $2.8 trillion, or 52% of total 
industry assets. The broker-dealer industry looks less concentrated from the perspective of 
revenue, with the top four firms earning more than $18 billion, or 19% of the market, and the top 
eight firms earning $28 billion, or 29% of total industry revenues.   
Table 21: Broker Dealer Market Concentration – Assets, Revenues, and Customer Accounts 
  
Total Assets (1,000s) 
Total Revenue 
(1,000s) 
Customer Accounts 
4-firm total 
$2,112,685,000 $18,039,203 106,463,445 
8-firm total 
$2,834,007,000 $28,402,354 158,609,487 

   
302 
 
  
   
All broker dealers 
$5,406,121,988 $97,076,632 240,153,894 
  
   
4-firm concentration 
39.08% 18.58% 44.33% 
8-firm concentration 
52.42% 29.26% 66.04% 
This table uses FOCUS data analyzed in the previous table to calculate the market share of broker dealers 
based on firm total assets, total revenue, and customer accounts.  The sum of the top four and eight firms 
for each of these variables is compared to the sum of all broker dealers for each of these three variables 
(assets, revenue, total accounts) that submitted a Form FOCUS PART II for Q2 2022.  Total accounts are 
from FOCUS Report Schedule I for Q4-2021.          
 
There is significant variation in the sources of broker-dealer revenue.  Table 22 reports 
sources of broker-dealer revenue along with the revenue as a percentage of the broker-dealer’s 
total revenue in Q1 2022.  A broker-dealer reports a source of revenue on its supplemental 
statement of income (SSOI) if it is more than 5% of its total revenue.  Larger broker-dealers tend 
to have more diversified sources of revenue than smaller broker-dealers, with the majority of 
broker-dealers with 1 billion or more in assets reporting earning revenue in a number of 
categories.  Smaller broker-dealers appear to earn more of their revenue from a limited number 
of sources, with some broker-dealers with under 10 million dollars in assets on average earning 
more than 50% of their revenue from one source.  Larger broker-dealers appear to earn more 
money from fees and interest, rebate, and dividend income.  Smaller broker-dealers appear to 
earn more money from fees and commissions and other revenue sources. 
Table 22: Sources of Broker-Dealer Revenue as a Percentage of Broker-Dealer Total Revenue by Asset Size 
 
 
Size of Broker-Dealer (Total Assets) 
Revenue Source 
Statistic >50bn 
1bn-
50bn 
500mn-
1bn 
100mn-
500mn 
10mn-
100mn 
1mn-
10mn 
<1mn 
Total Broker-Dealers Reporting Revenue 
21 100 27 127 511 1,042 1,588 
Total Commissions 
Count 
18 69 21 86 299 518 428 
Mean 
10.75% 4.28% 26.47% 27.05% 30.03% 29.40% 26.48% 
Revenue from Sale of 
Investment Company 
Shares 
Count 
11 33 6 54 166 305 375 
Mean 
0.79% 3.53% 0.40% 6.97% 6.41% 6.39% 13.80% 

   
303 
 
Total Revenue From Sale of 
Insurance Based 
Products 
Count 
9 34 5 44 145 278 320 
Mean 
0.22% 3.08% 7.65% 17.10% 24.81% 22.93% 30.67% 
Total Net Gains or Losses 
on Principal Trading 
Count 
18 80 19 66 201 224 86 
Mean 
4.40% 7.81% 16.42% 3.76% 20.16% 29.47% 50.26% 
Capital Gains (Losses on 
Firm Investments) 
Count 
8 42 11 43 123 189 141 
Mean 
-3.10% -3.41% 14.38% -7.26% -4.97% 19.70% 5.34% 
Total 
Interest/Rebate/Dividen
d Income 
Count 
21 90 22 109 370 604 520 
Mean 
43.20% 31.27% 14.99% 5.42% 4.54% 2.68% 14.05% 
Total Revenue From 
Underwritings and 
Selling Group 
Participation 
Count 
17 65 12 62 187 272 231 
Mean 
9.49% 10.67% 14.94% 18.03% 37.33% 39.07% 46.40% 
Total Fees Earned 
Count 
19 82 24 114 434 812 897 
Mean 
32.01% 37.00% 42.37% 58.92% 52.46% 56.79% 69.35% 
Other Revenue 
Count 
17 75 18 85 307 513 469 
Mean 
3.37% 1.20% 2.88% 8.96% 7.47% 16.93% 30.82% 
 
This table estimates the number of broker-dealers reporting different sources of revenue and the average percentage of the 
reported revenue source as a percentage of broker-dealer total revenue for Q2 2022 broken out into groups based on the 
broker-dealer’s total assets. The different sources of revenue and total revenue are reported by each broker-dealer during Q2 
2022 in their FINRA Supplemental Statement of Income Form (Form SSOI).  Form SSOI does not require a broker-dealer to 
report a revenue or expense section source if the revenue or expenses for that section is less than the greater of $5,000 or 5% 
of the broker-dealer’s total revenue or total expenses, as applicable. Total Assets are estimated by Total Assets (allowable and 
non-allowable) from Part II of the FOCUS filings (Form X-17A-5 Part II) from Q2 2022 and correspond to balance sheet total 
assets for the broker-dealer. 
 
 Retail brokers compete for customers by providing a range of services that assist their 
clients in transacting in securities including stocks, bonds, mutual funds, ETFs, options, futures, 
and crypto asset securities.  Retail broker services can broadly be divided into “discount brokers” 
and “full-service” brokers.  Discount brokers typically provide commission-free trading for 
online purchases of stocks and ETFs, but often charge fees for purchases of other securities, such 
as mutual funds, options, and futures.  Some discount brokers’ affiliates manage proprietary 
mutual funds and ETFs, which earn them management fees paid by the investors that purchase 
these funds.  Compared to discount brokers, “full-service” brokers charge higher commissions 
that may include compensations for other services, such as investment research and personalized 
financial guidance. 

   
304 
 
 Some brokers seek to differentiate themselves from other broker-dealers by providing 
increased access to crypto asset securities futures, forex, or fractional share trading.  Brokers also 
distinguish themselves by the accessibility and functionality of their trading platform, which can 
be geared towards less experienced or more sophisticated investors.  Discount retail brokers can 
also differentiate themselves by providing more extensive customer service as well as tools for 
research and education on financial markets.  Full-service brokers compete by developing a 
personalized broker-customer relationship and providing guidance based on the detailed 
knowledge of the customer's financial goals.  
Broker-dealers may incur costs
532
 or earn rebates in seeking to fill their customers’ 
orders.  These costs and rebates may be passed on to customers in whole or in part.  Some of 
these costs are indirect: an illiquid or unlisted security may require the broker to search for 
liquidity either by attempting multiple routings to find a counterparty, or by contacting broker-
dealers that may formally (in association with an ATS that specializes in unlisted securities) or 
informally make markets in unlisted or hard to trade securities.  For some unlisted securities, 
there may be no market maker expected to continually provide two-sided quotes. 
C. Economic Effects and Effects on Efficiency, Competition, and Capital 
Formation 
 The Commission preliminarily believes that the proposed requirements with respect to 
introducing brokers could result in better execution quality for retail customer orders to the 
                                                 
532
  Some exchanges pay rebates to orders that either provide or remove liquidity from their 
limit order books.  Some trading venues charge fees to one or both counterparties to the 
trade.   

   
305 
 
extent that the proposal leads to changes in broker-dealers’ order handling practices.   
Furthermore, the proposal would enable the Commission to exercise additional enforcement 
capabilities
533
 that the Commission believes would enhance investor protection and improve 
specific deterrence.
534
  The Commission also believes that the documentation requirement with 
respect to conflicted transactions could help enhance regulatory oversight, as well as promote 
broker-dealer compliance, and thus, improve investor protection to the extent that the 
documented information includes information or data that is not currently documented nor 
available through public or regulatory data sources.  However, the Commission lacks detailed 
data on broker-dealers’ current order handling practices and documentation practices that would 
allow it to predict the extent of changes as a result of this proposal.
535
  The Commission 
                                                 
533
  This full complement of enforcement capabilities is not available to the Commission to 
enforce FINRA rules. 
534
 See also infra section V.C.1.  
535
  Considering broker-dealers are diverse in business models and practices, the Commission 
lacks quantifiable data that summarizes how order handling data are currently 
documented, which might serve as a baseline in assessing the effects of the proposed rule.  
While CAT includes routing data for NMS securities, no similar database exists for fixed 
income or other assets covered by the proposed rules.  Although the Commission could 
discuss current routing practices through an analysis of CAT data, it would not capture 
the information set that a broker-dealer evaluated in making its routing decisions, such as 
what pricing information it had when it made the routing choice, what venues were 
considered for the order, or why those venues were considered for the order.  The 
Commission also has no information regarding the broker-dealer’s assessment as to how 
the specific customer and order characteristics affected its decision to handle a customer 
order in a certain way.  Based on its experience, the Commission believes that some 
larger broker-dealers already maintain documentation on their transactions that exceeds 
what would be required under the proposed rules, but the Commission does not know the 
extent to which other broker-dealers also maintain such documentation.  Consequently, 
some broker-dealers would incur fewer costs (and their compliance would result in fewer 
benefits) than others.   

   
306 
 
therefore cannot ascertain the extent to which these benefits would be realized, as discussed 
below.   
 The Commission preliminarily believes that the proposal would result in costs associated 
with reviewing, updating, and establishing policies and procedures, and to the extent that the 
proposal leads to changes in broker-dealers’ order handling practices, could result in costs 
associated with implementing changes to order handling practices according to the updated 
policies and procedures.  The proposed requirements for broker-dealers that engage in conflicted 
transactions could result in further changes to order handling practices, but the extent of those 
changes is unknown.  Due to the diversity of broker-dealer business models and operations and 
the lack of quantifiable data on how practices vary across broker-dealers, the Commission cannot 
reasonably estimate how many of these broker-dealers would choose to de-conflict
536
 to avoid 
the costs associated with the proposed requirements that apply solely to conflicted transactions.  
 The Commission preliminarily believes that the proposal could promote competition in 
the market for trading services (e.g., exchanges, ATSs, non-ATS trading venues) and also in the 
market for market access.  However, the Commission believes that the proposal could have 
mixed effects on competition in the market for broker-dealer services.  While it could promote 
competition among broker-dealers, especially on the basis of execution quality, it could also 
result in higher barriers to entry and potential exit of small broker-dealers.     
                                                 
536
  To de-conflict, a broker-dealer might need to deal with the treatment of exchange rebates, 
payment for order flow, or the nature of its executing brokers’ business (i.e., principal 
versus agency capacity), among other factors.
   

   
307 
 
 The Commission assesses the economic effects of the proposed amendments in NMS 
stocks relative to a regulatory baseline in NMS stocks that includes the implementation of the 
MDI Rules.
537
  Furthermore, the Commission’s analysis reflects the Commission’s assessment of 
the anticipated economic effects, including potentially countervailing or confounding economic 
effects from the MDI Rules in NMS stocks.
538
  However, given that the MDI Rules have not yet 
been implemented, they have not affected market practice and therefore data that would be 
required for a comprehensive quantitative analysis of the economic effects in NMS stocks that 
includes the effects of the MDI Rules is not available.  It is possible that the economic effects in 
NMS stocks relative to the baseline could be different once the MDI Rules are implemented. 
1. Benefits  
The Commission preliminarily believes the proposal, which incorporates and goes 
beyond the existing best execution regulatory regime set forth by FINRA and MSRB, could 
promote investor protection (e.g., better execution quality for retail customer orders) by 
facilitating regulatory oversight and enforcement.
539
  The Commission believes that benefits 
could result from, among other things, the requirements with respect to introducing brokers, the 
                                                 
537
  See supra section V.B.3.a).d. 
538
  See id. for a discussion of the Commission’s anticipated economic effects of the MDI 
Rules as stated in the MDI Adopting Release. 
539
  See the discussion of enforcement mechanisms in supra section V.B.1.a).  In enforcement 
situations limited to violations of proposed Regulation Best Execution, the Commission 
would gain the ability to i) obtain civil money penalties against defendants in injunctive 
actions; ii) order respondents to cease-and-desist and obtain related relief and sanctions;  
and iii) in situations limited to violations of proposed Regulation Best Execution 
involving broker-dealers and associated persons that would not potentially be subject to 
MSRB best execution rules, obtain relief available under Sections 15(b)(4) and (6). 

   
308 
 
documentation requirements for conflicted transactions, and additional enforcement capabilities 
of the Commission.   
The Commission preliminarily believes that the proposal would enhance investor 
protection and improve retail customer order execution quality to the extent that the proposal 
improves broker-dealers’ order handling practices.  Specifically, broker-dealers could improve 
their customer order handling practices, resulting from documentation, updates and reviews of 
both existing and the best execution policies and procedures that would be required under the 
proposal including the reductions in conflicts of interest when handling retail customer orders.  
The Commission also believes the proposal would enhance investor protection by enabling the 
Commission to exercise additional enforcement capabilities and improving specific deterrence 
through the ability to bring injunctive actions for violations of this rule, issue cease-and-desist 
proceedings for allegations of violations of this rule, and, among other things, order remedial 
actions and sanctions against a broader group of registered persons pursuant to Exchange Act 
Section 15(b)(4) for willful violations of this rule.  Furthermore, improvements in investor 
protection could result from increased documentation requirements for conflicted transactions, 
particularly in fixed income and thinly traded non-NMS stock equity securities.  The extent of 
this improvement depends on whether the documented information include information or data 
that is neither currently documented nor available through public or regulatory data sources.  The 
proposed documentation requirement would help facilitate the Commission’s and SRO’s 
enforcement and examinations, as well as promote broker-dealer compliance, and thus, result in 
better investor protection. 
The Commission preliminarily believes the proposal could lead to changes in order 
handling practices, and in turn, improve the execution quality of retail customer orders, through 

   
309 
 
four mechanisms.  First, the proposal would require that introducing brokers that route their 
orders to executing brokers compare that broker’s execution quality to what might have been 
received from competing executing brokers.
540
  The Commission believes that some broker-
dealers that currently rely on executing brokers already compare their executing broker’s 
execution quality to the execution quality of competing executing brokers, so these broker-
dealers are unlikely to be affected by this element of the proposal.  Introducing brokers that do 
not currently implement rigorous comparison of executing brokers are expected to adjust their 
routing practices in response to this newly required analysis, or justify in their policies and 
procedures how they fulfill their best execution duties in light of these analyses.  Because 
FINRA’s and MSRB’s current policies and procedures requirements do not require this level of 
detail, the Commission cannot ascertain how many brokers already conduct such a comparison 
with alternative executing brokers and how many would need to make adjustments.  However, 
any such adjustments could improve the execution quality that retail customers receive for their 
orders. 
                                                 
540
  While FINRA Rule 5310.09(c) allows an introducing broker, instead of conducting its 
own regular and rigorous review, to review the methodology and results of its executing 
broker’s regular and rigorous review of its execution quality on a quarterly basis, it does 
not specifically require the introducing broker to compare the execution quality of its 
executing broker to what it would have received from other executing brokers.  See supra 
section V.B.2.a) for a discussion on introducing broker best execution review 
requirements.  See also FINRA Rule 5310.09(c), Regular and Rigorous Review of 
Execution Quality. 

   
310 
 
Second, the Commission preliminarily believes that the proposal’s heightened standards 
for conflicted transactions could lead to improved prices for retail customers.
541
  Under the 
proposal, broker-dealers that handle retail customer orders and that choose to accept PFOF, to 
participate in transactions on a principal basis, or to route to affiliated broker-dealers that execute 
orders would be subject to heightened standards.  In response to this proposed requirement, the 
Commission believes that some broker-dealers that route to executing broker dealers that engage 
in conflicted transactions could seek to remove such conflicts, for example by no longer 
accepting payment for order flow or selecting executing brokers that do not execute on a 
principal basis.
542
  The Commission also believes that executing brokers (e.g., wholesalers) in 
NMS stocks and options could adjust their order handling practices under the proposal in 
anticipation of increased execution quality analysis by retail broker-dealers, from whom they 
receive order flow.  These executing brokers in NMS stocks and options that routinely pay for 
retail order flow and/or engage with it on a principal basis could adjust their order handling 
practices to access additional venues to seek midpoint liquidity, additional price improvement, or 
offer more price improvement to the orders routed by those retail broker-dealers.
543
  Although 
the Commission cannot quantify the degree of reduction in conflicted transactions that would 
occur under the proposal because it cannot predict how individual broker-dealers would adjust 
                                                 
541
  See supra section IV.C about the discussion for the requirements involving conflicted 
transactions for retail orders and supra sections V.C.2.a and V.C.2.b.i describing the 
conflicts of interest in retail order handling. 
542
  See infra section V.C.2 for the discussion about costs of broker-dealer efforts to de-
conflict versus comply with requirements of conflicted transactions. 
543
  See infra section V.C.2.b for the discussion of wholesaler costs with respect to conflicted 
transactions. 

   
311 
 
their business models to comply with the proposal, the Commission preliminarily believes that 
any resulting reduction in conflicted transactions could improve the prices retail customers 
realize for their transactions.  That said, the Commission acknowledges that some retail 
customers could pay more for their transactions when in reducing its conflicted transactions, a 
broker-dealer changes order handling practices to route to destinations, which may not always 
provide the same price improvement that was previously realized for conflicted transactions.  
Third, the Commission preliminarily believes the proposal could result in better 
execution quality for retail customer orders to the extent that the proposal leads to changes in 
broker-dealers’ order handling practices.  Compared to the FINRA and MSRB rules, the 
Commission believes that the proposal would require greater specificity in the policies and 
procedures with respect to best execution.  Upon reviewing its existing policies and procedures, a 
broker-dealer could be required to update its policies and procedures to comply with the 
proposed requirements.  To the extent that updated policies and procedures would require 
corresponding changes in order handling practices, the broker-dealer would adjust its order 
handling practices for retail customer orders.  The Commission acknowledges that many broker-
dealers currently may have order handling practices that are consistent with the requirements 
under the proposed Rule 1101(a).
544
  In this case, the Commission does not expect the order 
handling practices of these broker-dealers to change.
545
  On the other hand, many broker-dealers 
                                                 
544
  See infra section IX for proposed Rule 1101(a). 
545
  As previously discussed in supra section IV.B, the factors that must be included in a 
broker-dealer’s policies and procedures under proposed Rule 1101(a) are generally 

   
312 
 
could be required to adjust order handling practices, including conducting more detailed reviews 
of their practices, under the proposal.  However, the Commission lacks detailed information on 
broker-dealers’ current policies and procedures with respect to best execution standards and 
order handling practices to determine how many broker-dealers would be required to change 
their order handling practices under the proposal.
546
 
Fourth, the Commission preliminarily believes that the proposal could help ensure the 
effectiveness of broker-dealers’ best execution policies and procedures, and thus, result in better 
execution quality for retail customer orders to the extent that the requirements under the 
proposed Rule 1102 enhances broker-dealers’ current review process with respect to order 
handling practices.  The Commission acknowledges that many broker-dealers currently may 
conduct reviews that are consistent with the requirements under the proposed Rule 1102, which 
includes a specific requirement to review order handling practices.  In this case, the Commission 
does not expect the order handling practices of these broker-dealers to change, and there would 
thus be no change in execution quality for their retail customer orders. 
The Commission does not believe that the order handling practices or execution quality 
of institutional customer orders would be significantly impacted by the proposal.  The 
Commission understands that institutional customers often utilize multiple broker-dealers in the 
handling of their orders, which lowers the costs of switching brokers if they exhibit poor 
                                                 
consistent with the factors that FINRA and the MSRB have identified as relevant to a 
broker-dealer’s best execution determinations. 
546
  See supra note 535 for the discussion about data availability on broker-dealers’ current 
order handling practices. 

   
313 
 
execution quality.  Furthermore, in general, the Commission believes that there is less conflict in 
institutional customer order handling because institutional customers have better access 
(compared to retail customers) to data, which they utilize to monitor and analyze the execution 
quality that various broker-dealers offer.
547
  The Commission believes that (compared to retail 
brokers) institutional monitoring and lower switching costs encourage broker-dealers to provide 
increased execution quality in order to compete to attract institutional orders.  Thus, the 
Commission does not expect that broker-dealers would make significant adjustments to their 
order handling practices for institutional customer orders under the proposal. 
a) NMS Stocks and Options 
The Commission preliminarily believes the proposed documentation requirement with 
respect to conflicted transactions could result in benefits in the NMS stock and options markets.  
However, a significant amount of information that would help reconstruct market conditions 
(e.g., NBBO, size at NBBO, trade prices, volume, order level information in CAT) around the 
time of conflicted transactions is currently available through public and regulatory data sources 
(e.g., SIP, CAT, OPRA), so those benefits may be small.  To the extent that the documented 
information includes information that is not currently documented nor available through public 
or regulatory data sources , the proposed documentation requirement would help promote broker-
dealer compliance and facilitate enforcement and examination, and thus, result in better investor 
protection.  Furthermore, the Commission believes that any additional documentation could 
                                                 
547
  The Commission understands that institutional customers also utilize third-party vendors 
to conduct transaction cost analysis and evaluate the performance of their broker-dealers 
based on those reports.  See also supra section V.B.3.e) for a discussion about 
institutional customer order handling practices. 

   
314 
 
enhance internal review process (e.g., a review by the best execution committee).  Documented 
information could inform broker-dealers in adjusting order handling procedures with respect to 
conflicted transactions, which would result in better execution quality. 
The Commission preliminarily believes that retail customer execution prices in NMS 
stocks and options could improve to the extent that there is a trade-off between the amount of 
PFOF a retail broker receives and the price improvement, which wholesalers provide to its 
customers’ orders.
548
  Under the proposal, retail broker-dealers accepting PFOF would be subject 
to the proposed Rule 1101(b), which would require a broker-dealer to establish additional 
policies and procedures and retain certain documentation with respect to conflicted 
transactions.
549
  The proposed Rule 1101(b) would also require them to document any 
arrangement, whether written or oral, concerning PFOF, including the parties to the arrangement, 
all qualitative and quantitative terms concerning the arrangement, and the date and terms of any 
changes to the arrangement.  Additionally, broker-dealers that accept PFOF would not qualify as 
introducing brokers under the proposed Rule 1101(d), which otherwise would permit these 
broker-dealers to rely on their executing broker’s compliance with the proposed Rules 1101(a), 
(b), and (c).
550
  Some broker-dealers, particularly those with business models that do not rely 
                                                 
548
  See supra section V.B.3.a).b. 
549
  See supra section IV.C. 
550
  Under proposed Rule 1101(d), principal trades by an executing broker with the 
introducing broker’s customer to fill fractional share orders in NMS stocks would be 
considered to be handled on an agency basis, and thus, allow it to rely on its executing 
broker’s compliance with the proposed Rules 1101(a), (b), and (c).  See supra section 
IV.E. for a discussion on proposed Rule 1101(d) and supra section V.B.3.a).i.d for 
additional discussion on fractional share orders in NMS stocks.   

   
315 
 
extensively on payment for retail order flow, could elect to pass any PFOF on to customers 
rather than complying with provisions of the proposal that apply only to broker-dealers that do 
not qualify for the relief provided to introducing brokers.
551
   
The requirement for a broker-dealer to engage in additional due diligence if it engages in 
a conflicted transaction for or with a retail customer order could improve execution quality to the 
extent the requirement promotes competition between broker-dealers to provide best execution to 
retail broker-dealers that continue to accept PFOF.  Because the proposal would require these 
retail broker-dealers to document their compliance with the best execution standard for 
conflicted transactions, including all efforts to enforce their best execution policies and 
procedures for conflicted transactions and the basis and information relied on for their 
determinations that such conflicted transactions would comply with the best execution standard, 
broker-dealers that pay for order flow could be incentivized to both improve the execution prices 
of orders routed to them for execution and to provide more information to broker-dealers routing 
to them, allowing those broker-dealers to improve their customers’ execution prices and more 
easily comply with the provisions of the proposal that require more extensive documentation of 
their best execution standards.   
To the extent broker-dealers that receive PFOF change their order handling practices to 
comply with the heightened standards in the proposal, these changes are likely to reduce the 
                                                 
551
  As explained in supra note 183, when all payment for order flow for a customer order 
from a particular market is passed through to the customer and the broker-dealer retains 
no part of the payment for order flow associated with that customer order, the broker-
dealer would not be engaging in a conflicted transaction under proposed Rule 1101(b) 
with respect to that customer order.  See also infra section V.C.2.a for the discussion 
about the costs of broker-dealer efforts to de-conflict versus comply with requirements of 
conflicted transactions. 

   
316 
 
profitability of their business model because the orders they are routing may be more likely to be 
executed on venues that charge for providing liquidity, or do not provide compensation for order 
flow, or that provide compensation that is less than what these broker-dealers could realize by 
internalizing order flow, or routing elsewhere under existing procedures.  Faced with potentially 
lower revenues from changing order handling procedures, broker-dealers that pay to receive 
order flow could choose to make few or no changes to their routing practices and could instead 
focus on maintaining arrangements with specific broker-dealers
552
 (from whom they are already 
receiving orders or could determine that their current PFOF arrangement meets the requirements 
under the proposal) to meet their obligations under the proposal without significant changes.  
Some broker-dealers that make payments for order flow could compete on the basis of providing 
service and information to their broker-dealer customers that help those broker-dealers satisfy 
their own requirements under the proposal, such as providing additional information on routing 
practices and data on how they provide the best execution possible.  Competition between these 
broker-dealers could foster innovation that improves prices received by retail customer orders 
executed under PFOF agreements. 
                                                 
552
  See infra section V.C.2.a for the discussion of how broker-dealers who route to other 
broker-dealers for execution may choose to comply with the proposal.  The Commission 
recognizes that it is possible under the proposal that these broker dealers would reduce 
their payments for order flow because broker-dealers who route orders to them may 
choose to stop accepting PFOF in order to meet the definition of “introducing broker” in 
proposed Rule 1101(d).  However, the Commission preliminarily believes this would not 
increase the profitability of broker-dealers that currently pay to receive order flow 
because presumably their payments to secure order flow are less than the profits they earn 
to execute that order flow often in a principal capacity. 

   
317 
 
 With respect to listed options, the Commission preliminarily believes that retail order 
execution quality could improve to the extent that the proposal results in broker-dealers adjusting 
their customer order handling practices consistent with the heightened standards required of 
conflicted transactions.
553
  Some broker-dealers that handle retail options orders and engage in 
conflicted transactions, such as executing orders on a principal basis or routing to affiliates, may 
adjust their routing practices to access additional venues or consider additional opportunities for 
price improvement.  This could be driven both by the requirements of proposed Rule 1101(b) to 
consider additional opportunities for price improvement and in anticipation of increased 
execution quality analysis by other broker-dealers, for whom they route orders.  For example, 
these broker-dealers may adjust their routing practices to further consider the possibilities of 
exposing a smaller customer order of 5 contracts or less for price improvement opportunities in 
auctions or look for liquidity within the NBBO spread instead of routing the customer order to a 
venue that would allow a market maker to internalize 100% of a given customer order with 5 
contracts or less on the limit order book at the best displayed prices without competition from 
other liquidity providers.
554
  Additionally, broker-dealers may route more customer orders to 
price improvement auctions that are more competitive rather than ones that provide the broker-
dealer a better chance at internalizing a larger share of the customers’ orders.  Furthermore, with 
regards to non-marketable limit orders, broker-dealers may consider routing more orders to 
                                                 
553
  See supra section IV.C about the discussion for the requirements involving conflicted 
transactions for retail orders and supra Sections V.C.2.a and V.C.2.b.i describing the 
conflicts of interest in retail order handling. 
554
  See supra section V.B.3.a).ii for discussion of the handling of retail orders in the options 
markets. 

   
318 
 
exchanges that have higher likelihood of executions in the form of fill rates and average shorter 
time to execution rather than to the exchanges that pay the highest liquidity rebates. 
b) Fixed Income Securities 
 The Commission preliminarily believes that the proposed documentation requirement 
with respect to conflicted transactions could facilitate regulatory oversight and enforcement and 
promote broker-dealer compliance with best execution standards, promoting investor protection 
in the fixed income securities markets.  For introducing brokers that utilize trading services of 
executing brokers, the requirement to review and compare execution quality of various executing 
brokers could result in better execution quality for retail customer trades to the extent that 
brokers choose to change their executing brokers to those that offer better execution quality.  In 
general, the proposal would improve execution quality to the extent that the proposal results in 
enhancements to broker-dealers’ order handling procedures.  The extent to which customer order 
execution quality would improve depends on how many and to what extent broker-dealers would 
adjust their order handling procedures as a result of this proposal.  However, the Commission 
cannot ascertain the extent to which this benefit would be realized because the Commission lacks 
data on how many broker-dealers would change order handling procedures in response to the 
proposal.   
 For very illiquid fixed income securities, execution quality improvement resulting from 
changes in order handling procedures with respect to conflicted transactions could be limited.  
Because a broker-dealer transacting in illiquid fixed income securities will only have a few 
potential counterparties, exposing retail orders to a greater number of trading venues (e.g., 
through RFQs) may not result in more responses nor more competitive responses.  On the other 
end of the spectrum, the Commission expects little impact on the execution quality of on-the-run 

   
319 
 
U.S. Treasury securities because transaction costs for such securities are already low.  The 
impact is most likely to materialize in fixed income securities that have moderate liquidity, as 
discussed further below.  
 The Commission preliminarily believes that the documentation requirement for 
conflicted transactions under the proposal could facilitate regulatory oversight and promote 
broker-dealer compliance with best execution standards, promoting investor protection in the 
fixed income securities markets.
555
  To the extent that broker-dealers do not currently document 
efforts to obtain the most favorable price in conflicted transactions, these broker-dealers would 
be required to document such information.  Compared to the markets for equities and listed 
options where quotes and trades are widely disseminated, in most fixed income markets only 
transactions are reported and disseminated publicly.  The extent to which the proposed 
documentation requirement would help facilitate regulatory oversight depends on the types of 
documented information.  To the extent that the documented information includes information or 
data that is not currently documented nor available through public or regulatory data sources, 
such as the markets checked, internal and external quotes, and other factors (e.g., trading 
protocols, prices, immediacy, trade size) considered for the basis of best execution, the proposed 
documentation requirement would help facilitate regulators’ enforcement and examination of a 
broker-dealer for compliance, and thus, result in better investor protection.  Furthermore, the 
Commission believes that documentation could enhance internal review process (e.g., a review 
                                                 
555
  FINRA members are currently required to conduct regular and rigorous review of 
execution quality under FINRA Rule 5310.09.  However, the Commission does not know 
the types of information that broker-dealers document for the purpose of regular and 
rigorous review of execution quality under FINRA Rule 5310 and MSRB Rule G-18.  

   
320 
 
by best the execution committee).  Documented information could inform the broker-dealer in 
adjusting order handling procedures with respect to conflicted transactions, which would result 
in better execution quality.  
 The Commission preliminarily believes that the execution quality of retail customer 
trades in fixed income securities effected by brokers that qualified for relief under the 
FINRA/MSRB rules by relying on their executing brokers for trading services could improve.  
Under the proposal, introducing brokers,
556
 as defined in proposed Rule 1101(d), and carrying 
brokers that currently avail themselves of the relief under the FINRA/MSRB rules and hence rely 
on their executing brokers for retail customer trading services, would be required to review and 
compare the execution quality of their executing brokers with the execution quality they might 
have obtained from other executing brokers and adjust their routing practices accordingly.
557
  To 
the extent that some of these brokers change their executing brokers for trading services to those 
that offer better execution quality, retail customer trades of the brokers would receive better 
execution quality.
558
  Furthermore, the requirement to review and compare execution quality of 
                                                 
556
  These brokers are non-carrying brokers that qualified for relief under the FINRA/MSRB 
rules. 
557
  Carrying brokers that qualified for relief under the FINRA/MSRB rules would not have 
relief from the requirements of the proposal unless these brokers restructure their 
business to become non-carrying brokers.  Under the proposed rule 1101(c) with respect 
to regular review of execution quality, these carrying brokers would be required to review 
and compare the execution quality of their executing brokers with the execution quality 
they might have obtained from other executing brokers, and adjust their order handling 
and routing practices accordingly. 
558
  The Commission acknowledges that some brokers could already be reviewing and 
comparing the execution quality, of which various executing brokers offer, in the 
selection of their executing brokers. 

   
321 
 
executing brokers could promote competition among executing brokers, which could result in 
better execution quality for retail customer trades.
559
 
The Commission preliminarily believes that the proposed requirements with respect to 
conflicted transactions could result in better execution quality for internalized trades in fixed 
income securities.
 
  To the extent that broker-dealers make changes to order handling procedures 
(upon reviewing and comparing execution quality across competing markets) and connect to 
additional trading venues to expose retail customer orders (e.g., via RFQs and BWICs) more 
broadly across multiple trading venues for the purpose of internalization, the execution quality of 
internalized trades could improve.  Sending RFQ messages more broadly across multiple trading 
venues may result in better execution quality for internalized trades if a broader exposure of 
customer order results in more competitive prices for the purpose of internalization (i.e., price-
matching using more competitive price).  For example, exposing a customer order via RFQs on 
multiple trading venues could result in more competitive responses to be used as the reference 
price to match or improve for the purpose of internalization.  However, to the extent that broker-
dealers continue to engage in last-look practices in RFQs for the purpose of internalization, 
conducting RFQs on more trading venues may not necessarily result in more responses nor more 
competitive responses as discussed below.           
To the extent that a broker-dealer determines, upon reviewing data, that the use of last-
look in RFQs impedes attracting competitive responses, the broker-dealer could discontinue last-
look practices or limit the use of last-look to meaningfully improve price in an occasion when 
                                                 
559
  Executing brokers would compete on, among other things, fees, markups/markdowns, 
and the quality of trading services. 

   
322 
 
RFQ responses are not reflective of the market.  For example, a broker-dealer handling a retail 
customer order may participate in an RFQ by blind bidding/offering and internalize the order 
only if the broker-dealer is the best bid/offer in the RFQ, or otherwise give up the order to 
another responder with the best bid/offer.  Such RFQ practice could attract more competitive 
responses thereby improving the execution quality of internalized trades via RFQs.
560
  However, 
the Commission believes that this benefit is not likely to be realized.  Broker-dealers would 
continue to use last-look in conducting RFQs for the purpose of internalization so long as such 
internalization practice continues to provide profit incentive for those broker-dealers.    
In order to justify the continued use of last-look in fixed income securities trading, 
broker-dealers could provide meaningful price improvement by exercising last-look in RFQs for 
the purpose of internalization, which would result in better execution quality.  To the extent that 
a broker-dealer’s review or assessment reveals that the use of last-look in RFQs impedes 
attracting competitive responses, the broker-dealer could respond by providing price 
improvements to the best response bids/offers to compensate for receiving less competitive 
bids/offers in RFQs as compared to, for instance, in a blind auction as described above.
  
    
Broker-dealers’ assessment of last-look practices in fixed income securities trading may 
not affect execution quality for internalized trades via RFQs.  Unless a broker-dealer’s review or 
assessment shows a negative impact of last-look practices on the execution quality of 
internalized trades, the Commission does not expect the broker-dealer to alter nor discontinue 
                                                 
560
  See infra section V.C.2.b for the discussion about how the proposal might adversely 
impact market liquidity.  The Commission preliminarily believes that this benefit in the 
execution quality improvement for retail customer trades may be reduced to the extent 
that eliminating last-look practices in RFQ for the purpose of internalization adversely 
affects the principal trading activities of inventory carrying broker-dealers. 

   
323 
 
last-look practices in RFQs for the purpose of internalization.  If the broker-dealer makes no 
changes, the rule would produce no improvement in the execution quality for internalized trades 
via RFQs.  Specifically, in exercising last-look, a broker-dealer that currently applies trade desk 
spreads (in the form of markdown/markup) to external bids/offers but not to internal bids/offers, 
which results in more favorable comparisons for the internal bids/offers, to win RFQs, may 
continue to apply such practice so long as the execution quality of external trades would be 
worse than that of internalized trades. 
The Commission preliminarily believes that the proposed requirements with respect to 
conflicted transactions could result in better execution quality for riskless principal trades in 
fixed income securities.  To the extent that broker-dealers make changes to order handling 
procedures (upon reviewing and comparing execution quality across competing markets) and 
connect to additional trading venues in order to search or expose retail customer orders more 
broadly across multiple trading venues, the execution quality of riskless principal trades for retail 
customers could improve.  Broker-dealers could increase the use of RFQs across multiple trading 
venues to expose retail customer orders in order to obtain competitive prices.  Furthermore, as 
another way to expose retail customer orders more broadly, broker-dealers could represent retail 
customer orders on limit order systems across multiple trading venues.  For example, in case of a 
retail customer sell order, instead of conducting an RFQ on the bid side of the market, a broker-
dealer could represent the customer order by placing a limit order on the offer side of the market 
for certain fixed income securities (e.g., liquid on-the-run Treasury securities, liquid corporate 
debt securities) should the broker-dealer determine that the characteristics of the customer order 
are consistent with this type of order handling (e.g., the customer is not demanding immediacy of 
execution).  This would lower transaction costs of the retail customer because this customer 

   
324 
 
would not pay the bid ask spread if the order is executed at the offer price (compared to 
executing at the bid price obtained via an RFQ). 
In response to the proposed requirements with respect to conflicted transactions, retail 
broker-dealers could stop executing retail customer fixed income securities orders on a riskless 
principal basis.  To the extent that it is more cost effective for broker-dealers to handle retail 
customer orders on an agency basis rather than a riskless principal basis under the proposal, 
broker-dealers could change business practices to handle retail customer orders on agency basis 
and not incur the costs associated with the requirements under conflicted transactions (e.g., 
trading venue subscription fees and implementation costs associated with changing order 
handling procedures).
561
  In such case, execution quality may not change.  In particular, a broker-
dealer, whose primary business is retail self-directed trading conducted on riskless principal 
basis, could change its business practices to handle retail self-directed trading on agency basis to 
the extent that conducting its self-directed trading business on an agency basis would be less 
costly compared to doing so on a riskless principal basis. 
c) Non-NMS Stock Equity Securities 
There are three possible channels through which benefits of the proposal to the non-NMS 
stock equities market may derive: 1) requirements with respect to conflicted transactions; 2) the 
regular review of execution quality of executing brokers used by introducing brokers; and 3) 
                                                 
561
  See infra section V.C.2.a) for discussions about trading venue subscription fees and costs 
associated with making changes to order handling procedures. 

   
325 
 
some broker-dealers implementing policies and procedures to comply with this proposal, which 
may offer improved execution quality to transactions effected by these broker-dealers.
562
  
The Commission preliminarily believes that the documentation requirement with respect 
to conflicted transactions could help facilitate regulatory oversight and enforce  ment, as well as 
promote broker-dealer compliance, and thus, enhance investor protection in the non-NMS stock 
equity securities market.  To the extent that the documented information includes additional 
information beyond what broker-dealers currently record, and which may not be currently 
available through public or regulatory data sources (e.g., CAT), such as non-firm quotes on 
trading venues and factors (e.g., immediacy, trade size) considered for the basis of best 
execution, the proposed documentation requirement would help facilitate Commission and SRO 
enforcement and examinations, and thus, result in better investor protection.  Similarly, the 
Commission believes that documentation could enhance the internal review process (e.g., a 
review by best execution committee).  Documented information could inform broker-dealers in 
adjusting order handling procedures with respect to conflicted transactions, which could result in 
better execution quality. 
The proposal would require additional policies and procedures, beyond FINRA Rule 
5310 and related FINRA notices
563
 that currently address non-NMS stock equities transactions, 
                                                 
562
  See section V.C.1 introduction for more explanation of the general benefit to execution 
quality that retail customers could experience.  In the non-NMS stock equity securities 
market, the Commission believes a majority of transactions would be subject to the 
Conflicts of Interest provisions in proposed Rule 1101(b); however, there may be some 
broker-dealers who could improve execution quality while implementing policies and 
procedures as explained in section V.C.1. 
563
  See supra section II.C for details on FINRA rules and notices with respect to the concept 
of “best execution.” 

   
326 
 
when engaging in transactions that are executed in a principal capacity, routed to an affiliate for 
execution, or involve PFOF.  Conflicted transactions are ubiquitous in the non-NMS stock 
equities market.  These enhanced policies and procedures may induce broker-dealers to more 
carefully consider and change routing behavior in handling customer orders.  While this proposal 
does not mandate changes, the changes could arise as broker-dealers are required to maintain 
policies and procedures that dictate the handling of conflicted transactions.  In some cases, this 
could induce broker-dealers to reduce or eliminate conflicted transactions they participate in due 
to heightened costs of procedures, such as the documentation requirement.  While in other cases, 
there could be no such inducement of broker-dealers to change order routing behavior.  Trading 
in non-NMS stock equity securities is heavily concentrated in two platforms; however, there are 
other sources of liquidity beyond those two.  This proposal could induce broker-dealers to 
connect to additional liquidity sources due to the requirements of conflicted transactions of this 
proposal.  To the extent that broker-dealers’ e nhanced policies and procedures determine that 
they should connect to additional liquidity sources for conflicted transactions, customers’ 
transaction costs could be lowered through better prices found on the additional sources.
  
Additionally, to the extent that broker-dealers are either no longer routing to wholesalers or 
internalizing orders based on policies and procedures that resulted in different routing decisions, 
customer orders could experience price improvement opportunities, as their orders would be 
exposed to external competition.  
Introducing brokers, as defined in proposed Rule 1101(d), would be required to conduct 
regular reviews of executing brokers they use for their retail customer transactions. This review, 

   
327 
 
which differs from the quarterly review
564
 required by FINRA Rule 5310 for all brokers, could 
cause introducing brokers to seek out additional executing brokers to develop business 
relationships with.  These additional options, from which introducing brokers could choose to 
route their customer orders, could promote competition among executing brokers in the non-
NMS stock equities market.  This increased competition could result in better execution quality 
to the introducing brokers’ retail customers in the form of lower transaction costs and increased 
fill rates for illiquid securities.  
d) Crypto Asset Securities
565
 
As mentioned above in Section V.B.3.c, the Commission lacks data on broker-dealer 
routing behavior, the frequency of crypto asset securities trading in both non-conflicted and 
conflicted transactions, and many details of trading protocols and crypto asset securities trading 
platforms.  Also, as noted in Section V.B.3.c, this market features many vertically integrated 
                                                 
564
  When transacting in municipal securities, broker-dealers are subject to MSRB Rule G-18.  
The rule requires an annual review of policies and procedures, which could take into 
account execution quality review.  The rule in this proposal is substantively different 
from FINRA Rule 5310 or MSRB Rule G-18. 
565
  For purposes of measuring the benefits and costs of the proposed rule on a broker-
dealer’s duty of best execution in the crypto market, this analysis assumes that market 
participants are compliant with existing applicable Commission, FINRA, and MSRB 
rules, including those directly addressing the duty of best execution for the handling and 
execution of customer orders in securities and government securities.  See supra section 
III.A.3.  To the extent that some entities engaged in broker-dealer activities with regard to 
crypto asset securities are not FINRA or Commission registered entities, they may incur 
additional costs to comply with existing registration obligations that are distinct from the 
costs associated with the proposed rule and are not discussed in this analysis.  Similarly, 
any benefits from coming into compliance with existing registration obligations are also 
not discussed in this analysis.  See id. 

   
328 
 
trading platforms, which makes analogous comparison to other asset markets less exact.  To the 
extent that broker-dealers operate in a fashion similar to other asset markets,
566
 the Commission 
preliminarily believes the proposal could drive benefits in the crypto asset securities market 
through three possible channels: 1) the requirements with respect to conflicted transactions; 2) 
the regular review of execution quality of executing brokers used by introducing brokers
567
; and 
3) some broker-dealers implementing policies and procedures to comply with this proposal, 
which could offer improved execution quality to all transactions conducted by these broker-
dealers.  
The Commission preliminarily believes that the documentation requirement with respect 
to conflicted transactions could help facilitate regulatory oversight and enforcement, as well as 
promote broker-dealer compliance, and thus, enhance investor protection in the crypto asset 
securities market.  To the extent that documented information includes information or data that is 
not currently documented nor available through public or regulatory data sources, the proposed 
documentation requirement would help facilitate enforcement and examination, and thus, result 
in better investor protection.  Furthermore, the Commission believes that documentation could 
enhance internal review process (e.g., a review by the best execution committee).  Documented 
                                                 
566
  The Commission preliminarily believes the closest market comparison may be the non-
NMS stock equity securities market; though, no exact comparison to any other asset 
market is likely with crypto asset securities. 
567
  The Commission understands the crypto asset securities market has several large, 
vertically integrated platforms.  The Commission lacks the data to determine whether 
entities analogous to introducing brokers are prevalent in this market.  However, the 
discussed benefits are those which the Commission believes could accrue in cases where 
such market structure exists. 

   
329 
 
information could inform broker-dealers in adjusting order handling procedures with respect to 
conflicted transactions, which would result in better execution quality. 
The proposal would also require written policies and procedures beyond those required 
under FINRA Rule 5310,
568
 when engaging in transactions that are executed in a principal 
capacity, routed to an affiliate for execution, or involve PFOF.  While this proposal does not 
mandate changes, the enhanced policies and procedures required by this proposal may induce 
brokers to more carefully consider and change routing behavior in handling customer orders.  
Specifically, as broker-dealers are directed to write and maintain policies and procedures that 
dictate the handling of currently conflicted transactions, they may review their existing routing 
behavior.  In some cases, this could induce broker-dealers to reduce or eliminate conflicted 
transactions, in which they participate due to heightened costs of procedures, such as the 
documentation requirement. To the extent that broker-dealers with enhanced policies and 
procedures determine that they should connect to additional liquidity sources for conflicted 
transactions, investors’ transaction costs could be lowered through better prices being found on 
the additional sources.  Additionally, to the extent that broker-dealers are either no longer routing 
to wholesalers or internalizing based on policies and procedures that resulted in different routing 
decisions, customer orders could experience price improvement opportunities, as their orders 
would be exposed to external competition.  
                                                 
568
  See supra section II.C for details on FINRA rules and notices surrounding the concept of 
“best execution.” 

   
330 
 
Introducing brokers,
569
 as defined in the proposed Rule 1101(d), would be required to 
conduct regular review of executing brokers they use to for their customer transactions. This 
review, which differs from the quarterly review
570
 required by FINRA Rule 5310 for all brokers, 
could cause introducing brokers to seek out additional executing brokers with whom to develop 
business relationships.  These additional options, from which introducing brokers could choose 
to route their customer orders, could promote competition among executing brokers in the crypto 
asset securities market.  This increased competition could result in better execution quality to the 
introducing brokers’ retail customers in the form of lower transaction costs and increased fill 
rates for illiquid securities.  
2. Costs 
In order to comply with the proposal, broker-dealers would collectively incur costs to: 
update their policies and procedures; review and update those policies and procedures annually; 
conduct and document regular reviews of best execution compliance; and possibly make 
operational changes in response to those regular reviews.  Assuming all broker-dealers will need 
to perform each of these activities and do not do so already, and do not have policies and 
procedures in place that would be consistent with the proposed rules, the Commission estimates 
                                                 
569
  As noted in the introduction of this section, the Commission lacks data on broker-dealer 
activities in this market.  In this instance, the Commission does not have data on the 
prevalence of introducing brokers in the crypto asset securities market. This discussion 
applies to the extent these entities operate in this market. 
570
  When transacting in municipal securities, broker-dealers are compelled by MSRB Rule 
G-18.  The rule requires an annual review of policies and procedures, which could take 
into account execution quality review.  The rule in this proposal is substantively different 
from FINRA Rule 5310 or MSRB Rule G-18. 

   
331 
 
one-time compliance costs of up to $165.4 million and annual costs of $128.9 million.  To the 
extent that broker-dealers already have policies and procedures and practices that are consistent 
with the proposed rules, aggregate implementation costs would be less than these estimates, and 
based on the Commission’s experience, the Commission preliminarily believes these estimates 
overstate costs broker-dealers would bear in implementing the proposed rules.
571
     
The proposal would entail other costs as well, as discussed below.  Where possible, the 
Commission has attempted to estimate these costs.  Other costs are discussed qualitatively.  The 
Commission believes it is likely these costs would be passed to broker-dealer customers, and 
would ultimately be borne by customers. 
a) Compliance Costs for Broker-Dealers 
i. Carrying Broker-Dealers 
Under the proposal, broker-dealers would fall into three groups: 1) those that qualified for 
relief from the FINRA Regular and Rigorous Review of Execution Quality under FINRA Rule 
                                                 
571
  The one-time costs average $47,298 per broker-dealer; ongoing costs average $36,843 
per broker-dealer annually.  Again, these estimates assume that all broker-dealers will 
need to implement new or updated policies and procedures or practices to be consistent 
with the proposed rules.  Based on its experience, the Commission preliminarily believes 
that some broker-dealers may already have policies and procedures and other practices 
that are consistent with proposed Rule 1101.  If, for example, all 3,273 of the broker-
dealers that the Commission estimates would choose to not engage in conflicted 
transactions have policies and procedures and other practices consistent with proposed 
Rule 1101, the aggregate total cost of the proposal to all broker-dealers would be $38.8 
million in one-time costs and $48.1 million in annual costs.  Because not all broker-
dealers are likely to already have policies and procedures and other practices that are 
consistent with proposed Rule 1101, aggregate implementation costs would be higher 
than these estimates.  Accordingly, it is likely that actual costs would fall between these 
estimates and those cited above. 

   
332 
 
5310.09(c) from primary analysis requirements under FINRA/MSRB rules previously and would 
meet the introducing broker requirements to qualify for the proposed relief under proposed Rule 
1101(d);
572
 2) those that did not qualify for relief under FINRA Rule 5310.09(c) and would not 
qualify for the proposed relief under proposed Rule 1101(d); and 3) those that qualified for relief 
under FINRA Rule 5310.09(c) previously but would not qualify for the proposed relief under 
proposed Rule 1101(d).  The third group, which may include as many as 144
573
 broker-dealers 
that carry customer accounts, would be required under the proposed rule to comply with the 
policies and procedures and regular review provisions of proposed Rules 1101(a), (b), and (c) 
because these broker-dealers would not qualify for the introducing broker exemption (because 
they carry customer accounts).  Under the proposal, a broker-dealer that qualified for relief under 
FINRA Rule 5310.09(c) that does not meet the definition of introducing broker under proposed 
Rule 1101(d) would be required to incur costs to set up their own best execution policies and 
procedures, and it would likely no longer be able to rely on an executing broker for its analysis 
of execution quality, unless the broker-dealer were to revise their business model to no longer 
carry customer accounts.  The Commission’s cost estimates below assume that all broker-dealers 
will implement this review under the proposal.  Based on the Commission’s experience, the 
Commission preliminarily believes that many broker-dealers in the first two groups already 
conduct reviews of execution quality consistent with the requirements of the proposal.  
                                                 
572
  See supra section II.C for the discussion about FINRA Rule 5310.09(c) and supra Section 
IV.E for the discussion about introducing broker requirements under proposed Rule 
1101(d). 
573
  Based on April-June 2022 FOCUS data. 

   
333 
 
Consequently, the Commission believes its cost estimates for compliance overestimate costs 
broker-dealers will collectively bear to implement the proposal.  
ii. Conflicted Broker-Dealers 
 Conflicted broker-dealers may comply with the proposed requirements in a number of 
ways.  First, they may choose to engage in more rigorous analysis of the execution quality their 
orders receive than is required of unconflicted broker-dealers, comparing the execution quality of 
multiple possible broker-dealers that they could route order flow to for execution, as well as 
execution quality available on other venues where liquidity is reasonably available, and regularly 
update routing practices based on these analyses.  Based on the Commission’s experience, the 
Commission preliminarily believes that some broker-dealers already engage in these practices.  
However, particularly smaller broker-dealers who continue
574
 to accept PFOF from an executing 
broker-dealer may have previously relied on the best execution obligations of broker-dealers they 
route to, and under the proposal, would no longer qualify for the relief from such analyses 
previously provided under FINRA/MSRB rules.  For these broker-dealers, performing such 
analyses might require engaging external consultants to provide such analyses if the broker-
dealer’s staff does not possess the necessary expertise or if the broker-dealer’s staffing is not 
adequate to support the additional duties required, and might also require engaging external 
consultants to obtain analyses incorporating the necessary data (such as information on 
alternative trading system liquidity) to which they may not currently have access.  The 
                                                 
574
  Resolving conflicts is discussed below. 

   
334 
 
Commission’s cost estimates below assumes that smaller broker-dealers (those carrying less than 
$100MM in total assets) will incur costs to engage external parties for this review. 
The Commission preliminarily believes that due to the prevalence of exchange rebates, 
many of the 2,440 retail broker-dealers
575
 are likely to qualify as conflicted under the proposal.  
The Commission is able to preliminarily estimate an upper bound on potential implementation 
costs from these broker-dealers by assuming that all 2,440 retail broker-dealers would remain 
conflicted after implementation of the proposal,
576
 but the Commission preliminarily believes the 
implementation costs for many broker-dealers are likely to be lower than this estimate because 
some conflicted broker-dealers receive payments from their conflicted order flow that are less 
than the implementation costs they would incur under the proposed rule; consequently, the 
Commission preliminarily believes that some broker-dealers will choose to de-conflict to avoid 
incurring these costs.   For purposes of its analysis, the Commission assumes that broker-dealers 
with less than $100MM in total assets will comply with the proposal by removing their 
conflicts.
577
  The Commission preliminarily believes that some broker-dealers may continue to 
                                                 
575
  Based on Q2 2022 FOCUS data. 
576
  If all 2,440 broker-dealers were to implement the more rigorous requirements required 
for broker-dealers engaging in conflicted transactions, these broker-dealers would 
collectively incur $155.3MM in implementation costs averaging $63,637 per broker-
dealer.  The Commission also assumes each would incur $9,000 per year in costs to 
update order-handling procedures in response to its annual review of execution quality, 
for ongoing annual costs of $22.0 MM. 
577
  If a broker-dealer has revenue from conflicted transactions that over time sufficiently 
exceeds the $24,935 in additional implementation costs the Commission estimates 
conflicted broker-dealers will incur and the $9,000 annual cost to update order-handling 
procedures, the broker-dealer is likely to choose to continue to engage in conflicted 
transactions since its revenue from such activities exceeds the additional implementation 

   
335 
 
use one or more clearing broker-dealers that have previously paid to receive their order flow, and 
in such cases the primary cost to the broker-dealer would be the lost PFOF revenue.  However, if 
a broker-dealer needed to change the broker-dealer it routed to, or engage the services of another 
intermediary to handle its order flow in order to remove conflicts, the broker-dealer would likely 
incur switching costs such as staff time allocated to researching and negotiating with alternative 
providers of services.
578
 
The Commission preliminarily believes that each broker-dealer that would be required 
under the proposed rules to comply with provisions of the proposal applicable to conflicted 
broker-dealers would consider its options under the proposed rules strategically.  For some firms, 
the costs of staffing the activities required for compliance would exceed their expected profits 
from conflicted transactions.  The Commission expects these firms would choose to alter their 
business models to reduce conflicts so compliance changes necessary for conflicted transactions 
are not required under the proposed rules.  It is possible that a consolidation of business would 
result: some broker-dealers may exit the market, while others would invest further and compete 
to serve the customers of exiting broker-dealers.  Some broker-dealers may reduce conflicts 
identified under the proposed rules and compete for customer order flow on the basis of their 
less-conflicted status.  To the extent that exiting broker-dealers were able to offer lower-costs 
                                                 
and ongoing costs necessary to comply while engaging in conflicted transactions.  
Because the majority of PFOF revenues accrue to a small number of broker-dealers, the 
Commission preliminarily believes that smaller broker-dealers are unlikely to receive 
significant PFOF revenue that would justify the additional implementation costs.  For 
some of these broker-dealers, passing the PFOF they receive on to their customers may 
suffice to de-conflict.  See note 183
, supra. 
578
  See infra note 581 and text for discussion of related costs the broker-dealer would likely 
incur to operationalize changing a routing destination. 

   
336 
 
than broker-dealers that either reduce conflicts or comply with provisions of the proposal 
required of conflicted broker-dealers, direct costs such as commissions and fees for these firms’ 
investor customers may increase. 
iii. All broker-dealers 
Broker-dealers would incur costs to update policies and procedures to reflect the 
proposal.  They would incur other costs to regularly review the execution quality of venues or 
other broker-dealers to which they route customer orders.  To the extent that broker-dealers 
already have policies and procedures that comply with the proposal, aggregate implementation 
costs would be less than this estimate, and based on the Commission’s experience, the 
Commission preliminarily believes these estimates overstate costs broker-d ealers would bear in 
implementing the proposal.  Implementation costs are summarized in Table 23 below.
579
 
 
Table 23: Total Implementation Costs 
 
   
Per registrant ($) 
 
Industry-wide ($) 
Required Policies and Procedures 
  
Internal Labor External  
 
Internal 
Labor External  Total 
         
         
BDs excluding conflicted retail (3273) 
        
Update policies and procedures 
 
One time 6,462 32,240 
 
21,150,126 105,521,520 126,671,646 
Annual review and update of P&P 
 
Annual 2,154 8,800 
 
7,050,042 28,802,400 35,852,442 
Conduct and document review of execution quality 
 
Annual 7,642 6,080 
 
25,012,266 19,899,840 44,912,106 
         
Conflicted BDs (225) 
        
Update policies and procedures 
 
One time 55,701 7,936 
 
12,532,725 1,785,600 14,318,325 
Annual review and update of P&P 
 
Annual 6,421 
  
1,444,725 
 
1,444,725 
                                                 
579
  See infra Section VI.7 for detailed discussion of these estimates. 

   
337 
 
Conduct and document review of execution quality 
 
Annual 20,840 
  
4,689,000 
 
4,689,000 
         
Annual Report  
        
         
Unconflicted BDs (3273) 
        
Update procedures for reviewing best ex policies 
and procedures 
 
One time 1,795 4,960 
 
5,875,035 16,234,080 22,109,115 
Conduct and document regular reviews 
 
Annual 4,062 7,920 
 
13,294,926 25,922,160 39,217,086 
         
Conflicted BDs (225) 
        
Update procedures for reviewing best ex policies 
and procedures 
 
One time 8,952 1,488 
 
2,014,200 334,800 2,349,000 
Conduct and document regular reviews 
 
Annual 12,278 
  
2,762,550 
 
2,762,550 
         
         
Total Implementation Costs 
     
41,572,086 123,876,000 165,448,086 
Total Annual Costs 
     
54,253,509 74,624,400 128,877,909 
         
Costs in this table are constructed from estimates in Section VI.D. In its economic analysis, the Commission assumes that the 225 
retail broker-dealers with over $100MM in total assets are large and will continue to engage in conflicted transactions if the 
proposed rules are adopted, and follows the Section VI.D estimates for large broker-dealers. The remaining 3273 broker-dealers 
are assumed to be unconflicted for purposes of the proposed rules, and this analysis follows the Section VI.D estimates for small 
broker-dealers. Section VI.D assumes that smaller broker-dealers are less likely to engage in conflicted transactions, but 
acknowledges some costs associated with conflicted transactions. Furthermore, Section VI.D cost estimates assume broker-
dealers will outsource many compliance tasks and thus relies more upon external costs. To the extent that these broker-dealers 
elect to perform these tasks with internal personnel, their implementation costs are likely to be over-stated in this analysis.  
Consequently, this analysis is likely to over-estimate compliance costs for unconflicted broker-dealers.   
Where internal burden hours appear in Section VI.D, the Commission employed hourly rates to monetize these costs.  These 
hourly rates are based on SIFMA's Management & Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead, and adjusted with a factor of 1.27 for inflation based on the 27% change in the Consumer Price Index 
from December 2013 to September 2022. The Commission employed the following hourly rates, with the description employed 
in Section VI.D in parenthesis: Attorney (legal counsel) $483 per hour; Compliance Attorney (compliance counsel) $424 per 
hour; General Counsel (general counsel) $693 per hour; CCO (CCO) $616 per hour; Compliance Manager (compliance manager) 
$359 per hour; Paralegal (legal personnel) $253 per hour; Compliance Manager (compliance personnel) $359 per hour; 
Operational Specialist (business-line personnel) $159 per hour. 
 

   
338 
 
The previous table discusses the costs broker-dealers would incur to comply with the 
proposal.
580
  In the case of conflicted broker-dealers that would be newly required to evaluate 
execution quality from multiple sources in evaluating execution quality, it is possible they would 
periodically need to change their routing practices to reflect changes they observe in their data 
analysis.  The Commission preliminarily estimates that each conflicted broker-dealer that 
changes its routing practices will incur costs of approximately $9,000.
581
  The Commission 
cannot estimate the number of broker-dealers that would need to make this change periodically, 
but the Commission preliminarily estimates that the changes will be no more than $2 million
582
 
annually in aggregate. 
                                                 
580
  See infra section VI.D. 
581
  The Transaction Fee Pilot required re-programming of SORs as well. For that pilot, the 
Commission estimated that the costs of a one-time adjustment to the order routing 
systems of a broker-dealer would $9,000 per broker-dealer.  The Commission 
preliminarily believes that this estimate remains a reasonable estimate of costs associated 
with changes that broker-dealers would incur from having to update their routing 
systems.  See Securities Exchange Act Release No. 84875 (Dec. 19, 2018), 84 FR 5202 
(Feb. 20, 2019) (Transaction Fee Pilot for NMS Stocks). 
582
  225 conflicted broker-dealers x $9,000 per order-handling change = $2.025MM annually.   
The Commission assumes that order-handling changes would be annual because the 
proposal requires the annual review of the best execution policies and procedures, 
including order handling practices.  Based on the Commission’s experience, the 
Commission preliminarily believes that many broker-dealers, including many that the 
Commission believes will be unconflicted if the proposal is adopted and implemented, 
already change order-handling practices regularly for both best-execution and other 
operational reasons, such as reducing costs.  Consequently, the Commission preliminarily 
believes that this estimate exceeds the annual costs that broker-dealers would bear under 
the proposal. 

   
339 
 
iv. Additional Compliance Costs for NMS Stocks and Options 
For NMS stocks, a broker-dealer engaging in conflicted transactions would currently be 
required to subscribe to SIP data under current SRO best execution rules.  To consider a broader 
range of markets, such broker-dealers might add connections to one or more ATSs, subscribe to 
more detailed data or consider connecting to “ping” destinations (automated systems run by OTC 
liquidity providers that may elect to internalize any order routed to their system).
583
  In making 
this choice, some broker-dealers may compare their current routing practices to a hypothetical 
competitor that does the bare minimum and consider their practices compliant with the proposal 
even if all competitors currently do more than this hypothetical minimum. 
584
    To the extent 
broker-dealers believe that their current routing practices are in compliance and do not make 
changes to routing practices, both the benefits and the costs of the proposed rules would be less 
than they would be otherwise.  
                                                 
583
  The Commission preliminarily believes that larger broker-dealers that are likely to 
continue engaging in conflicted transaction if the proposed rules are adopted are likely to 
already connect to a broader range of venues than would be represented by SIP data.  The 
Commission cannot predict how many broker-dealers that elect to engage in conflicted 
transactions would increase the range of venues to which they connect and what costs 
they would incur to do so because broker-dealers are diverse in business models and 
practices and each broker-dealer would need to evaluate its own operational procedures 
to make such a determination. 
584
  Based on staff discussion with market participants, the Commission preliminarily 
believes that broker-dealers are often not certain what their competitors’ routing practices 
are.  Such information is proprietary and generally not publicly available. 

   
340 
 
v. Additional Compliance Costs Associated with Fixed Income Securities 
     With respect to fixed income securities trading, broker-d
ealers that engage in 
conflicted transactions could add subscription to one or more trading venues (e.g., ATSs, RFQ 
platforms, single dealer platforms) to the extent that the benefit (i.e., improvement in execution 
quality) from adding subscription to trading venue outweighs the costs (e.g., venue subscription 
fees).
585
  The Commission expects that a broker-dealer would subscribe to additional trading 
venues to take liquidity (as opposed to provide liquidity by posting quotes or responding to 
RFQs) in executing retail customer orders on riskless principal basis or to discover prices for the 
purpose of internalization.  The Commission understands that subscription fees for liquidity 
takers are not significant.  Furthermore, the broker-dealer would choose to connect to a trading 
venue via low cost means, for example, web-based graphical user interface (GUI) rather than via 
more costly application programming interface (API), which may include the costs associated 
with connectivity and systems reconfiguration (e.g., reconfiguring to adjust API), to the extent 
that the broker-dealer does not expect to maintain constant connection to execute a large number 
of customer orders on the venue.  To the extent that making changes to business practices to 
handle customer orders on an agency basis in fixed income securities trading is less costly than 
incurring costs to comply with the requirements with respect to conflicted transactions, broker-
dealers may choose to handle retail customer orders on an agency basis rather than a riskless 
                                                 
585
  In their Form ATS submissions, 15 of 33 ATSs state they have no access, connectivity 
and/or subscription fees.  The Commission preliminarily believes that most ATSs charge 
fees primarily based on transactions, and subscribers are responsible for any costs related 
to providing their connectivity.  To the extent an ATS does charge subscription fees, 
broker-dealers are likely to consider those fees in making a determination of whether the 
liquidity on such an ATS is reasonably available. 

   
341 
 
principal basis.  In particular, a broker-dealer whose primary business is retail self-directed 
trading conducted on a riskless principal basis could change its business practices to convert its 
self-directed trading business to handling orders on an agency basis.  The Commission 
preliminarily believes that the costs associated with such a conversion could include the costs 
related to changing risk management practices for intraday capital commitment, compliance 
systems, recordkeeping practices for orders and transactions, and accounting practices.  
However, the Commission is uncertain about these costs associated with the business practice 
changes needed to convert a self-directed trading business from a riskless principal to agency 
based model and requests comments on the costs.  
vi. Additional Compliance Costs for non-NMS Stock Equity Securities 
In the case of non-NMS stock equities, liquidity on ATSs beyond those that specialize in 
non-NMS stock equities may be rare.  For a broker-dealer that currently participates in the non-
NMS stock market, adding additional markets may mean subscribing to additional ATSs, or 
possibly, contacting other broker-dealers that act as liquidity providers of last resort through 
direct messages thus seeking additional sources of liquidity manually.  To the extent that broker-
dealers are able to bear the costs of seeking this additional liquidity (through ATS subscriptions 
or manual negotiation) while maintaining a profitable trading service, broker-dealers in the non-
NMS stock equities market could pursue these actions and pass on the costs to customers.  In the 
case of very illiquid non-NMS stock equities, broker-dealers may be left with either no apparent 
options to add additional markets, or with markets which are prohibitively expensive to consider 
as additional liquidity sources (such as contacting other broker-dealers or block holders of the 
security to inquire about their interest in being a counterparty).  In such cases, there may not be 

   
342 
 
additional implementation costs for conflicted transactions because alternative markets may not 
be available. 
vii. Additional Compliance Costs Associated with Crypto Asset Securities 
Broker-dealers trading crypto assets that are securities may incur costs to comply with the 
proposed rule.
586
  Because the Commission lacks data and other information on existing broker-
dealers and their practices in the crypto asset securities market, it is difficult to precisely 
determine the costs of compliance for such broker-dealers.  Generally, the Commission expects 
the costs of compliance to be most similar to costs associated with trading non-NMS stocks.  To 
the extent that the current market practices of market participants that would need to comply 
with the proposed rule differ significantly from the practices required under the proposed rule, 
the costs for compliance with the proposal may be large; this may be the case, for example, for 
market participants whose practices are not currently consistent with FINRA Rule 5310.  On the 
other hand, market participants with existing best execution policies and procedures, such as 
those that operate across other asset classes (e.g., NMS securities), may bear incremental lower 
costs of compliance.   
For crypto asset securities that are traded on multiple platforms, conflicted broker-dealers 
may need to connect to additional platforms to comply with the proposal.  In the case of crypto 
asset securities that are not traded on multiple platforms, broker-dealers would incur costs to 
directly contact liquidity providers of last resort, such as broker-dealers that might agree to trade 
                                                 
586
  Affected parties that effect transactions in the crypto market may include some market 
participants that may not be currently registered as a broker-dealer but should be under 
existing regulations.  As noted above, this analysis does not account for costs of such 
market participants to register as broker-dealers or otherwise come into compliance with 
existing applicable regulation. 

   
343 
 
the asset if contacted directly.  Because transacting manually in this manner involves the time of 
a professional trader, the cost to make these additional inquiries required by the proposal might 
be uneconomical, particularly in the case of small trades. 
b) Other Costs 
As discussed previously, currently many retail orders in NMS securities are executed 
without paying commissions.
587
  The Commission preliminarily believes that the proportion of 
retail order flow being executed under PFOF agreements may decrease, although the 
Commission is uncertain of the magnitude of this reduction.
588
  It is possible that reductions in 
the proportion of retail order flow being executed under such agreements could cause the 
prevalence of retail commissions to increase because revenues from these agreements may have 
previously offset retail broker dealer costs that would otherwise be covered by commissions 
collected from retail investors.  This effect may be mitigated if broker-dealers elect to pass 
exchange rebates to their customers.  The Commission preliminarily believes that it is unlikely 
that the proposal would significantly increase the prevalence of retail commissions because the 
market to provide retail broker-dealer services is competitive and many of the broker-dealers that 
the Commission believes will remove their conflicts receive relatively small payments for their 
order flow.
589
   
                                                 
587
  See supra Section V.B.3.a 
588
  See supra Section V.C.1. 
589
  In the case of larger broker-dealers that derive significant revenue from PFOF, the 
Commission preliminarily believes that they will continue to do so and incur the 
additional compliance costs discussed previously in Table 23. 

   
344 
 
The Commission further believes that the costs of the rule could advantage larger broker-
dealers and may increase barriers to entry and disadvantage smaller broker-dealers, potentially 
resulting in some of them exiting the market.  To the extent that smaller broker-dealers are more 
likely to provide specialized services and provide innovation, there may be less competition to 
provide specialized services and less innovation if the proposal is adopted.  Investors whose 
broker-dealers exit the market would face search costs to find alternative broker-dealers that 
offer the same services; those services may be offered at inferior prices by remaining 
competitors.  Some services may no longer be offered by any competitors if a specialized broker-
dealer exits the market, although the Commission preliminarily believes that if there is sufficient 
demand for such a service, a broker-dealer may make it available to customers when demand is 
sufficient, as may be the case after one or more broker-dealers exit the market. 
While the Commission cannot predict how many retail broker dealers will terminate 
PFOF arrangements, t  he Commission preliminarily believes that under the proposal, retail 
broker-dealers are likely to reduce their use of PFOF agreements for both NMS stocks and listed 
options because engaging in such agreements would cause the broker dealer to incur heightened 
best execution obligations under the proposal and satisfying those obligations may cause broker-
dealers to incur costs in excess of their PFOF revenue.
590
  Since most broker dealers that receive 
                                                 
590
  The Commission lacks data on many broker-dealers’ PFOF revenue, but acknowledges 
that some broker-dealers will realize an indirect cost from forgone PFOF revenue.  In the 
case where a broker-dealer receives PFOF from another broker-dealer or trading venue, 
this will constitute a transfer from one registrant to another, and will not increase industry 
costs in aggregate.  In cases where a broker-dealer passes PFOF on to its customers to 
avoid conflicts, this payment may reduce investor trading costs and increase industry 
costs in aggregate. 

   
345 
 
PFOF receive relatively small payments for routing their order flow,
591
 smaller broker-dealers in 
particular may consider curtailing this practice to avoid incurring the additional compliance 
costs.  Furthermore, broker-dealers that currently pay to receive order flow may adjust their 
business models
592
 to rely less on these arrangements.  The Commission preliminarily believes 
this is likely to reduce the share of retail customer order flow that is internalized because some 
broker-dealers that currently receive PFOF are likely to stop receiving it to become de-
conflicted, and some broker-dealers that pay PFOF will internalize fewer of the orders they 
receive to comply with the proposal.  If this occurs, broker-dealers that reduce their reliance on 
PFOF arrangements would also be likely to see commensurate decreases in their revenue.  This 
increase in costs to execute customer orders may be passed on to retail investors as additional 
fees to trade, or in the form of commissions. 
Similarly, the Commission preliminarily believes that firms that currently pay to receive 
retail order flow would likely receive less of such directed order flow.  While this may be a cost 
savings to those firms, it is likely to represent a reduction in what was previously a profitable 
business operation, and the lost profit opportunities are not likely to offset any cost savings.  It is 
                                                 
591
  Many broker-dealers receive PFOF, but the majority of PFOF is received by a small 
group of broker-dealers.  Consequently, many broker-dealers receive relatively small 
PFOF payments, although for some broker-dealers these small payments may contribute 
significantly to profits, depending on other revenue sources.  Regardless of this relative 
magnitude, the costs to comply with the proposal’s heightened standards may be 
prohibitive for broker-dealers that receive relatively modest PFOF revenue, and their 
compliance costs may exceed the revenue the broker-dealer receives for engaging in 
conflicted transactions.  See supra Section V.B.3 and Section V.C.2.a)ii.. 
592
  If broker-dealers choose to pass exchange rebates on to their customers, they may incur 
additional costs associated with updating systems to account for these payments.   

   
346 
 
possible such firms may choose to compete on other venues (ATSs and exchanges) to participate 
in this order flow, but the Commission preliminarily believes that profits from such a venture are 
unlikely to be comparable to the profits of internalization because, on other venues, other broker-
dealers would be able to compete with these broker-dealers to provide liquidity to these orders 
which should reduce the cost of that liquidity to investors.
593
  If these firms reduce the capital 
they currently allocate to providing liquidity, spreads could increase particularly in the short-
term because fewer market participants would be competing to provide liquidity.  However, the 
Commission preliminarily believes that the market to provide liquidity to retail orders is 
competitive and other competitors are likely to increase their capital provision over time to 
satisfy demand.
594
 
In addition to costs discussed previously, broker-dealers that engage in conflicted 
transactions would face heightened standards under the proposal.  These standards would require 
them to obtain and assess information beyond what would be required of a broker-dealer that is 
not conflicted, including price, volume, and execution quality, in identifying a broader range of 
markets beyond those identified as material potential liquidity sources.  The Commission 
preliminarily believes that this requirement may be interpreted very differently by different 
broker-dealers, and may prove challenging in markets for some asset classes where the number 
of potential markets is limited and broker-dealers may effectively be checking all reasonably 
available prices in current practice.   
                                                 
593
  See supra Section V.C.1. 
594
  See infra Section V.D.3. 

   
347 
 
i. Additional Other Costs in NMS Stocks and Options 
In equities, the Commission preliminarily believes that firms that internalize retail order 
flow provide liquidity to a wide range of securities, including those that are very thinly traded.  
In fact, fulfillment of these more difficult to fill orders may be part of a service bundle that 
internalizers provide to broker-dealers that route them their order flow.  Generally, thinly traded 
securities are more risky for liquidity providers because quotation data are relatively sparse 
compared to more heavily traded securities, such quotations are more likely to be stale, and there 
may be no market makers that have a duty to maintain two-sided quotes in these securities.
595
  It 
is possible that execution prices may be less favorable for retail investors under the proposal if 
liquidity providers that previously paid for order flow and fulfilled these difficult to execute 
orders under such arrangements dedicate less capital to making markets in these securities.  It is 
possible that execution times for these securities may be significantly delayed as broker-dealers 
would need to search for liquidity to fill these orders, and this delay is an additional factor that a 
broker-dealer would need to consider in the order’s execution quality.  It is also possible that 
execution prices for these transactions may be less favorable than they might be under a PFOF 
arrangement because the price improvement statistics on these orders are currently included in 
                                                 
595
  See, for example, Menkveld, Albert J. and Wang, Ting, How do designated market 
makers create value for small-caps?, 16 Journal of Financial Markets 571 (2013), 
available at https://www.sciencedirect.com/science/article/pii/S1386418112000535#aep-
abstract-id6; Craig, Louis, Kim, Abby, and Won Woo, Seung, Pre-trade Information in 
the Municipal Bond Market, (SEC Working Paper, July 2018), available at dera_wp_pre-
trade_information_in_the_municipal_bond_market.pdf 
(sec.gov)https://www.sec.gov/files/dera_wp_pre-
trade_information_in_the_municipal_bond_market.pdf and Craig et al, supra note 471. 

   
348 
 
the criteria retail broker dealers evaluate in choosing executing broker dealers.
596
  However, the 
Commission preliminarily believes that the market to provide liquidity to retail orders, including 
orders in less liquid securities is competitive.  If the proportion of such orders entering the 
market beyond internalizers increases, it is likely other broker-dealers that provide liquidity to 
asset markets would increase liquidity provision to this segment of the equities market.  The 
costs realized by investors transacting in these securities may increase, however, because broker-
dealers are unlikely to provide additional liquidity unless they can cover their costs and earn 
appropriate risk-adjusted returns.
597
 
In addition to the costs discussed above, the Commission preliminarily believes that in 
the market for listed options, the NBBO spreads set by resting best displayed liquidity could be 
wider and the depths at the best market prices could be thinner because of the increasing order 
flow segmentation under the proposal.  Specifically, liquidity providers could deploy less capital 
to provide the resting displayed liquidity in the limit order books in favor of price improvement 
auctions or price improving inside the NBBO.  Because the proposed rules could result in 
potentially more efficient price improvement auctions and/or potentially more retail orders being 
routed to the auctions for price improvement opportunities, order flow routed there could become 
less impactful and more profitable. At the same time, the orders filled by the lit quotes would 
                                                 
596
  Broker-dealers that pay to receive order flow may be providing better execution to 
difficult to fill orders because the execution in such orders is an element upon which their 
clients evaluate them.  Consequently, outside of PFOF arrangements, such orders might 
receive inferior execution quality to what they would receive under such an arrangement. 
597
  Securities for which it is more difficult to find trading counterparties often are 
characterized by infrequent trades, less frequent quotations and lower market 
capitalization.  These factors are likely to increase the adverse selection risk liquidity 
providers face when providing liquidity to the market for these securities. 

   
349 
 
become more impactful and impose relatively more adverse selection risk on the liquidity 
providers who provide resting displayed liquidity, in part due to the increased level of order 
segmentation.  Less capital from liquidity suppliers would make the liquidity in order books 
thinner and potentially widen the NBBO.  Wider NBBO spread and thinner depth would 
inevitably lead to worse execution quality to the orders that are not exposed to price 
improvement opportunities.  To the extent that the proposal would make a subset of retail 
customers better off by improving the prices those customers receive, it would correspondingly 
adversely affect other customers by harming prices and liquidity in displayed quotes. 
ii. Additional Other Costs in Fixed Income Securities 
With respect to fixed income securities trading, the Commission preliminarily believes 
that the proposal could adversely affect liquidity.  To the extent that broker-dealers no longer 
practice last-look in conducting RFQs for the purpose of internalization, these broker-dealers 
could earn less profits from principal trading that relies on broker-dealers’ capacity to commit 
capital for carrying inventory.  A reduction in capital commitment for fixed income securities 
intermediation could result in lower liquidity, particularly for those trades that rely on broker-
dealers’ capacity to provide immediacy by trading on a principal basis (by taking fixed income 
securities into inventory).  This would result in an increase in pre-arranged trades between a 
buyer and a seller (so that the broker-dealer can quickly offset its position in the opposite 
direction), which take a longer time to execute, increasing transaction costs of market 
participants.                       
To the extent that broker-dealers handling retail customer orders choose to conduct RFQs 
to fulfill the proposed requirements with respect to conflicted transactions, this could result in an 
increase of RFQs to a degree that RFQ messages would overwhelm market participants (e.g., 

   
350 
 
broker-dealers responding to RFQs).  This could increase the number of RFQs with no or few 
responses resulting in less competitive prices and worse execution quality for retail customer 
trades.  However, the Commission preliminarily believes that this effect would be mitigated as 
more market participants adopt automation in the process for responding to RFQ messages to be 
responsive to RFQs, and thus, attract more order flow. 
3. Efficiency, Competition, and Capital Formation 
The Commission has considered the effects of the proposed amendments on efficiency, 
competition, and capital formation, and discussed these effects below.  
a) Competition 
i. Market for Trading Services 
The Commission preliminarily believes that the proposal would improve competition 
among trading venues.  The proposal requires that broker-dealers consider a wider range of 
trading venues.  In the equity and option markets, the Commission also preliminarily believes 
that the proposal would reduce the proportion of retail order flow that is internalized.  The 
Commission preliminarily believes that this would increase competitive opportunities for 
exchanges and other trading venues because more broker-dealers will consider exchanges and 
ATSs as potential execution venues.  In the fixed income securities markets, the proposal could 
promote competition among trading venues to the extent that broker-dealers expose retail 
customer orders broadly across multiple trading venues for the purpose of executing riskless 
principal trades and for the purpose of internalization. 
In the market for NMS stock and options trading services, the Commission preliminarily 
believes that competition would increase. To the extent that the proposal’s requirement that 
broker-dealers incorporate material sources of liquidity into their order handling practices causes 

   
351 
 
broker-dealers to consider additional execution venues such as additional exchanges or ATSs for 
their orders, competition between trading venues may increase.  Other factors that may 
encourage broker-dealers to more frequently use exchanges and ATSs for trading include the 
heightened standards for conflicted transactions and the heightened standards for transactions 
where a PFOF arrangement is in place. 
By considering more sources of liquidity and the heightened standards for broker-dealers 
in conflicted transactions, it allows for venues such as exchanges and ATSs to compete for order 
flow that may have been internalized by wholesalers before the effects of this rule.  The 
requirement to consider price improvement from midpoint liquidity before internalizing a retail 
trade could increase competition by resulting in more trading venues competing to offer 
programs that offer midpoint liquidity to retail orders.  There will be increased demand for the 
services of trading service venues. Given this increased demand, the venues will compete to 
acquire as much of it as possible.  Given this increased demand, it is possible that the fees venues 
charge may rise, particularly if large venues capture most of the increased order flow.  
The Commission preliminarily believes that the proposal would increase competition 
between broker-dealers to provide liquidity to retail orders by requiring broker-dealers that route 
to executing brokers to consider a wider range of executing venues.  Currently, most retail order 
flow for which the customer has not specified an execution venue is routed first to an 
internalizer.  Under the proposal, broker-dealers would need to consider a wider range of trading 
venues and programs (such as retail liquidity programs
598
) before routing customer orders. 
                                                 
598
  See supra Section V.B.3a).i. 

   
352 
 
The Commission preliminarily believes that the proposal would have limited impact on 
the market to provide liquidity to unlisted stocks and thinly traded NMS stocks.  As the proposal 
requires brokers to check material sources of liquidity, there will be little change if these sources 
of liquidity are few to begin with.   
The Commission preliminarily believes that the proposal would promote price 
competition and competition in price improvement mechanisms for listed options.  Under current 
practice, in order to attract order flow from wholesalers, the exchanges that provide the price 
improvement auction mechanisms often establish asymmetric fee schedules charging the 
competing liquidity providers higher fees than the wholesaler for participating in the auction.  
This limits the ability of competing liquidity providers to provide more favorable pricing to 
compete with the wholesaler in those auctions, resulting in less than fully efficient price 
improvement offered to the customer.  Under the proposal, when considering a price 
improvement auction, the wholesaler would be required to consider a broad range of price 
improvement auctions across the exchanges and evaluate the execution quality that may be 
received from these auctions and how that might be impacted by auction features such as 
asymmetric fee schedules after controlling for all the other factors such as the allocation model.  
Therefore, the option exchanges would have incentives to level the playing field by reducing the 
existing auction transaction fee gap to enhance competition in those auctions to attract the retail 
order flow.  
Currently, there is no mid-point liquidity protocol available across the limit order books 
operated by the exchanges for listed options, but the Commission is aware that there is at least 
one option exchange which provides a protocol allowing market participants to provide liquidity 
on the limit order book within the NBBO prices to interact with incoming marketable orders and 

   
353 
 
provide price improvement against NBBO at the same time.  The Commission preliminarily 
believes that, under this proposal, more exchanges would have incentives to develop protocols 
which would facilitate liquidity provision within the prevailing NBBO spread because broker-
dealers would be required to have policies and procedures that specifically address opportunities 
for price improvement and other order exposure opportunities.  Thus, the wholesaler would need 
to check or reasonably estimate whether there could be substantial midpoint or within-NBBO 
liquidity available on the limit order books operated by other exchanges. Some exchanges may 
even consider establishing protocols to allow customer order flow executed at the midpoint of 
NBBO prices, which would further increase opportunities for retail orders to receive price 
improvements. 
ii. Market for Broker-Dealer Services 
 The Commission preliminarily believes that the proposal could have mixed effects on 
competition in the market for broker-dealer services.  Changes in order handling practices that 
could occur as part of the rule could promote competition between broker-dealers to attract 
customers.  However, the costs of the rule could advantage larger broker-dealers and may 
increase barriers to entry and disadvantage smaller broker-dealers, potentially resulting in some 
of them exiting the market. 
 While modifying their policies and procedures, broker-dealers could change their order 
handling practices and also the services they utilize from other broker-dealers while handling 
customer orders.  These changes in order handling practices could promote competition among 
broker-dealers, especially on the basis of execution quality, to attract customers.  It could also 

   
354 
 
promote competition among broker-dealers offering services to other broker-dealers to attract 
new clients.
599
 
The Commission preliminarily believes that the proposal may increase barriers to entry 
and disadvantage smaller broker-dealers because of the increased compliance costs and resulting 
economies of scale that would result under the proposal.  Furthermore, the proposal could result 
in consolidation among smaller broker-dealers or these broker-dealers being absorbed (via 
merger) by larger broker-dealers to take advantage of the economies of scale.  Such a change to 
the competitive landscape could also reduce competition in the market for trading services.  In 
the case of broker-dealers that meet the definition of introducing broker under FINRA rules but 
do not do so under the proposal, compliance costs may be high.
600
  Some of these broker-dealers 
may adjust their business models to no longer compete as introducing brokers, and new entrants 
may be discouraged due to elevated costs of complying with the proposal. 
Additionally, the proposed rules for conflicted transactions for retail orders and on 
introducing brokers accepting PFOF may reduce the PFOF retail brokers receive in the equity 
and options markets.  To the extent that these firms do experience a major reduction in their 
PFOF revenue, they may face pressure to develop other lines of revenue, including the addition 
of commissions and/or fees for trading and advisory services, although broker dealers that have 
heavily promoted their commission-free business model would be more reticent to add 
commissions and/or fees, despite the loss of PFOF.     
                                                 
599
  See infra Section V.B.3.a.i for discussion about competition about market for market 
access. 
600
  See supra Section V.C.2. 

   
355 
 
To the extent that some retail brokers do resume charging commissions, they may be 
constrained by competitive pressures in the commission rates they can charge.  Larger retail 
brokers that do not accept equity PFOF could continue to provide commission-free trading.  
This, in turn, would put competitive pressure on the extent to which retail broker-dealers could 
charge commissions and still retain customers.  If the ability of smaller retail brokers to charge 
commissions is constrained by competition, it could increase the competitive advantage of larger 
retail brokers, which could raise the barriers to entry for new brokers and cause some smaller 
retail brokers to exit the market.    
The Commission is unable to quantify the likelihood that one or more smaller brokers 
would cease operating.  Even if one or more small brokers were to exit, while the Commission 
acknowledges that services to niche markets more likely served by smaller broker-dealers might 
decline, the Commission does not believe this would significantly impact competition in the 
larger market for generalized broker services because the market is served by multiple large 
competitors.  Additionally, the market would likely still be served by many small competitors.  
Consequently, if a smaller retail broker were to exit the market, demand is likely to be swiftly 
met by existing competitors.  The Commission recognizes that small brokers may have unique 
business models that are not currently offered by competitors, but the Commission believes a 
competitor could create similar business models previously offered by exiting firms if demand 
were adequate. Moreover, if the services generated by these business models are not provided by 
existing competitors, it seems likely new entrants would provide them if demand were sufficient. 
iii. Market for Market Access 
The Commission preliminarily believes that the proposal would increase competition in 
the market for market access.  A number of aspects of the proposal could result in more broker-

   
356 
 
dealers utilizing the services of a routing or executing broker or engaging in more extensive 
comparisons of the services and execution quality of different routing or executing brokers.  This 
would increase competition among broker-dealers offering order routing and execution services 
to other broker-dealers in order to attract new customers.  
 The introducing broker requirements under Rule 1101(d) would enhance competition the 
market for market access in two ways.  The requirement for introducing brokers to regularly 
compare the execution quality of their executing broker to that of other executing brokers would 
promote competition between executing brokers.   Broker-dealers that carry customer accounts 
that currently route their order flow to an executing broker to handle in an principal capacity 
would not be eligible for the introducing broker relief under Rule 1101(d) and would have to 
develop policies and procedures for handling customer orders.  If they utilized a routing broker 
as part of developing these policies they would need to compare different routing brokers and 
develop the criteria for selecting a routing broker as part of their policies and procedures. They 
would have to also compare their routing broker to the other routing brokers as part of their 
regular review of their policies and procedures.  This could enhance competition among routing 
brokers in order to attract these broker-dealers as clients. 
 The heightened standards for broker-dealers handling retail orders engaging in conflicted 
transactions may also promote competition in the market for market access.  The additional 
requirements for broker-dealers handling retail orders engaging in conflicted transactions may 
lead to some retail brokers that currently route orders to wholesalers to instead utilize the 
services of a routing broker to handle their orders.
601
  There could be increased competition 
                                                 
601
  See supra Section V.C.1.a  

   
357 
 
among routing brokers to provide these conflict-free routing services to retail brokers.  
Additionally, the heightened standards for broker-dealers that accept PFOF may foster 
competition between broker-dealers to provide best-execution services to retail broker-dealers 
that continue to accept PFOF.  Because the proposal would require these retail broker-dealers to 
document their compliance with the best execution standard for conflicted transactions, including 
all efforts to enforce their best execution policies and procedures for conflicted transactions and 
the basis and information relied on for their determinations that such conflicted transactions 
would comply with the best execution standard, this could increase competition among broker-
dealers that pay for order flow to provide adequate information to broker-dealers routing to them, 
allowing those broker-dealers to improve their customers’ execution quality.  Without such 
assistance from broker-dealers that pay for order flow, the broker-dealers that provide order flow 
may be faced with the need to perform significant data analysis on multiple executing broker-
dealers if they intend to continue receiving PFOF.  For some broker-dealers, the expense of 
conducting such analysis is likely to exceed the revenue they receive for directing their order 
flow to executing broker-dealers that pay to receive their order flow.  These broker-dealers may 
choose to stop receiving PFOF or pass all PFOF they receive through to their customers in order 
to avoid these expenses.  Consequently, broker-dealers that pay for order flow are likely to be 
incentivized to assist their customer broker-dealers in complying with the rule to avoid losing 
their order flow.  It is also possible that broker-dealers that currently receive PFOF may simply 
maintain their routing practices and stop accepting PFOF to reduce their compliance burden 
under the proposal. 
 With respect to fixed income securities trading, the proposed requirements with respect to 
introducing brokers and regular review of execution quality could promote competition in the 

   
358 
 
market for market access (i.e., amongst executing brokers).  Brokers that outsource execution 
services for fixed income securities would conduct regular reviews and compare execution 
quality in the selection of their executing brokers, which would promote competition and 
innovation in the fixed income market for market access.  Executing brokers would compete on 
fees, efficiency in order handling procedures, and efficiency in the selection of trading venues or 
counterparties, which in turn, would result in better execution quality for retail customer trades. 
b) Efficiency 
The Commission preliminarily believes the proposal would improve price efficiency in 
asset markets because broker-dealers will need to consider a wider range of markets and 
execution methodologies when routing customer orders.  By facilitating competition between a 
larger pool of liquidity providers, more liquidity providers may be incentivized to compete to 
provide liquidity.  This would provide a wider range of quotes and facilitate price efficiency to 
the extent that the expanded liquidity pool provides more informative quotes. 
While the Commission preliminarily believes the proposal could improve retail order 
execution prices,
602
 the Commission recognizes that it could take longer for conflicted orders to 
be executed because broker-dealers might need to consider additional venues before routing an 
order, and they may need to perform more routings before the order is fulfilled.  It is possible 
that market prices could move unfavorably during this time.   
c) Capital Formation  
The Commission preliminarily believes that the proposal may improve capital formation 
by incentivizing broker-dealers to allocate additional capital to the provision of liquidity.  The 
                                                 
602
  See supra Section V.C.1. 

   
359 
 
proposal’s requirement that broker-dealers consider additional pricing information and execution 
venues before routing customer orders and heightened standards for best execution for conflicted 
transactions may result in more order flow being routed to venues with competitive quotations.  
If such quotations are more likely to result in executions, particularly with retail order flow that 
usually carries lower adverse selection costs to broker-dealers,
603
 broker-dealers would have 
greater incentives to provide such quotations.   
The Commission also recognizes that liquidity provision in thinly traded and unlisted 
securities may decrease.  Currently, broker-dealers with business models that specialize in 
internalizing retail order flow may be providing liquidity in very thinly traded securities as part 
of a bundle of services that they provide to their customers.  If the internalization of retail orders 
decreases as the Commission preliminarily believes it might, broker-dealers may be faced with 
difficult liquidity searches when their customers wish to trade thinly traded or unlisted securities.  
It is possible that an increase in retail demand for liquidity in these securities may be met with an 
increase in liquidity supply from firms that are more willing under the proposal to make markets 
in these securities than they were when a greater proportion of retail flow was internalized.  To 
the extent that broker-dealers’ willingness to make markets in these securities decreases overall, 
this may increase trading costs for these securities and make it more difficult for companies to go 
public before they are eligible to be listed on registered exchanges. 
                                                 
603
  See, e.g., Barber, Brad M., and Terrance Odean, Trading is hazardous to your wealth: 
The common stock investment performance of individual investors?, 55 J. FIN. 773 
(2000). 

   
360 
 
D. Reasonable Alternatives 
1. SEC Adopts FINRA Rule 5310 and MSRB Rule G-18 Best Execution 
Rules 
As an alternative, the Commission could adopt existing FINRA Rule 5310 and MSRB 
Rule G-18  rules and associated guidance.  This alternative would have lower costs and benefits 
compared to the proposal, because changes
604
 in order handling practices would be unlikely to 
occur under this alternative compared to the proposal.  Under this alternative, improvements to 
investor protection might be less than those from the proposed rules.  
This alternative would not include the enhanced requirements within proposed Rule 
1101(b) related to transactions with broker-dealer subject to specified conflicts of interest, which 
represent the majority of retail transactions in the equity, options, and fixed income markets.
605
  
Proposed Rule 1101(b) would require a broker-dealer engaging in conflicted transactions to 
address additional considerations in its best execution policies and procedures, and to document 
its compliance with the best execution standard for such transactions.  To the extent that the 
proposal would have resulted in improved execution quality for the retail orders by reducing the 
inefficiencies
606
 present in existing conflicted transactions, this alternative would result in less 
improvement in retail investor execution quality compared to the proposal. 
                                                 
604
  See supra Sections V.C.1, V.C.2, and V.C.3 for the Commission’s projections on the 
effect of  broker-dealers’ order handling practices. 
605
  See supra Section IV.C.1 and Section IV.C.2 
606
  The inefficiencies associated with existing conflicts of interest include, but are not 
limited to, the trade-off between payment for order flow and price improvement for 
equities (See supra Section V.B.3.a.iii.) and the less than fully competitive price 
improvement auction mechanisms for options (See supra Section V.B.3.a.II.b.). 

   
361 
 
 Under this alternative, broker-dealers would still qualify for relief under FINRA Rule 
5310.09(c), instead of having to meet the introducing broker requirements to qualify for the 
propose relief under proposed Rule 1101(d).  Broker-dealers that meet the requirements of 
FINRA’s relief but would not have met the requirements of proposed Rule 1101(d) would 
experience lower compliance costs under this alternative because they would not have to develop 
or update their own policies or procedures or adjust their business model to de-conflict from their 
executing broker.
607
  The costs of the proposal could advantage larger broker-dealers, increase 
barriers to entry for new broker-dealers, and disadvantage smaller broker-dealers, which could 
potentially result in some of them existing the market.
608
  The lower compliance costs under this 
alternative would increase competition among broker-dealers compared to the proposal by 
lowering barriers to entry for new broker dealers and decreasing the likelihood that smaller 
broker-dealers would exit the market.
609
  
2. Require Order Execution Quality Disclosure for Other Asset Classes 
 Standardized information on the execution quality available at different market centers 
and for different executing brokers could aid broker-dealers in their best execution reviews.  
However, only market centers executing trades in NMS stocks are required to report 
standardized execution quality statistics under Rule 605.
610
  This alternative would require 
                                                 
607
  See supra Section V.C.1. 
608
  See supra Section V.C.3.a).ii for a discussion of the effects of the proposal on 
competition between broker-dealers. 
609
  See id.  
610
  The Commission also is proposing to amend the order execution quality disclosures 
required by Rule 605.  See Securities Exchange Act Release No. 96494 (Dec. 14, 2022). 

   
362 
 
execution quality disclosures from market centers and large broker-dealers in the options and 
fixed income markets.  In addition to execution quality data at the individual security-level, 
similar to Rule 605 data, the execution quality disclosures would include aggregated 
standardized summary reports of key execution quality statistics, which would allow smaller and 
less sophisticated investors to analyze and make comparisons between their own broker-dealers 
and other broker-dealers.  Compared to the proposal, these disclosures may better allow investors 
to evaluate execution quality for their orders within their broker-dealer’s overall executions in a 
given security and facilitate broker-to-broker comparison of order execution beyond equities 
markets.  Although the proposed rule would require each broker-dealer to establish policies and 
procedures with greater specificity, this does not necessarily mean that the order handling 
practices reach the same level of efficiency across the broker-dealers.  It is possible that some 
broker-dealers would handle the customer orders less efficiently than others.  Under the 
alternative, broker-dealers, which engage in less efficient order handling practices may recognize 
the inadequacy when comparing their own execution quality statistics with those disclosed by the 
more efficient broker-dealers, and improve the order handling practices accordingly to attract 
order flow.  Therefore, increased transparency may reduce differences in execution quality 
within specific security-time intervals, particularly in the corporate and municipal bond markets.  
Broker-dealers may be able to incorporate these execution quality statistics into their best 
execution policies and procedures, which could improve their ability to identify market centers 
that offer better execution quality, resulting in potentially greater improvements in order 
                                                 
The Commission encourages commenters to review that proposal to determine whether it 
might affect their comments on this proposing release. 

   
363 
 
handling compared to proposal.  This alternative may increase competition among broker-dealers 
and trading centers in asset classes other than NMS stocks compared to the proposal by 
promoting competition based more on the basis of publicly available execution quality and less 
on other inducements to attract more customers/order flow.   
 However, developing these execution quality disclosures may cause market centers and 
large broker-dealers in the options and fixed income markets to incur higher startup costs relative 
to the proposal as market centers would need to develop systems to produce and post such 
reports.  To the extent that certain market centers already have systems or infrastructures in place 
to produce execution quality metrics, they would incur costs to modify the current systems 
and/or the format of the reports in order to comply with the standards set forth in the execution 
quality disclosure requirements.  Additionally, execution quality disclosures for the options and 
fixed income markets may be complex and difficult to produce for a number of reasons.  First, 
the number of individual securities in the options and fixed income markets is significantly larger 
than in the equity markets.  The corporate bond market has approximately 58,000 outstanding 
issues, more than fourteen times the number of NMS listed equities.
611
  This number is small in 
comparison to the municipal bond market which has approximately one million outstanding 
issues.
612
  Individual equities can have hundreds of individual outstanding options contract 
identifiers.  Second, fixed income and options securities have defined maturities, which might be 
shorter than a disclosure interval (i.e., a contract with a week expiration relative to a monthly 
                                                 
611
  See O’Hara and Zhou, supra note 469. 
612
  See Muni Facts, Municipal Securities Rulemaking Board, available at 
https://www.msrb.org/News-and-Events/Muni-Facts. 

   
364 
 
reporting period).  This security-level inconsistency may present complications in evaluating 
time series changes in execution quality.  Finally, a broad lack of pre-trade information in fixed 
income markets make execution quality statistics such as effective-quoted spread ratios difficult, 
if not impossible, to calculate for many securities. 
3. Utilize FINRA and MSRB Approach to Introducing Broker 
The Commission could alternatively propose to remove the requirements for introducing 
and executing brokers related to PFOF, carrying firm status, and affiliation.  This definition 
would more closely align with FINRA and MSRB approach to introducing brokers.  FINRA 
Rule 5310.09(c) applies to a member that routes its order flow to another member that has agreed 
to handle that order flow as agent for the customer (e.g., a clearing firm or other executing 
broker-dealer), whereas the proposal would additionally require the firm not to be a carrying 
firm, accept PFOF from an executing broker, or route customer orders to an affiliated executing 
broker.  Under this alternative, it is likely that most brokers that qualify under FINRA Rule 
5310(c) would qualify as introducing brokers under proposed Rule 1101(d).  By categorizing 
more broker-dealers as “introducing brokers,” the overall compliance cost carried by the market 
would be lower as compared to the proposed rule.  This alternative would likely cause fewer 
small broker-dealers, which currently qualify for relief under FINRA Rule 5310.09(c) and 
MSRB Rule G-18.08(b) and wish to remain conflicted or still carry customer accounts, to change 
business models to comply with the alternative rule.
613
  
The brokers who benefit under this alternative are those who currently qualify for relief 
under FINRA Rule 5310.09(c) and MSRB Rule G-18.08(b) but fail at least one of the following 
                                                 
613
  See supra Section V.C.1. 

   
365 
 
criteria include in proposed Rule 1101(d): (i) does not carry customer accounts and does not hold 
customer funds or securities, (ii) has entered into an arrangement with an unaffiliated broker or 
dealer that has agreed to handle and execute on an agency basis the introducing broker’s 
customer orders (“executing broker”), and (iii) has not accepted any monetary payment, service, 
property, or other benefit that results in remuneration, compensation, or consideration from the 
executing broker in return for the routing of the introducing broker’s customer orders to the 
executing broker.  Thus, many current broker-dealers that qualify for relief under the FINRA and 
MSRB rules, and to some extent their executing brokers, would have lower costs of compliance 
since there would be no need for those broker-dealers to change their business models.  Also, this 
alternative may lower barriers to entry for some potential introducing brokers.  However, under 
this alternative, the benefits of the proposal would also be diminished.  With more broker-dealers 
meeting the proposal’s definition of introducing broker, the benefits compared to the proposal 
would be lower.  Specifically under this alternative, the Commission preliminarily believes that 
instead of changing their business models to stop being conflicted, introducing brokers and their 
executing brokers would be more likely to engage in conflicted transactions, and more 
introducing brokers would receive PFOF.  Therefore, the execution quality benefits would be 
lower since the incentive created by the PFOF would persist, potentially leading to less efficient 
order routing which may benefit broker-dealers at the expense of retail customers. 
4. Ban or Restrict Off-Exchange PFOF 
Rather than requiring heightened best execution standards for transactions involving 
PFOF, alternatively the Commission could ban or restrict off-exchange PFOF in the equity and 
options markets.  Under this alternative, registered exchanges would still be allowed to pay 
rebates.   

   
366 
 
Compared to the proposal, this alternative may further reduce conflicts of interest within 
and improve order handling practices by retail broker-dealers.  A 2016 study sponsored by CFA 
Institute examined changes in equity market execution quality following the Financial Services 
Authority (FSA) 2012 guidance banning PFOF in the United Kingdom.
614
  The study describes 
internalization under PFOF as a scenario that can increase the probability of conflicted equity 
and options transactions, particularly for retail investors, in the United Kingdom.  The study 
finds that over the time period from 2010 to 2014, the proportion of retail-sized trades executing 
at the best quoted price increased from around 65% to more than 90%.  The authors claim these 
findings suggest that the integrity of the order book improved.  
Alternatively, rather than an outright ban on PFOF, the Commission could impose 
specific restrictions on PFOF that could allow retail broker-dealers to pass through payments to 
end customers in cases where it would permit best execution.  For example, a retail broker-dealer 
may consider two order execution venues with different executable prices: the first venue has a 
more favorable price, and the second venue provides PFOF to the retail broker-dealer.  If the 
difference in price between the two venues is smaller than the PFOF for the order in question, the 
retail-broker could return to the customer the portion of PFOF, which is greater than the venue 
price difference. 
A ban or restriction on PFOF would increase the likelihood of higher commissions for 
retail investors or an increase in the cost of other services offered by retail broker-dealers 
                                                 
614
  See Sviatoslav Rosov, Payment for Order Flow in the United Kingdom: Internalisation 
[sic], Retail Trading, Trade-Through Protection, and Implications for Market Structure, 
CFA Institute (2016), available at https://www.cfainstitute.org/en/advocacy/policy-
positions/payment-for-order-flow-in-the-united-kingdom. 

   
367 
 
compared to the proposal.  It may also further reduce competition between broker-dealers 
compared to the proposal.  Larger broker-dealers with more diversified business models may be 
more likely to expand their market share and smaller broker-dealers who are more dependent on 
PFOF revenue streams may be more likely to exit the market.  
 
5. Require Broker-Dealers to Utilize Best Execution Committees 
The Commission considered requiring each broker-dealer to maintain a best execution 
committee to regularly review the broker-dealer’s best execution policies, procedures and the 
results of its efforts to secure best execution for its customers.  
 Requiring such a committee and defining its membership might improve execution 
quality by ensuring sufficient expertise is recruited to establish and monitor the broker-dealer’s 
best execution efforts.  Furthermore, requiring such a committee might increase executive 
attention to best execution, potentially improving execution quality for the broker-dealer’s 
customers. 
 Requiring such a committee and defining its membership would entail certain costs in 
addition to those resulting from the proposed rules.  First, if the Commission were to define the 
membership of the committee, it is likely that individual broker-dealers’ organizational structures 
would vary in ways that would make a defined membership structure a poor fit because of, for 
instance, a single employee performing multiple roles, or individual roles handled by groups 
rather than a single individual.  In addition, broker-dealers are diverse in their business plans and 
operations and a role that might be considered critical at one broker-dealer (such as managing 
fixed income executing brokers in thinly traded bonds) might be inapplicable at another broker-
dealer that does not trade in these instruments.   

   
368 
 
If the Commission were to require the committee and not define its membership, broker-
dealers might assign to the committee less senior staff or staff whose roles are not germane to 
achieving best execution for customer orders, significantly limiting the benefits of establishing 
such a committee.  Furthermore, based on the its experience, the Commission believes that 
broker-dealers, particularly large broker-dealers that are more likely to continue to engage in 
conflicted transactions if the proposed rules are adopted, may have such a committee already 
established, further limiting the potential benefits of such a provision. 
6. Require Order-by-Order Documentation for Conflicted or All 
Transactions 
 
The Commission considered requiring each broker-dealer to document on an order-by-
order basis, for conflicted or all transactions, the data that it considered as it handled the order.  
Such a requirement might offer two benefits beyond the benefits of the proposed rules.  First, it 
might improve the quality of the broker-dealer’s regular review of its execution practices 
compared to the proposed rules.  Because the broker-dealer would analyze orders on a case-by-
case basis, it might identify routing practices that could be changed to improve customer order 
execution quality.  Second, it might improve regulators’ ability to oversee the broker-dealer’s 
efforts to provide best execution to its customers relative to the proposed rules as such records 
would be available to regulators during examinations of the broker-dealer or upon request.   
 The Commission preliminarily believes that such a requirement would offer greater 
potential benefits for conflicted transactions because broker-dealers engaging in such 
transactions have greater incentives to route orders in a manner that might not result in the best 
execution for customers. 

   
369 
 
 Based on its experience, the Commission believes that some broker-dealers, particularly 
the largest broker-dealers that are likely to continue to engage in conflicted transactions if the 
proposed rules are adopted, already maintain this type of documentation for both internal review 
and operational purposes.  Nevertheless, the requirement would be costly.  Broker-dealers that do 
not already retain this data likely have chosen not to do so because the data are not operationally 
valuable to them for business purposes, and they believe that they are satisfying their best-
execution obligations based on other data that they have available.  For these broker-dealers, the 
requirement could impose considerable costs.  They would need to alter information technology 
systems to capture this data, including contemporaneous pricing data and routing records, some 
of which (such as prices offered in response to a RFQ and much information related to fixed 
income and digital crypto assets) is not incorporated into other regulatory data sources such as 
CAT and thus might be stored on systems not integrated with other order routing systems, or 
systems that capture regulatory data.  Processing this data might be computationally demanding, 
particularly for options, that have very high quotation traffic.  Furthermore, creating and 
maintaining software to produce this documentation would require significant effort by highly 
skilled programmers, which would further increase the costs associated with such a requirement.  
As discussed previously,
615
 the Commission preliminarily believes that broker-dealers that elect 
to refrain from conflicted transactions if the proposed rules are adopted are more likely to be 
smaller broker-dealers and these costs, many of which are fixed, are more likely to result in the 
broker-dealer changing its business model or exiting the market, while the aggregate benefits to 
                                                 
615
  See Section V.C.2.ii, supra. 

   
370 
 
investors of such a requirement for smaller broker-dealers is likely to be smaller than for larger 
broker-dealers that handle more customer orders. 
7.  Staggered Compliance Dates 
The Commission considered an alternative approach where smaller broker-dealers would 
be given more time to comply with the proposed rules.  Having longer to comply might ease 
implementation for smaller broker-dealers that are less likely to have specialized staff to conduct 
tasks required for compliance.  However, the later compliance date for smaller broker-dealers 
would also delay the realization of the proposed rules’ benefits for investors.   
The Commission preliminarily believes that the cost savings of the alternative could be 
small.  Specifically, under the proposed rules, smaller broker-dealers would likely qualify as 
introducing brokers and would likely de-conflict rather than continue to engage in conflicted 
transactions and incur the additional costs associated with the rule requirements that introducing 
brokers are exempt from under Rule 1101(d).
616
  Consequently, the Commission preliminarily 
believes smaller broker-dealers would have fewer requirements to implement under the proposal, 
mitigating the burden of implementation relative to larger broker-dealers.  In addition, the 
Commission believes that smaller broker-dealers would likely engage external parties for review 
of proposed policies and procedures and for assistance in conducting annual reviews; this 
reliance on external resources for implementation activities would likely mitigate the burden of 
                                                 
616
  See supra section V.C.2.a for discussion of carrying and conflicted broker-dealer costs. 

   
371 
 
implementation on current staff.
617
  These mitigations would limit the potential cost savings of 
delaying implementation for smaller broker-dealers. 
E. Request for Comments  
The Commission is sensitive to the potential economic effects, including costs and 
benefits, of the proposed rule.  The Commission has identified certain costs and benefits 
associated with the proposal and requests comment on all aspects of its preliminary economic 
analysis, including with respect to the specific questions below.  The Commission encourages 
commenters to identify, discuss, analyze, and supply relevant data, information, or statistics 
regarding any such costs or benefits.  In addition to our general request for comments on the 
economic analysis associated with the proposed rules and proposed amendments, we request 
specific comment on certain aspects of the proposal: 
159. What are commenters’ views of the Commission’s economic rationale for the 
proposed rule? 
160. What are commenters’ views of the Commission’s characterization of the relevant 
baseline, against which it considered the effects of the proposal?  
161. What are commenters’ views of the Commission’s characterization of the current 
legal and regulatory framework?  
162. What are commenters’ views of the Commission’s characterization of the 
conflicts of interest in order handling and a need for heightened best execution 
requirements with respect to conflicted transactions? 
                                                 
617
  See supra section V.C.2.a).ii for the discussion about the cost associated with small 
broker-dealers utilizing external sources.  

   
372 
 
163. What are commenters’ views of the Commission’s characterization of the 
conflicts of interest in order handling with respect to PFOF?  
164. What are commenters’ views of the Commission’s characterization of the 
conflicts of interest in order handling with respect to principal trading? 
165. What are commenters’ views of the Commission’s characterization of order 
handling and execution? 
166. What are commenters’ views of the Commission’s characterization of retail 
customer order handling and execution for NMS stocks? 
167. What are commenters’ views of the Commission’s characterization of retail 
customer order handling and execution for listed options?  Do commenters believe that 
the majority of retail orders are routed to the wholesalers in exchange of payment for 
order flow by the retail brokers?  Do commenters believe whether there is a trade-off 
between price improvement received for those retail orders and payment for order flow? 
168. What are commenters’ views of the Commission’s characterization of retail 
customer order handling and execution for fixed income securities?  The Commission 
requests information on the number of trading venues (e.g., ATSs, RFQ platforms, 
broker’s broker platforms, single platforms), to which broker-dealers currently maintain 
access, for the purpose of executing and exposing retail customer orders.  The 
Commission requests information with respect to how broadly broker-dealers expose 
retail customer orders.  The Commission requests information with respect to how many 
executing brokers, to which broker-dealers outsource their fixed income securities trading 
services.  The Commission requests information on what broker-dealers currently 
document (e.g., efforts to apply its best execution policies and procedures for conflicted 

   
373 
 
transactions, the basis and information relied on for its determinations that such 
conflicted transactions would comply with the best execution standard, identifying the 
markets checked, internal quotes, external quotes, limit orders on trading venues) with 
respect to retail customer orders. 
169. The Commission requests comments on retail customer order handling and 
execution for non-NMS stock equity securities.  Please provide any relevant details and 
data on retail customer order handling and execution of non-NMS stock equity securities 
for assessing the effects of the proposal. 
170. What are commenters’ views of the Commission’s characterization of retail 
customer order handling and execution for crypto asset securities?  
171. What are commenters’ views of the Commission’s characterization of best 
execution review process? 
172. What are commenters’ views of the Commission’s characterization of execution 
quality review? 
173. What are commenters’ views of the Commission’s characterization of best 
execution committees? 
174. What are commenters’ views of the Commission’s characterization of the 
competition in the market for broker-dealer services? 
175. What are commenters’ views of the Commission’s characterization of the 
competition in the market for NMS stock trading services? 
176. What are commenters’ views of the Commission’s characterization of the 
competition in the market for listed options trading services?  Do commenters believe 

   
374 
 
that the current features of price improvement auctions are favoring the wholesalers that 
bring the order flow and therefore not competitive?  
177. What are commenters’ views of the Commission’s characterization of the 
competition in the market for fixed income securities trading services? 
178. What are commenters’ views of the Commission’s characterization of the 
competition in the market for corporate debt securities trading services? 
179. What are commenters’ views of the Commission’s characterization of the 
competition in the market for municipal securities trading services? 
180. What are commenters’ views of the Commission’s characterization of the 
competition in the market for U.S. Treasury securities trading services? 
181. What are commenters’ views of the Commission’s characterization of the 
competition in the market for market access?  
182. What are commenters’ views of the Commission’s assessment of the benefits of 
the proposal? 
183. To what extent do commenters believe that broker-dealers will make changes to 
their order handling procedures due to regulatory risk?  What kind of changes might they 
make?  Does the proposal adequately reflect the costs they would bear?  Please provide 
estimates of the costs if possible. 
184. To what extent do commenters believe conflicted broker-dealers will add 
additional routing destinations to expose orders to venues beyond those identified as 
material potential liquidity sources for non-conflicted transactions? 
185. Are there some markets, in which finding venues beyond those identified as 
material potential liquidity sources for non-conflicted transactions difficult?  Please 

   
375 
 
explain.  To what extent will seeking such additional sources of liquidity be cost 
efficient? 
186. What are commenters’ views on the Commission’s discussion of ATS 
connectivity charges? 
187. What are commenters’ views of the Commission’s assessment of the effects 
stemming from changes in order handling procedures? 
188. What are commenters’ views on the extent to which investor execution quality 
will change under the proposal?  Please explain. 
189. To what extent will carrying broker-dealers face additional challenges and bear 
additional costs to comply with the proposal beyond those already discussed in the 
Economic Analysis?  Will the additional restrictions on carrying broker-dealers improve 
investor execution quality? 
190. To what extent do broker-dealers that would be categorized as “conflicted” under 
the proposal already comply with the heightened standards described by the proposal?  
Will these broker-dealers face additional challenges and bear additional costs complying 
with the proposal beyond those already discussed in the Economic Analysis?  Please 
explain. 
191. Do commenters agree with the Commission’s preliminary belief that broker-
dealers that receive relatively small payments for order flow or other incentives that 
would categorize them as conflicted, may choose to stop receiving those incentives to 
comply with the proposal?  Does the Economic Analysis adequately reflect the cost of the 
proposal to these broker-dealers?  Is the Commission’s assumption that broker-dealers 

   
376 
 
with less than $100MM in total assets are likely to de-conflict to avoid the heightened 
standards associated with conflicted transactions reasonable?   
192. Are some broker-dealers likely to pass exchange rebates through to customers in 
order to avoid being conflicted under the proposal?  Are there other ways for broker-
dealers to deal with these rebates that would be less costly to implement?  What costs 
would broker-dealers bear to pass exchange rebates through to their customers? 
193. When a broker-dealer makes changes to its order routing in response to execution 
quality analysis, what costs does it incur? Are the Commission’s estimates of these costs 
reasonable? 
194. Do commenters believe that broker-dealers that currently pay to receive order 
flow may assist their broker-dealer clients in complying with the proposal by providing 
additional information on their policies and procedures to provide best execution?  What 
information would they need to provide and how proprietary is this information? 
195. Do commenters believe that broker-dealers that currently pay to receive order 
flow are significant contributors to the market for liquidity provision in thinly traded 
securities?  Would the proposal disrupt liquidity provision to securities that are thinly 
traded?  In which types of securities would these effects be most pronounced? 
196. Do commenters believe that the proposal is likely to increase the prevalence of 
commissions in retail trading?  In which asset classes would such changes be most likely? 
197. What are commenters’ views of the Commission’s assessment of the effects 
stemming from changes in order handling procedures for NMS stocks? 
198. What are commenters’ views of the Commission’s assessment of the effects 
stemming from changes in order handling procedures for listed options?  Do commenters 

   
377 
 
believe that more retail orders would be routed to price improvement auctions for 
execution?  Do commenters believe that more retail orders would be routed to the 
exchanges that offer price improvement order types on the limit order books? 
199. What are commenters’ views of the Commission’s assessment of the effects 
stemming from changes in order handling procedures for on-the-run U.S. Treasury 
securities? 
200. What are commenters’ views of the Commission’s assessment of the effects 
stemming from changes in order handling procedures for fixed income securities 
(excluding on-the-run U.S. Treasury securities)? 
201. With respect to fixed income securities trading, do commenters believe that the 
proposal (e.g., the documentation requirement with respect to conflicted transactions) 
would enhance internal review (e.g., internal review by best execution committee) of 
execution quality? 
202. With respect to fixed income securities trading, do commenters believe that the 
proposal would improve the execution quality of retail customer trades by executing 
brokers?  Please explain. 
203. The Commission requests comments on the effects stemming from changes in 
order handling procedures for non-NMS stock equity securities. 
204. What are commenters’ views of the Commission’s description of the non-NMS 
stock equity market?  Please highlight any omitted or misunderstood elements on this 
market. 
205. Do commenters agree with the Commission’s characterization of internalization 
in the non-NMS stock equities market? 

   
378 
 
206. Do commenters agree with the assertion that the non-NMS stock equity market 
can offer a high degree of transparency in liquid securities?  Please list any sources of 
pre-trade and post-trade information used when transacting in this market. 
207. What are commenters’ views on the necessity to connect to any given ATS when  
transacting in non-NMS stock equities?  Please explain the rationale for connecting to an 
additional ATS in this market.  If there are other non-ATS sources of liquidity, please 
describe them. 
208. Do commenters believe the effects of the proposed rule on the non-NMS equity 
securities market will cause any brokers (introducing or otherwise) to reduce 
participation in or to exit this market?  Please describe the rationale for any response. 
209. Do commenters believe the requirements of this rule will have effects on the 
liquidity in the market for non-NMS stock equities?  Please explain. 
210. Do commenters believe that execution quality can be accurately measured in the 
non-NMS equity securities market?  If so, please describe methods currently used to 
achieve execution quality analysis. 
211. What are commenters’ views of the Commission’s assessment of the effects 
stemming from changes in order handling procedures for crypto asset securities? 
212. The Commission requests more information regarding the proportion of crypto 
asset security trading that is facilitated by introducing brokers. 
213. The Commission requests more information regarding the level and variation of 
payment for order flow (i.e., transaction rebates) rates in crypto asset security markets.  
214. The Commission requests more information regarding the frequency of affiliated 
ATS routing in crypto asset security markets.  

   
379 
 
215. The Commission requests more information regarding the frequency of principal 
trading in crypto asset security markets.  
216. What are commenters’ views of the Commission’s assessment of the costs of the 
proposal?  Please provide as many quantitative estimates to support your position on 
costs as possible. 
217. Does the Economic Analysis account for all compliance costs?  If not, what other 
compliance costs would market participants incur?  Please provide as many quantitative 
estimates to support your position on costs as possible. 
218. With respect to fixed income securities trading, do commenters believe that 
broker-dealers would alter business practices to execute self-directed trades of retail 
customer on an agency basis rather than riskless principal basis to avoid being subject to 
the proposed requirements for conflicted transactions?  If so, please provide quantitative 
cost estimates for converting retail self-directed trading business from riskless principal 
based to agency based. 
219. The Commission requests comments on the costs associated with subscribing to a 
fixed income ATS (e.g., subscription fees, connectivity fees, API).  Please provide 
quantitative cost estimates if possible. 
220. What are commenters’ views of the Commission’s assessment of the effects of the 
proposal on efficiency, competition and capital formation?  
221. What are commenters’ views of the Commission’s assessment of the proposal’s 
effects on competition?  
222. What are commenters’ views of the Commission’s assessment of the proposal’s 
effects on the competition in the market for trading services?  

   
380 
 
223. What are commenters’ views of the Commission’s assessment of the proposal’s 
effects on the competition in the market for trading services for NMS stocks?  
224. What are commenters’ views of the Commission’s assessment of the proposal’s 
effects on the competition in the market for trading services for listed options?   In 
particular, would the proposed rule result in the exchanges improving the level of 
competition and efficiency of the price improvement auction mechanisms by offering 
more symmetric fee schedule and allocation model?  Would the proposed rule result in 
certain options exchanges starting to introduce order types to allow liquidity provision at 
the midpoint of the NBBO spread? 
225. What are commenters’ views of the Commission’s assessment of the proposal’s 
effects on the competition in the market for trading services for fixed income securities?  
226. The Commission requests comments on the proposal’s effects on the competition 
in the market for trading services for non-NMS stock equity securities. 
227. What are commenters’ views of the Commission’s assessment of the proposal’s 
effects on the competition in the market for trading services for crypto asset securities? 
228. What are commenters’ views of the Commission’s assessment of the proposal’s 
effects on competition in the market for broker-dealer services?  
229. What are commenters’ views of the Commission’s assessment of the proposal’s 
effects on the competition in the market for broker-dealer services for NMS stocks?  
230. What are commenters’ views of the Commission’s assessment of the proposal’s 
effects on the competition in the market for broker-dealer services for listed options?  

   
381 
 
231. What are commenters’ views of the Commission’s assessment of the proposal’s 
effects on the competition in the market for broker-dealer services for fixed income 
securities? 
232. The Commission requests comments on the proposal’s effects on the competition 
in the market for broker-dealer services for non-NMS stock equity securities. 
233. What are commenters’ views of the Commission’s assessment of the proposal’s 
effects on the competition in the market for broker-dealer services for crypto asset 
securities? 
234. What are commenters’ views of the Commission’s assessment of the proposal’s 
effects on the competition in the market for market access?  
235. What are commenters’ views of the Commission’s assessment of the proposal’s 
effects on the competition in the market for market access for NMS stocks?  
236. What are commenters’ views of the Commission’s assessment of the proposal’s 
effects on the competition in the market for market access for listed options?  
237. What are commenters’ views of the Commission’s assessment of the proposal’s 
effects on the competition in the market for market access for fixed income securities?  
238. The Commission requests comments on the proposal’s effects on the competition 
in the market for market access for non-NMS stock equity securities. 
239. What are commenters’ views of the Commission’s assessment on the competition 
in the market for market access for crypto asset securities? 
240. What are commenters’ views on the likelihood of broker-dealers reducing their 
participation in or leaving certain markets due to compliance costs of the proposal?  

   
382 
 
Which markets would be most affected?  Are there particular groups of investors that 
may be underserved by these markets if the proposal is adopted? 
241. What are commenters’ views of the economic effects on the market structure or 
order handling practices in the markets for securities based swaps, asset-backed 
securities, and repurchase and reverse repurchase agreements?  
242. What are commenters’ views of the Commission’s assessment of the effects of the 
proposal on efficiency?  
243. What are commenters’ views of the Commission’s assessment of the effects of the 
proposal on capital formation?  
244. What are commenters’ views of the Commission’s assessment of the effects of an 
alternative to adopt FINRA Rule 5310 and MSRB Rule G-18 best execution rules?  
245. What are commenters’ views of the Commission’s assessment of the effects of an 
alternative to require order execution quality disclosure for other asset classes?  
246. What are commenters’ views of the Commission’s assessment of the effects of an 
alternative to utilize FINRA’s and MSRB’s definition of introducing brokers?  
247. What are commenters’ views of the Commission’s assessment of the effects of an 
alternative to ban or restrict off-exchange PFOF?  
248. Are there any additional reasonable alternatives that the Commission should 
consider?  If so, please discuss that alternative and provide the benefits and costs of that 
alternative relative to the baseline and to the proposal. 
VI. Paperwork Reduction Act 

   
383 
 
Certain provisions of proposed Rules 1101 and 1102, as well as proposed Rule 17a-
4(b)(17), contain “collection of information requirements” within the meaning of the Paperwork 
Reduction Act of 1995 (“PRA”).
618
  The Commission is submitting these collections of 
information to the Office of Management and Budget (“OMB”) for review in accordance with 44 
U.S.C. 3507(d) and 5 CFR 1320.11.  The titles for these collections of information are:  (1) 
“Regulation Best Execution”; and (2) Rule 17a-4—Records to be Preserved by Certain Exchange 
Members, Brokers and Dealers (OMB control number 3235-0279).
619
  An agency may not 
conduct or sponsor, and a person is not required to respond to, a collection of information unless 
the agency displays a currently valid control number. 
A. Summary of Collection of Information 
Proposed Rules 1101 and 1102, as well as proposed Rule 17a-4(b)(17), would include a 
collection of information within the meaning of the PRA for broker-dealers, as described below 
in this section VI.A.  Further, the proposed Rule 17a-4(b)(17) would impose new record 
retention obligations on broker-dealers subject to Regulation Best Execution. 
1. Required Policies and Procedures and Related Obligations 
As detailed above,
620
 proposed Rule 1101 would require that a broker-dealer that engages 
in any transaction for or with a customer or a customer of another broker-dealer establish, 
maintain, and enforce written policies and procedures reasonably designed to comply with the 
proposed best execution standard.  These policies and procedures would be required to address:  
                                                 
618
  44 U.S.C. 3501 et seq. 
619
  See 17 CFR 240.17a-4.  The proposed amendment to Rule 17a-4(b)(17) would amend the 
existing PRA for Rule 17a-4. 
620
  See supra sections IV.B – IV.E. 

   
384 
 
(1) how a broker-dealer will comply with the best execution standard; (2) how the broker-dealer 
will determine the best market and make routing or execution decisions for customer orders; (3) 
additional considerations applicable to conflicted transactions with retail customers; and (4) to 
the extent applicable, the obligations of introducing brokers that meet the definition in proposed 
Rule 1101(d).   
In particular, these policies and procedures must address how the broker-dealer will 
comply with the best execution standard, including by obtaining and assessing reasonably 
accessible information, including information about price, volume, and execution quality, 
concerning the markets trading the relevant securities; identifying markets that may be 
reasonably likely to provide the most favorable prices for customer orders; and incorporating 
these material potential liquidity sources into the broker-dealer’s order handling practices and 
ensuring that the broker-dealer can efficiently access each such material potential liquidity 
source.
621
  The policies and procedures must also address how the broker-dealer will determine 
the best market and make routing or execution decisions for customer orders, including by:    (1) 
assessing reasonably accessible and timely information with respect to the best displayed prices, 
opportunities for price improvement, including midpoint executions, and order exposure 
opportunities that may result in the most favorable price; (2) assessing the attributes of customer 
orders and considering the trading characteristics of the security, the size of the order, the 
likelihood of execution, the accessibility of the market, and any customer instructions in 
selecting the market most likely to provide the most favorable price; and (3) in determining the 
                                                 
621
  See proposed Rule 1101(a)(1). 

   
385 
 
number and sequencing of markets to be assessed, reasonably balancing the likelihood of 
obtaining a better price with the risk that delay could result in a worse price.
622
   
For conflicted transactions, as described in more detail above,
623
 proposed Rule 1101(b) 
would require written policies and procedures to address additional considerations.
624
  The 
broker-dealer’s policies and procedures would need to additionally address:  (1) how the broker-
dealer will obtain and assess information beyond that required by proposed Rule 1101(a)(1)(i), 
including additional information about price, volume, and execution quality, in identifying a 
broader range of markets beyond those identified as material potential liquidity sources and (2) 
how the broker-dealer will evaluate a broader range of markets, beyond those identified as 
material potential liquidity sources, that might provide the most favorable price for customer 
orders, including a broader range of order exposure opportunities and markets that may be 
smaller or less accessible than those identified as material potential liquidity sources.  The 
broker-dealer must additionally document, in accordance with written procedures, its compliance 
with the best execution standard for conflicted transactions, including all efforts taken to enforce 
the policies and procedures required by proposed Rule 1102(b) for conflicted transactions, and 
the basis and information relied on for its determination that such conflicted transactions would 
comply with the best execution standard.  The broker-dealer would also have to document any 
arrangement, whether written or oral, concerning payment for order flow, including the parties to 
                                                 
622
  See proposed Rule 1101(a)(2). 
623
  See supra section IV.C.  
624
  See proposed Rule 1101(b). 

   
386 
 
the arrangement, all qualitative and quantitative terms concerning the arrangement, and the date 
and terms of any changes to the arrangement. 
A broker-dealer would also have to, no less frequently than quarterly, review the 
execution quality of its transactions for or with customers or customers of another broker-dealer 
and how such execution quality compares with the execution quality the broker-dealer might 
have obtained from other markets, revise its best execution policies and procedures, including its 
order handling practices, accordingly, and document the results of this review.
625
 
To the extent that it has an arrangement with an executing broker for the handling of is 
customer orders, an introducing broker, as defined in proposed Rule 1101(d), would not have to 
comply with all of the requirements of proposed Rule 1101.  Instead, as described above,
626
 
proposed Rule 1101(d) would provide that an introducing broker that routes customer orders to 
an executing broker would not need to separately comply with proposed Rules 1101(a), (b), and 
(c), so long as the introducing broker establishes, maintains, and enforces policies and 
procedures that require the introducing broker to regularly review the execution quality obtained 
from its executing broker, compare that execution quality with the execution quality it might 
have obtained from other executing brokers, and revise its order handling practices, accordingly.  
An introducing broker would additionally be required to document the results of its review. 
Finally, any broker-dealer subject to proposed Rule 1101 would be required under 
proposed Rule 17a-4(b)(17) to preserve the records made under proposed Rule 1101.
627
  
                                                 
625
  See proposed Rule 1101(c). 
626
  See supra section IV.E.  
627
  Any written policies and procedures developed pursuant to proposed Rule 1101 would be 
required to be preserved pursuant to existing Rule 17a-4(e)(7). 

   
387 
 
Accordingly, a broker-dealer would be required to preserve those records for a period of not less 
than three years, the first two years in an easily accessible place.   
2. Annual Report  
As detailed above,
628
 proposed Rule 1102 would require that a broker-dealer that effects 
any transaction for or with a customer or a customer of another broker-dealer, no less frequently 
than annually, review and assess the design and overall effectiveness of its best execution 
policies and procedures, including its order handling practices.  The broker-dealer must prepare a 
written report detailing the results of such review and assessment, including a description of all 
deficiencies found and any plan to address deficiencies, and the report must be presented to the 
broker-dealer’s board of directors (or equivalent governing body).  The broker-dealer would be 
required to preserve a copy of each such report, and the documentation for each such review and 
assessment, pursuant to proposed Rule 17a-4(b)(17).
629
 
B. Proposed Use of Information  
Generally, the collections of information required under proposed Rules 1101 and 1102, 
as described below in this section VI.B, would enable a broker-dealer to comply with its 
obligations under proposed Regulation Best Execution, allow the broker-dealer to identify any 
inadequacies and make any revisions to its policies and procedures, including order handling 
practices, as appropriate to ensure the broker-dealer’s continued effective compliance with the 
                                                 
628
  See supra section IV.F. 
629
  Any written procedures developed pursuant to proposed Rule 1102 would be required to 
be preserved pursuant to existing Rule 17a-4(e)(7). 

   
388 
 
best execution standard, and create documentation that the Commission and SROs could use for 
purposes of examinations and investigations. 
Records retained in accordance with proposed Rule 17a-4(b)(17) would assist a broker-
dealer in supervising and assessing internal compliance with Regulation Best Execution and 
assist the Commission and SROs in connection with examinations and investigations. 
1. Required Policies and Procedures and Related Obligations 
The collection of information pursuant to proposed Rule 1101 would require written 
documentation of a broker-dealer’s policies and procedures reasonably designed to comply with 
the best execution standard in proposed Rule 1100.  Generally, these policies and procedures 
would provide a documented process for handling customer orders that a broker-dealer would 
use to ensure its ongoing compliance with the best execution standard.  In addition, these written 
policies and procedures would assist the Commission and SROs in conducting examinations and 
investigations for compliance with the proposed rules, including the proposed best execution 
standard.  Any ongoing collections of information pursuant to proposed Rule 1101, including a 
conflicted broker-dealer’s documentation of its best execution determinations and its payment 
for order flow arrangements in accordance with written procedures, a broker-dealer’s 
documentation of the results of its execution quality reviews, and an introducing broker’s 
documentation of its executing broker execution quality reviews, would assist the broker-dealer 
in its ongoing efforts to transact for or with customers consistent with its best execution policies 
and procedures, and in turn ensure compliance with the best execution standard.  Ongoing 
collections of information would also assist the Commission and SROs in examinations and 
investigations by ensuring that appropriate documentation is available to determine whether a 

   
389 
 
broker-dealer is adhering to its best execution policies and procedures and otherwise in 
compliance with all applicable requirements of proposed Regulation Best Execution. 
2. Annual Report 
The collection of information pursuant to proposed Rule 1102 would also provide 
appropriate documentation of a broker-dealer’s continued efforts to comply with the best 
execution standard and would help to ensure that the broker-dealer’s best execution policies and 
procedures remain effective.  In particular, the requirement of proposed Rule 1102 to document 
the results of a broker-dealer’s annual review of its best execution policies and procedures would 
enable the broker-dealer, including its governing body, to identify any inadequacies and make 
any changes to the broker-dealer’s best execution policies and procedures, including its order 
handling practices, as appropriate in order to further its compliance with the proposed rules.  The 
collection of information pursuant to proposed Rule 1102 would also create documentation of 
such compliance that the Commission and SROs could use for purposes of investigations and 
examinations.   
C. Respondents 
The respondents to proposed Rules 1101, 1102, and 17a-4(b)(17) would be broker-
dealers that engage in securities transactions for or with a customer, or a customer of another 
broker-dealer.  Based on FOCUS Report data,
630
 the Commission estimates that, as of June 30, 
                                                 
630
  FOCUS Reports, or “Financial and Operational Combined Uniform Single” Reports, are 
monthly, quarterly, and annual reports that broker-dealers are generally required to file 
with the Commission and/or SROs pursuant to Exchange Act Rule 17a-5.  See 17 CFR 
240.17a-5. 

   
390 
 
2022, there were 3,498 broker-dealers.
631
  The Commission preliminarily believes that nearly all 
of these broker-dealers would engage in customer transactions and be subject to these rules.  
Accordingly, for purposes of the PRA, the Commission estimates 3,498 respondents.  The 
Commission requests comment on the accuracy of these estimated figures. 
D. Total Initial and Annual Reporting and Recordkeeping Burdens 
1. Required Policies and Procedures and Related Obligations 
a) Initial Costs and Burdens 
The Commission preliminarily believes that broker-dealers generally already have 
policies and procedures in place to achieve compliance with the best execution rules of FINRA 
and the MSRB, as applicable, although these policies and procedures differ based on each 
broker-dealer’s business model.  For purposes of the PRA, the Commission must consider the 
burden on respondents to bring their best execution policies and procedures into compliance with 
the proposed rule, which in certain cases would impose additional and more specific obligations.  
The extent to which a respondent would be burdened by the proposed collection of information 
under the proposed rule would depend on the best execution policies and procedures that have 
already been established by a respondent as well as the respondent’s business model.  To the 
extent broker-dealers’ existing best execution policies and procedures already substantially 
address the requirements of proposed Rule 1101, these broker-dealers likely would only require 
limited updates to their policies and procedures to meet the additional obligations specified in the 
proposed rule.  To initially comply with this obligation, the Commission preliminarily believes 
that broker-dealers would employ a combination of in-house and outside legal and compliance 
                                                 
631
  The data are obtained from FOCUS Reports, Part II filed for the second quarter of 2022.  

   
391 
 
counsel to update existing policies and procedures.  The Commission assumes that, for purposes 
of this analysis, the associated costs and burdens would differ between small and large broker-
dealers, as large broker-dealers generally offer more products and services and are more likely to 
engage in conflicted transactions, and therefore would need to develop a more extensive set of 
policies and procedures.  Based on FOCUS Report data, the Commission estimates that, as of 
June 30, 2022, approximately 761 broker-dealers are small entities under the Regulatory 
Flexibility Act.
632
  Therefore, the Commission estimates that 2,737 broker-dealers would qualify 
as large broker-dealers for purposes of this analysis.
633
   
Although the exact nature and extent of the policies and procedures that a broker-dealer 
would be required to establish likely would vary depending upon the business model of the 
broker-dealer,
634
 the Commission broadly estimates that a large broker-dealer, which the 
Commission assumes is more likely to need to satisfy the heightened requirements applicable to 
conflicted transactions, would incur a one-time average internal burden of 85 hours for in-house 
legal and in-house compliance counsel to update existing policies and procedures to comply with 
proposed Rule 1101.
635
  The Commission additionally estimates a one-time burden of 12 hours 
                                                 
632
  See infra note 691 (describing the definition of the term “small entity”). 
633
  This calculation was made as follows: (3,498 total broker-dealers) – (761 small broker-
dealers) = 2,737 large broker-dealers. 
634
  For purposes of the PRA, the burden to establish policies and procedures means those a 
respondent is required to establish pursuant to proposed Rules 1101(a), (b), and (d). 
635
  This estimate would be broken down as follows: 67 hours for in-house legal counsel + 18 
hours for in-house compliance counsel to update existing policies and procedures = 85 
burden hours. 

   
392 
 
for a general counsel at a large broker-dealer and 12 hours for a Chief Compliance Officer to 
review and approve the updated policies and procedures, for a total of 109 burden hours.
636
  In 
addition, the Commission estimates a cost of approximately $7,936 for outside counsel to review 
the updated policies and procedures on behalf of a large broker-dealer.
637
  The Commission 
therefore estimates the aggregate burden for large broker-dealers to be 298,333 burden hours,
638
 
and the aggregate cost for large broker-dealers to be approximately $21.72 million.
639
 
In contrast, the Commission preliminarily believes small broker-dealers would primarily 
rely on outside counsel to update existing policies and procedures, as small broker-dealers 
generally have fewer in-house legal and compliance personnel.  Moreover, the Commission 
believes small broker-dealers would be less likely to engage in conflicted transactions subject to 
the additional procedural obligations of proposed Rule 1101(b), and would be more likely to 
qualify as introducing brokers and be exempt from complying with proposed Rule 1101(a), (b), 
and (c),  and therefore would need to develop a less extensive set of policies and procedures.  
                                                 
636
  This estimate is based on the following calculation: (85 hours of review for in-house legal 
and in-house compliance counsel) + (12 hours of review for general counsel) + (12 hours 
of review for Chief Compliance Officer) = 109 burden hours. 
637
  The Commission’s estimates of the relevant wage rates for outside legal services of 
$496/hour take into account staff experience, a variety of sources including general 
information websites, and adjustments for inflation.  This cost estimate is therefore based 
on the following calculation: (16 hours of review) x ($496/hour for outside counsel 
services) = $7,936 in outside counsel costs. 
638
  This estimate is based on the following calculation: (109 burden hours of review per large 
broker-dealer) x (2,737 large broker-dealers) = 298,333 aggregate burden hours. 
639
  This estimate is based on the following calculation: ($7,936 for outside counsel costs per 
large broker-dealer) x (2,737 large broker-dealers) = $21.72 million in outside counsel 
costs. 

   
393 
 
Accordingly, the Commission estimates that only 65 hours of outside legal counsel services 
would be required to update such small broker-dealers’ policies and procedures, for a total one-
time cost of approximately $32,240 per small broker-dealer,
640
 and an aggregate cost of 
approximately $24.53 million for all small broker-dealers.
641
  The Commission additionally 
estimates in-house compliance personnel would require 18 hours to review and approve the 
updated policies and procedures, for an aggregate burden of 13,698 hours.
642
 
 The Commission preliminarily believes that broker-dealers would utilize their existing 
recordkeeping systems to preserve any documents necessary to comply with proposed Rule 17a-
4(b)(17).  Accordingly, the Commission estimates that broker-dealers will incur no new initial 
burdens or costs to retain the records made pursuant to proposed Rule 17a-4(b)(17).  
Nevertheless, the Commission requests comment on this assumption and whether the 
requirements of proposed Rule 17a-4(b)(17) would pose additional initial burdens or costs on 
broker-dealers. 
                                                 
640
  This cost estimate is based on the following calculation: (65 hours of review) x 
($496/hour for outside counsel services) = $32,240 in outside counsel costs. 
641
  This cost estimate is based on the following calculation: ($32,240 for outside attorney 
costs per small broker-dealer) x (761 small broker-dealers) = $24.53 million in outside 
counsel costs. 
642
  This estimate is based on the following calculation: (18 burden hours) x (761 small 
broker-dealers) = 13,698 aggregate burden hours. 

   
394 
 
The Commission therefore estimates the total initial aggregate burden to be 312,031 
hours,
643
 and the total initial aggregate cost to be approximately $46.25 million.
644
 
b) Ongoing Costs and Burdens 
On an ongoing basis, a respondent would have to maintain and review its best execution 
policies and procedures to ensure their effectiveness as well as to address any deficiencies found 
and to accommodate the addition of, among other things, new products or services, new business 
lines, or new markets or trading characteristics for a particular security.  Proposed Rule 1101(c) 
would also require a broker-dealer to, no less frequently than quarterly, review the execution 
quality of its transactions for or with customers or customers of another broker-dealer, and how 
such execution quality compares with the execution quality the broker-dealer might have 
obtained from other markets, and to revise is best execution policies and procedures accordingly.  
Broker-dealers would also have to document the results of this review.  Additionally, proposed 
Rule 1101(b) would require broker-dealers that engage in conflicted transactions to document, in 
accordance with written procedures, their compliance with the best execution standard for 
conflicted transactions, including all efforts to enforce their best execution policies and 
procedures for conflicted transactions and the basis and information relied on for their 
determinations that such conflicted transactions would comply with the best execution standard, 
as well as to document their payment for order flow arrangements.  Moreover, in lieu of the 
                                                 
643
  This estimate is based on the following calculation: (298,333 aggregate burden hours for 
large broker-dealers) + (13,698 aggregate burden hours for small broker-dealers) = 
312,031 total aggregate burden hours. 
644
  This estimate is based on the following calculation: ($21.72 million in aggregate costs for 
large broker-dealers) + ($24.53 million in aggregate costs for small broker-dealers) = 
$46.25 million total aggregate costs. 

   
395 
 
requirements of proposed Rules 1101(a), (b), and (c), proposed Rule 1101(d) would require an 
introducing broker relying on that rule to establish, maintain, and enforce policies and 
procedures that require the introducing broker to regularly review the execution quality obtained 
from its executing broker, compare it with the execution quality it might have obtained from 
other executing brokers, and revise its order handling practices, accordingly.  The introducing 
broker would have to document the results of this review. 
Once a broker-dealer has established written policies and procedures reasonably designed 
to achieve best execution, the Commission estimates that large broker-dealers would each 
annually incur an internal burden of 25 hours to review and update existing policies and 
procedures:
645
  9 hours for legal personnel, 8 hours for compliance personnel, and 8 hours for 
business-line personnel.  The Commission further estimates that large broker-dealers would each 
annually incur an internal burden of 100 hours to conduct and document their reviews of 
execution quality pursuant to proposed Rule 1101(c) and document their efforts to obtain best 
execution for any conflicted transactions and their payment for order flow arrangements pursuant 
to proposed Rule 1101(b):  10 hours for legal personnel, 20 hours for compliance personnel, and 
70 hours for business-line personnel.  The Commission therefore estimates an ongoing, 
aggregate burden for large broker-dealers of approximately 342,125 hours.
646
  Because the 
Commission assumes that large broker-dealers would rely on internal personnel, rather than 
outside counsel, to update their policies and procedures on an ongoing basis, to conduct and 
                                                 
645
  See supra note 634. 
646
  This estimate is based on the following calculation: (125 burden hours per large broker-
dealer) x (2,737 large broker-dealers) = 342,125 aggregate ongoing burden hours. 

   
396 
 
document their execution quality reviews, and to document their efforts to obtain best execution 
for conflicted transactions, the Commission estimates large broker-dealers would not incur 
additional ongoing costs.  
The Commission assumes for purposes of this analysis that small broker-dealers would 
mostly rely on outside legal counsel and outside compliance consultants for review and update of 
their policies and procedures.
647
  The Commission preliminarily estimates that outside legal 
counsel would require approximately 11 hours per year to update policies and procedures, for an 
annual cost of approximately $5,456 for each small broker-dealer.
648
  The estimated aggregate, 
annual ongoing cost for outside legal counsel to update policies and procedures for all small 
broker-dealers would be approximately $4.15 million.
649
  In addition, the Commission estimates 
that small broker-dealers would require 11 hours of outside compliance services per year to 
update their policies and procedures, for an ongoing cost of approximately $3,344 per year,
650
 
                                                 
647
  See supra note 640. 
648
  This estimate is based on the following calculation: (11 hours per small broker-dealer) x 
($496/hour for outside counsel services) = $5,456 in outside counsel costs. 
649
  This estimate is based on the following calculation: ($5,456 in outside counsel costs per 
small broker-dealer) x (761 small broker-dealers) = $4.15 million in aggregate, ongoing 
outside legal costs. 
650
  The Commission believes that performance of this function will most likely be equally 
allocated between a senior compliance examiner and a compliance manager.  Based on 
industry sources, Commission staff preliminarily estimates that the costs for these 
positions in the securities industry are $264 and $344 per hour, respectively, for an 
average of $304 per hour.  This cost estimate is based on the following calculation: (11 
hours of review) x ($304/hour for outside compliance services) = $3,344 in outside 
compliance service costs. 

   
397 
 
and an aggregate ongoing cost of approximately $2.54 million.
651
  The Commission further 
estimates that small broker-dealers would require 20 hours of outside compliance services per 
year to conduct and document their reviews of execution quality and document their efforts to 
obtain best execution for conflicted transactions and payment for order flow arrangements, for an 
ongoing cost of approximately $6,080 per year,
652
 and an aggregate ongoing cost of 
approximately $4.63 million.
653
  The total aggregate, ongoing cost for small broker-dealers is 
therefore estimated at approximately $11.32 million per year.
654
  For purposes of this analysis, 
the Commission assumes that small broker-dealers would engage in fewer conflicted transactions 
than large broker-dealers and be more likely to comply with the regular review required by 
proposed Rule 1101(d) for introducing brokers in lieu of the regular review required by proposed 
Rule 1101(c). 
In addition to the ongoing costs described above, the Commission additionally estimates 
small broker-dealers would incur an internal burden of approximately 6 hours for an in-house 
compliance manager to review and approve the updated policies and procedures per year.  The 
                                                 
651
  This estimate is based on the following calculation: ($3,344 in outside compliance costs 
per small broker-dealer) x (761 small broker-dealers) = $2.54 million in aggregate, 
ongoing outside compliance costs. 
652
  This cost estimate is based on the following calculation: (20 hours of review) x 
($304/hour for outside compliance services) = $6,080 in outside compliance service 
costs. 
653
  This estimate is based on the following calculation: ($6,080 in outside compliance costs 
per small broker-dealer) x (761 small broker-dealers) = $4.63 million in aggregate, 
ongoing outside compliance costs. 
654
  This estimate is based on the following calculation: ($4.15 million for outside legal 
counsel costs) + ($2.54 million for outside compliance costs for policies and procedures) 
+ ($4.63 million for outside compliance costs for regular reviews and documentation) = 
$11.32 million total aggregate ongoing costs. 

   
398 
 
Commission further estimates that small broker-dealers would incur an internal burden of 
approximately 30 hours per year for in-house business-line personnel to conduct and document 
their reviews of execution quality and document their efforts to obtain best execution for 
conflicted transactions and payment for order flow arrangements.  In addition, the Commission 
estimates that small-broker dealers would incur an internal burden of approximately 8 hours per 
year for in-house compliance personnel to review the execution quality reviews and 
documentation of efforts to obtain best execution for conflicted transactions and payment for 
order flow arrangements.  The Commission estimates that the ongoing burden for business-line 
personnel, in-house compliance personnel and in-house compliance manager review for each 
small broker dealer would be 44 hours and the ongoing, aggregate burden for all small broker-
dealers would be 33,484 hours for business-line personnel, in-house compliance personnel, and 
in-house compliance manager review.
655
    
The Commission estimates that the approximate ongoing burden associated with the 
recordkeeping requirements of proposed Rule 17a-4(b)  (17) for any records made in compliance 
with proposed Rule 1101 would be 15,968 burden hours per year.
656
  The Commission does not 
                                                 
655
  This estimate is based on the following calculation: (6 hours in-house compliance 
manager review per small broker-dealer) + (30 hours business-line personnel review per 
small broker-dealer) + (8 hours in-house compliance personnel review per small broker-
dealer) = 44 hours per small broker dealer x (761 small broker-dealers) = 33,484 
aggregate ongoing burden hours. 
656
  Because the Commission assumes broker-dealers would utilize their existing 
recordkeeping systems to preserve any records made in compliance with proposed Rule 
1101, the Commission estimates that the burdens associated with such record retention 
would be minimal.  Accordingly, the Commission estimates the aggregate ongoing 
burden based on the following calculation: (5 burden hours in-house compliance 
personnel per large broker-dealer x 2,737 large broker-dealers) + (3 burden hours in-

   
399 
 
believe that the ongoing costs associated with ensuring compliance with the retention schedule 
would change from the current costs of ensuring compliance with existing Rule 17a-4.  However, 
the Commission requests comment regarding whether there would be additional costs relating to 
ensuring compliance with record retention and retention schedules pursuant to Rule 17a-4.     
The Commission therefore estimates the total ongoing aggregate burden to be 391,577 
hours,
657
 and the total ongoing aggregate cost to be approximately $11.32 million per year.
658
 
The Commission acknowledges that policies and procedures required by proposed Rule 
1101 may vary greatly by broker-dealer, given the differences in size and the complexity of 
broker-dealer business models.  Accordingly, the need to update policies and procedures might 
also vary greatly.  The Commission requests comment regarding the accuracy of the estimated 
burden hours and costs necessary to comply with the proposal. 
2. Annual Report  
a) Initial Costs and Burdens 
Proposed Rule 1102 would require a broker-dealer to, no less frequently than annually, 
review and assess the design and overall effectiveness of its best execution policies and 
procedures, including its order handling practices.  A broker-dealer would be required to conduct 
                                                 
house compliance personnel per small broker-dealer x 761 small broker-dealers) = 15,968 
aggregate ongoing burden hours. 
657
  This estimate is based on the following calculation: (342,125 aggregate ongoing burden 
hours for large broker-dealers for proposed Rule 1101) + (33,484 aggregate ongoing 
burden hours for small broker-dealers for proposed Rule 1101) + (15,968 aggregate 
ongoing burden hours for all broker-dealers for proposed Rule 17a-4(b)(17)) = 391,577 
total aggregate ongoing burden hours. 
658
  This estimate is based on the following calculation: ($11.32 million per year in total 
aggregate ongoing costs for small broker-dealers) + ($0 ongoing costs for large broker-
dealers) = $11.32 million per year in total aggregate ongoing costs. 

   
400 
 
the review and assessment in accordance with written procedures, as well as document the 
review and assessment.   The broker-dealer would also have to prepare a written report detailing 
the results of such review and assessment, including a description of all deficiencies found any 
plan to address deficiencies, and the report would be required to be presented to the board of 
directors (or equivalent governing body) of the broker-dealer.  The broker-dealer would be 
required to preserve a copy of each such report and documentation for each such review and 
assessment pursuant to proposed Rule 17a-4(b)(17). 
The Commission preliminarily believes that a respondent should currently have written 
compliance procedures reasonably designed to review its business activity.  Proposed Rule 1102 
would initially require a respondent to update such written compliance procedures to document 
the method in which the respondent plans to conduct its review and assessment pursuant to 
proposed Rule 1102.   
The Commission broadly estimates that a large broker-dealer would incur a one-time 
average internal burden of 15 hours for in-house legal and in-house compliance counsel to 
update its existing compliance procedures for reviewing and assessing the design and overall 
effectiveness of its best execution policies and procedures.
659
  The Commission additionally 
estimates a one-time burden of 2 hours for a general counsel at a large broker-dealer and 1 hour 
for a Chief Compliance Officer to review and approve the updated compliance procedures, for a 
                                                 
659
  This estimate would be broken down as follows: 10 hours for in-house legal counsel + 5 
hours for in-house compliance counsel to update existing policies and procedures = 15 
burden hours. 

   
401 
 
total of 18 burden hours per large broker-dealer.
660
  In addition, the Commission estimates a cost 
of approximately $1,488 for outside counsel to review the updated compliance procedures on 
behalf of a large broker-dealer.
661
  The Commission therefore estimates the aggregate burden for 
large broker-dealers to be 49,266 burden hours,
662
 and the aggregate cost for large broker-dealers 
to be approximately $4.1 million.
663
 
In contrast, the Commission believes small broker-dealers would primarily rely on 
outside counsel to update existing compliance procedures, as small broker-dealers generally have 
fewer in-house legal and compliance personnel.  The Commission estimates that a small broker-
dealer would require an average of 10 hours of outside legal counsel services to update the 
compliance procedures, for a total one-time cost of approximately $4,960 per small broker-
                                                 
660
  This estimate is based on the following calculation: (15 hours of review for in-house legal 
and in-house compliance counsel) + (2 hours of review for general counsel) + (1 hour of 
review for Chief Compliance Officer) = 18 burden hours. 
661
  The Commission’s estimates of the relevant wage rates for outside legal services of 
$496/hour take into account staff experience, a variety of sources including general 
information websites, and adjustments for inflation.”  This cost estimate is therefore 
based on the following calculation: (3 hours of review) x ($496/hour for outside counsel 
services) = $1,488 in outside counsel costs. 
662
  This estimate is based on the following calculation: (18 burden hours of review per large 
broker-dealer) x (2,737 large broker-dealers) = 49,266 aggregate burden hours. 
663
  This estimate is based on the following calculation: ($1,488 for outside counsel costs per 
large broker-dealer) x (2,737 large broker-dealers) = $4.1 million in outside counsel 
costs. 

   
402 
 
dealer,
664
 and an aggregate cost of approximately $3.77 million for all small broker-dealers.
665
  
The Commission additionally believes in-house compliance personnel at each small broker-
dealer would require 5 hours to review and approve the updated compliance procedures, for an 
aggregate burden of 3,805 hours.
666
 
The Commission preliminarily believes that both large and small broker-dealers would 
utilize their existing recordkeeping systems to preserve any documents necessary to comply with 
proposed Rule 17a-4(b)(17).  Accordingly, the Commission estimates that broker-dealers will 
incur no new initial burdens or costs to retain the records made pursuant to proposed Rule 1102.  
Nevertheless, the Commission requests comment on this assumption and whether the 
requirements of proposed Rule 17a-4(b)(17) would pose additional initial burdens or costs on 
broker-dealers. 
The Commission therefore estimates the total initial aggregate burden to be 53,071 
hours,
667
 and the total initial aggregate cost to be approximately $7.87 million.
668
 
                                                 
664
  This cost estimate is based on the following calculation: (10 hours of review) x 
($496/hour for outside counsel services) = $4,960 in outside counsel costs. 
665
  This cost estimate is based on the following calculation: ($4,960 for outside attorney 
costs per small broker-dealer) x (761 small broker-dealers) = $3.77 million in outside 
counsel costs. 
666
  This estimate is based on the following calculation: (5 burden hours) x (761 small broker-
dealers) = 3,805 aggregate burden hours. 
667
  This estimate is based on the following calculation: (49,266 aggregate burden hours for 
large broker-dealers) + (3,805 aggregate burden hours for small broker-dealers) = 53,071 
total aggregate burden hours. 
668
  This estimate is based on the following calculation: ($4.1 million in aggregate costs for 
large broker-dealers) + ($3.77 million in aggregate costs for small broker-dealers) = 
$7.87 million total aggregate costs. 

   
403 
 
b) Ongoing Costs and Burdens 
Proposed Rule 1102 would require a broker-dealer to review and assess, no less 
frequently than annually, the design and overall effectiveness of its best execution policies and 
procedures, including its order handling and routing practices.  Such review and assessment 
would be required to be conducted in accordance with written procedures and would be required 
to be documented.  A broker-dealer would be required to prepare a written report detailing the 
results of such review and assessment, including a description of all deficiencies found and any 
plan to address deficiencies, and the report would have to be presented to the board of directors 
(or equivalent governing body) of the broker-dealer.  The broker-dealer would be required to 
preserve a copy of each such report and documentation for each such review and assessment 
pursuant to proposed Rule 17a-4(b)(17).     
The ongoing burden of complying with proposed Rule 1102 would include a 
respondent’s documentation of its reviews and assessments of the design and overall 
effectiveness of its best execution policies and procedures and the preparation of its written 
reports.     
The Commission estimates that large broker-dealers would each annually incur an 
internal burden of 40 hours to conduct and document its annual reviews and assessments ( 5 
hours for legal personnel, 15 hours for compliance personnel, and 20 hours for business-line 
personnel).  The Commission estimates that large broker-dealers would each annually incur an 
internal burden of 8 hours to prepare the annual report ( 4 hours for legal personnel and 4 hours 
for compliance personnel) for a total ongoing burden of 48 hours per large broker-dealer.  The 
Commission therefore estimates an ongoing, aggregate burden for large broker-dealers of 

   
404 
 
approximately 131,376 hours.
669
  Because the Commission assumes that large broker-dealers 
would rely on internal personnel to prepare the annual report, the Commission estimates that 
large broker-dealers would incur no ongoing costs. 
The Commission assumes for purposes of this analysis that small broker-dealers would 
mostly rely on outside legal counsel and outside compliance consultants to conduct the annual 
reviews and assessments and prepare the annual report, with final review and approval from an 
in-house compliance manager.  The Commission preliminarily estimates that outside counsel 
would require approximately 5 hours per year to conduct and document its annual reviews and 
assessments, for an annual cost of approximately $2,480 for each small broker-dealer.
670
  The 
estimated aggregate, annual ongoing cost for outside legal counsel to conduct and document the 
annual reviews and assessments for small broker-dealers would be approximately $1.88 
million.
671
  In addition, the Commission expects that small broker-dealers would require 10 
hours of outside compliance services per year to conduct and document its annual reviews and 
assessments, for an ongoing cost of approximately $3,040 per small broker-dealer per year,
672
 
                                                 
669
  This estimate is based on the following calculation: (48 burden hours per large broker-
dealer) x (2,737 large broker-dealers) = 131,376 aggregate ongoing burden hours. 
670
  This estimate is based on the following calculation: (5 hours per small broker-dealer) x 
($496/hour for outside counsel services) = $2,480 in outside counsel costs. 
671
  This estimate is based on the following calculation: ($2,480 in outside counsel costs per 
small broker-dealer) x (761 small broker-dealers) = $1.88 million in aggregate, ongoing 
outside legal costs. 
672
  This cost estimate is based on the following calculation: (10 hours per small broker-
dealer) x ($304/hour for outside compliance services) = $3,040 in outside compliance 
service costs. 

   
405 
 
and an aggregate ongoing cost of approximately $2.31 million.
673
  The Commission 
preliminarily estimates that outside counsel would require approximately 3 hours per year to 
prepare the annual report, for an annual cost of approximately $1,488 for each small broker-
dealer.
674
  The estimated aggregate, annual ongoing cost for outside legal counsel to prepare the 
annual report for small broker-dealers would be approximately $1.13 million.
675
   In addition, the 
Commission preliminarily estimates that each small broker-dealer would require 3 hours of 
outside compliance services per year to prepare the annual report, for an ongoing cost of 
approximately $912 per year,
676
 and an aggregate ongoing cost of approximately $694,032 for 
all small broker-dealers.
677
  The total aggregate, ongoing cost for small broker-dealers is 
therefore estimated at approximately $6.01 million per year.
678
 
                                                 
673
  This estimate is based on the following calculation: ($3,040 in outside compliance costs 
per small broker-dealer) x (761 small broker-dealers) = $2.31 million in aggregate, 
ongoing outside compliance costs. 
674
  This estimate is based on the following calculation: (3 hours per small broker-dealer) x 
($496/hour for outside counsel services) = $1,488 in outside counsel costs. 
675
  This estimate is based on the following calculation: ($1,488 in outside counsel costs per 
small broker-dealer) x (761 small broker-dealers) = $1.13 million in aggregate, ongoing 
outside legal costs. 
676
  This cost estimate is based on the following calculation: (3 hours per small broker-dealer) 
x ($304/hour for outside compliance services) = $912 in outside compliance service 
costs. 
677
  This estimate is based on the following calculation: ($912 in outside compliance costs per 
small broker-dealer) x (761 small broker-dealers) = $694,032 in aggregate, ongoing 
outside compliance costs. 
678
  This estimate is based on the following calculation: ($1.88 million for outside legal 
counsel costs to conduct and document the annual review and assessment) + ($2.31 
million for outside compliance costs to conduct and document the annual review and 
assessment) + ($1.13 million for outside legal counsel to prepare the annual report) + 

   
406 
 
In addition to the costs described above, the Commission additionally estimates each 
small broker-dealer would incur an internal burden of approximately 12 hours for business-line 
personnel to conduct and document the annual reviews and assessments, and 4 hours per year for 
in-house compliance personnel to review the reviews and assessments and preparation of the 
annual report.  The Commission further estimates small broker-dealers would incur an internal 
burden of approximately 2 hours for an in-house compliance manager to review and approve the 
annual report.  The ongoing, aggregate burden for small broker-dealers would be 13,698 hours 
for in-house business-line personnel, compliance personnel, and compliance manager review.
679
   
The Commission estimates that the approximate ongoing burden associated with the 
recordkeeping requirement of proposed Rule 17a-4(b)(17) for any records made in compliance 
with proposed Rule 1102 would be 6,235 burden hours per year.
680
  The Commission does not 
believe that the ongoing costs associated with ensuring compliance with the retention schedule 
would change from the current costs of ensuring compliance with existing Rule 17a-4.  However, 
                                                 
($694,032 for outside compliance costs to prepare the annual report) = $6.01 million total 
aggregate ongoing costs. 
679
  This estimate is based on the following calculation: (12 hours business-line personnel 
review per small broker-dealer) + (4 hours compliance personnel review per small 
broker-dealer) + (2 hours compliance manager review per small broker-dealer) x (761 
small broker-dealers) = 13,698 aggregate ongoing burden hours. 
680
  Because the Commission assumes broker-dealers would utilize their existing 
recordkeeping systems to preserve any records made in compliance with proposed Rule 
1102, the Commission estimates that the burdens associated with such record retention 
would be minimal.  Accordingly, the Commission estimates the aggregate ongoing 
burden based on the following calculation: (2 burden hours in-house compliance 
personnel per large broker-dealer x 2,737 large broker-dealers) + (1 burden hour in-house 
compliance personnel per small broker-dealer x 761 small broker-dealers) = 6,235 
aggregate ongoing burden hours. 

   
407 
 
the Commission requests comment regarding whether there would be additional costs relating to 
ensuring compliance with record retention and retention schedules pursuant to Rule 17a-4. 
The Commission therefore estimates the total ongoing aggregate burden to be 151,309 
hours,
681
 and the total ongoing aggregate cost to be approximately $6.01 million per year.
682
 
The Commission acknowledges that policies and procedures may vary greatly by broker-
dealer, given the differences in size and the complexity of broker-dealer business models. 
Accordingly, the need to update policies and procedures and conduct an annual review and 
assessment might also vary greatly.  The Commission requests comment regarding the accuracy 
of the estimated burden hours and costs necessary to comply with the proposal. 
A. Total Paperwork Burden  
Based on the foregoing, the Commission preliminarily estimates that the total initial 
aggregate burden for all broker-dealers to comply with proposed Rules 1101 and 1102, as well as 
proposed Rule 17a-4(b)(17), would be 365,102 hours,
683
 and the total initial aggregate cost 
                                                 
681
  This estimate is based on the following calculation: (131,376 aggregate ongoing burden 
hours for large broker-dealers for proposed Rule 1102) + (13,698 aggregate ongoing 
burden hours for small broker-dealers for proposed Rule 1102) + (6,235 aggregate 
ongoing burden hours for all broker-dealers for proposed Rule 17a-4(b)(17)) = 151,309 
total aggregate ongoing burden hours. 
682
  This estimate is based on the following calculation: ($6.01 million per year in total 
aggregate ongoing costs for small broker-dealers) + ($0 ongoing costs for large broker-
dealers) = $6.01 million per year in total aggregate ongoing costs. 
683
  365,102 hours = 312,031 hours (Required policies and procedures) + 53,071 hours 
(Annual review). 

   
408 
 
would be approximately $54.12 million.
684
  The Commission preliminarily estimates that the 
total ongoing aggregate burden for all broker-dealers to comply with proposed Rules 1101 and 
1102, as well as proposed Rule 17a-4(b)(17), would be 558,854 hours per year,
685
 and the total 
ongoing aggregate cost would be approximately $17.33 million per year.
686
 
PRA Summary Table 
 
Initial 
PRA 
Burden 
Hours 
Ongoing 
Annual 
PRA 
Burden 
Hours 
(After 
First 
Year) 
Total 
PRA 
Burden 
Hours in 
First 
Year 
Initial 
PRA 
Costs 
Ongoing 
Annual 
PRA 
Costs 
(After 
First 
Year) 
Total PRA 
Costs in 
First Year 
Industry-Wide 
Burden due to 
Policies and 
Procedures 
under Proposed 
Rule 1101 
312,031 72,991 385,022 
$46.25 
million 
$6.69 
million 
$52.94 
million 
Industry-Wide 
Burden due to 
Regular 
Review and 
Documentation 
under Proposed 
Rule 1101 
0 302,618 302,618 $0 
$4.63 
million 
$4.63 
million 
Total 
Industry-Wide 
Burden due to 
312,031 375,609 687,640 
$46.25 
million 
$11.32 
million 
$57.57 
million 
                                                 
684
  $54.12 million = $46.25 million (Required policies and procedures) + $7.87 million 
(Annual review). 
685
   558,854 hours = 391,577 (Required policies and procedures) + 145,074 hours (Annual 
review) + 22,203 hours (Rule 17a-4(b)(17)).  
686
  $17.33 million = $11.32 million (Required policies and procedures) + $6.01 million 
(Annual review). 

   
409 
 
Proposed Rule 
1101 
Industry-Wide 
Burden due to 
Compliance 
Procedures 
under Proposed 
Rule 1102 
53,071 0 53,071 
$7.87 
million 
$0 
$7.87 
million 
Industry-Wide 
Burden due to 
Annual Review 
and 
Documentation, 
under Proposed 
Rule 1102 
0 118,612 118,612 $0 
$4.19 
million 
$4.19 
million 
Industry-Wide 
Burden due to 
Annual Report 
under Proposed 
Rule 1102 
0 26,462 26,462 $0 
$1.82 
million 
$1.82 
million 
Total 
Industry-Wide 
Burden due to 
Proposed Rule 
1102 
53,071 145,074 198,145 
$7.87 
million 
$6.01 
million 
$13.88 
million 
Total 
Industry-Wide 
Burden due to 
Proposed Rule 
17a-4(b)(17) 
0 22,203 22,203 0 0 0 
B. Collection of Information is Mandatory 
All of the collection of information would be mandatory. 
C. Confidentiality of Responses to Collection of Information 
  The collection of information would not be required to be made public but would not be 
confidential. 
D. Retention Period for Recordkeeping Requirements 
A broker-dealer would be required to preserve a copy of its policies and procedures under 
proposed Regulation Best Execution in a manner consistent with, and for the periods specified 

   
410 
 
in, Rule 17a-4(e)(7).  A broker-dealer would be required to preserve a copy of its other records 
under proposed Regulation Best Execution in a manner consistent with, and for the periods 
specified in, the proposed amendments to Rule 17a-4(b). 
E. Request for Comment 
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to: 
• Evaluate whether the proposed collections of information are necessary for the proper 
performance of the functions of the agency, including whether the information shall have 
practical utility;  
• Evaluate the accuracy of our estimates of the burden of the proposed collection of 
information; 
• Determine whether there are ways to enhance the quality, utility, and clarity of the 
information to be collected; and  
• Evaluate whether there are ways to minimize the burden of collection of information on 
those who are to respond, including through the use of automated collection techniques or 
other forms of information technology. 
Persons submitting comments on the collection of information requirements should direct 
them to the Office of Management and Budget, Attention:  Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, 
and should also send a copy of their comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090, with reference to F ile Number S7-
32-22.  Requests for materia ls submitted to OMB by the Commission with regard to this 
collection of information should be in writing, with reference to File Number S7-32-22 and be 
submitted to the Securities and Exchange Commission, Office of FOIA/PA Services, 100 F 

   
411 
 
Street NE, Washington, DC 20549-2736.  As OMB is required to make a  d ecision concerning the 
collection of infor  mation between 30 and 60 da  ys after publication, a c omment to OMB is best 
assured of h aving its full effect if OMB receive  s it within 30 days of p ublication. 
VII. Consideration of Impact on the Economy  
For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996 
(“SBREFA”),
687
 the Commission must advise the OMB as to whether the proposed regulation 
constitutes a “major” rule.  Under SBREFA, a rule is considered “major” where, if adopted, it 
results or is likely to result in: (1) an annual effect on the economy of $100 million or more 
(either in the form of an increase or decrease); (2) a major increase in costs or prices for 
consumers or individual industries; or (3) significant adverse effect on competition, investment, 
or innovation.  If a rule is “major,” its effectiveness will generally be delayed for 60 days 
pending Congressional review.  The Commission requests comment on the potential impact of 
Regulation Best Execution on the United States economy on an annual basis, on any potential 
increases in costs or prices for consumers or individual industries, and any potential effect on 
competition, investment, or innovation.  Commenters are requested to provide empirical data and 
other factual support for their views to the extent possible. 
VIII. Initial Regulatory Flexibility Act Analysis 
                                                 
687
  Public Law 104-121, Title II, 110 Stat. 857 (1996) (codified in various sections of 5 
U.S.C., 15 U.S.C., and as a note 5 U.S.C. 601). 

   
412 
 
The Regulatory Flexibility Act (“RFA”)
688
 requires federal agencies, in promulgating 
rules, to consider the impact of those rules on small entities.  Section 603(a)
689
 of the 
Administrative Procedure Act,
690
 as amended by the RFA, generally requires the Commission to 
undertake a regulatory flexibility analysis of all proposed rules, or proposed rule amendments, to 
determine the impact of such rulemaking on “small entities.”
691
  Under Section 605(b) of the 
RFA, a federal agency need not undertake a regulatory flexibility analysis of proposed rules 
where, if adopted, they would not have a significant economic impact on a substantial number of 
small entities.
692
 
A. Reasons for and Objectives of the Proposed Action 
As discussed above in section III.B, the Commission is proposing Regulation Best 
Execution to further the goals of the national market system and reinforce broker-dealer best 
execution obligations.     
The proposed rule would set forth the standard of best execution, and proposed Rule 
1101 would require a broker-dealer to establish, maintain, and enforce written policies and 
procedures that address specific elements that are designed to promote the best execution of 
                                                 
688
  5 U.S.C. 601 et seq. 
689
  5 U.S.C. 603(a). 
690
  5 U.S.C. 551 et. seq. 
691
  Although section 601(b) of the RFA defines the term “small entity,” the statute permits 
agencies to formulate their own definitions.  The Commission has adopted definitions for 
the term small entity for the purposes of Commission rulemaking in accordance with the 
RFA.  Those definitions, as relevant to this proposed rulemaking, are set forth in Rule 0-
10 under the Exchange Act, 17 CFR 240.0-10.  
692
  See 5 U.S.C. 605(b). 

   
413 
 
customer orders, and comply with certain execution quality review and documentation 
requirements.
693
  More specifically, proposed Rule 1101(a)(1) would require that a broker-
dealer’s policies and procedures address how it will:  (1) obtain and assess reasonably accessible 
information concerning the markets trading the relevant securities; (2) identify markets that may 
be material potential liquidity sources; and (3) incorporate the material potential liquidity sources 
into its order handling practices and ensure efficient access to each such material potential 
liquidity source.  Proposed Rule 1101(a)(2) would require a broker-dealer’s policies and 
procedures to address how it will:  (1) assess reasonably accessible and timely information, 
including information with respect to the best displayed prices, opportunities for price 
improvement, and order exposure opportunities that may result in the most favorable price; (2) 
assess the attributes of customer orders and consider the trading characteristics of the security, 
the size of the order, the likelihood of execution, the accessibility of the market, and any 
customer instructions in selecting the market most likely to provide the most favorable price; and 
(3) reasonably balance the likelihood of obtaining a better price with the risk that delay could 
result in a worse price when determining the number and sequencing of markets to be assessed.     
Proposed Rule 1101(b) would require a broker-dealer’s policies and procedures for 
conflicted transactions to address how it will:  (1) obtain and assess information beyond that 
required by proposed Rule 1101(a)(1)(i) in identifying a broader range of markets beyond the 
material potential liquidity sources; and (2) evaluate a broader range of markets beyond the 
material potential liquidity sources.  Proposed Rule 1101(b) would also require broker-dealers 
that engage in conflicted transactions with retail customers to document in accordance with their 
                                                 
693
  See supra section III.B. 

   
414 
 
written procedures their compliance with the best execution standard for conflicted transactions, 
including all efforts to enforce their best execution policies and procedures for conflicted 
transactions and the basis and information relied on for its determinations that such conflicted 
transactions would comply with the best execution standard.  Additionally, proposed Rule 
1101(b)(3) would require broker-dealers that engage in conflicted transactions to document their 
payment for order flow arrangements.   
Proposed Rule 1101(c) would require broker-dealers to no less frequently than quarterly 
review the execution quality of customer orders, and how such execution quality compares with 
the execution quality that might have been obtained from other markets, and revise their best 
execution policies and procedures, including order handling practices, accordingly.     
Proposed Rule 1101(d) would exempt an introducing broker that routes customer orders 
to an executing broker from separately complying with proposed Rules 1101(a), (b), and (c), so 
long as the introducing broker establishes, maintains, and enforces policies and procedures that 
require the introducing broker to regularly review the execution quality obtained from its 
executing broker, compare it with the execution quality it might have obtained from other 
executing brokers, and revise its order handling practices accordingly.  An introducing broker 
would additionally be required to document the results of its review.    
Proposed Rule 1102 would require each broker-dealer no less frequently than annually to 
conduct a review and assessment of the design and overall effectiveness of its best execution 
policies and procedures, and document such review and assessment in a report that would be 
provided to the broker-dealer’s governing body.   
Proposed amendments to Rule 17a-4 under the Exchange Act would specify the record 
preservation requirements for records made under proposed Regulation Best Execution.   

   
415 
 
B. Legal Basis 
Pursuant to the Exchange Act, 15 U.S.C. 78a et 
seq., and particularly sections 2, 3(b), 5, 
10, 11A, 15, 15A, 17, 23(a), 24, and 36 thereof, 15 U.S.C. 78b, 78c(b), 78e, 78j, 78k–1, 78o, 
78o-1, 78q, 78w(a), 78x, and 78mm, the Commission is proposing amendments to § 240.17a-4 
and new §§ 242.1100 through 242.1102. 
C. Small Entities Subject to the Proposed Rule 
For purposes of a Commission rulemaking in connection with the RFA, a broker-dealer 
will be a small entity if it: (1) had total capital (net worth plus subordinated liabilities) of less 
than $500,000 on the date in the prior fiscal year as of which its audited financial statements 
were prepared pursuant to Rule 17a-5(d) under the Exchange Act,
694
 or, if not required to file 
such statements, had total capital (net worth plus subordinated liabilities) of less than $500,000 
on the last business day of the preceding fiscal year (or in the time that it has been in business, if 
shorter); and (2) is not affiliated with any person (other than a natural person) that is not a small 
business or small organization.
695
  
As discussed in section VI, the Commission estimates that approximately 3,498 broker-
dealers would be subject to proposed Regulation Best Execution.  Based on FOCUS Report data, 
the Commission estimates that as of June 30, 2022, approximately 761 of those broker-dealers 
might be small entities for purposes of this analysis.  For purposes of this RFA analysis, the 
Commission refers to broker-dealers that might be small entities under the RFA as “small 
                                                 
694
  See 17 CFR 240.17a-5(d). 
695
  See 17 CFR 240.0-10(c). 

   
416 
 
entities,” and the Commission continues to use the term “broker-dealers” to refer to broker-
dealers generally, as the term is used elsewhere in this release.  
D. Projected Compliance Requirements of the Proposed Rule for Small Entities  
The RFA requires a description of the projected reporting, recordkeeping, and other 
compliance requirements of proposed Regulation Best Execution, including an estimate of the 
classes of small entities that would be subject to the requirements and the type of professional 
skill necessary to prepare the required reports and records.  Following is a discussion of the 
associated costs and burdens of compliance with proposed Regulation Best Execution, as 
incurred by small entities.  As described above in section IV, the proposed rules would require a 
broker-dealer to establish, maintain, and enforce written policies and procedures reasonably 
designed to comply with the proposed best execution standard, as well as additional policies and 
procedures for conflicted transactions and tailored policies and procedures applicable to 
introducing brokers.  The proposed rules would also set forth documentation requirements 
related to conflicted transactions and execution quality reviews.  Moreover, the proposed rules 
would require a broker-dealer to review and assess, no less frequently than annually, the design 
and overall effectiveness of its best execution policies and procedures, including its order 
handling practices, and prepare a written report that is provided to its board of directors or 
equivalent governing body detailing the results.  Finally, proposed amendments to Rule 17a-4 
would set forth record preservation requirements for records made under proposed Regulation 
Best Execution. 
1. Required Policies and Procedures and Related Obligations 
To initially comply with these requirements, the Commission preliminarily believes that 
small entities would primarily rely on outside counsel to update existing policies and procedures, 

   
417 
 
as small broker-dealers generally have fewer in-house legal and compliance personnel.  As 
discussed in section VI above, the Commission preliminarily believes the initial costs associated 
with this requirement for small entities would be $32,240 per small entity (reflecting an 
estimated 65 hours of outside legal counsel services), and an aggregate cost of $24.53 million for 
all small entities.
696
  The Commission additionally estimates in-house compliance personnel 
would require 18 hours to review and approve the updated policies and procedures, for an 
aggregate burden of 13,698 hours.
697
   
The Commission preliminarily believes that small broker-dealers would mostly rely on 
outside legal counsel and outside compliance consultants to review and update their policies and 
procedures on a periodic basis.  The Commission preliminarily estimates that outside legal 
counsel would require approximately 11 hours per year, totaling approximately $5,456 annually 
for each small entity for an estimated aggregate ongoing cost of approximately $4.15 million.  In 
addition, the Commission estimates that small entities would require 11 hours of outside 
compliance services per year to update their policies and procedures for an ongoing cost of 
approximately $3,344 per year, and the estimated aggregate ongoing cost to be $2.54 million.  In 
addition, the Commission estimates that small entities would require 20 hours of outside 
compliance services per year to conduct and document their review of execution quality and 
document all their efforts to obtain best execution for conflicted transactions, including the basis 
and information relied on for its determinations, and payment for order flow arrangement for an 
ongoing cost of approximately $6,080 per year, and an aggregate ongoing cost of approximately 
                                                 
696
  See supra notes 640-641.  
697
  See supra note 642. 

   
418 
 
$4.63 million.  The total aggregate ongoing cost for small entities is therefore estimated at 
approximately $11.32 million per year.  Separately, the Commission estimates that small entities 
would incur approximately six internal burden hours for an in-house compliance manager to 
review and approve the updated policies and procedures per year and incur an internal burden of 
approximately 30 hours per year for in-house business-line personnel to conduct and document 
their execution quality reviews and document all their efforts to obtain best execution for 
conflicted transactions and payment for order flow arrangements.  The Commission further 
estimates that small entities would incur an internal burden of approximately 8 hours per year for 
in-house compliance personnel to review the regular reviews of execution quality and 
documentation of efforts to obtain best execution for conflicted transactions and payment for 
order flow arrangements.  Thus, the Commission estimates that the ongoing burden for each 
small entity would be 44 hours and the ongoing, aggregate annual burden for all small entities to 
be 33,484 hours.
698
  
 Finally, the Commission preliminarily believes that small entities would utilize their 
existing recordkeeping systems to preserve any documents necessary to comply with proposed 
Rule 1101.  Thus, the Commission estimates that broker-dealers will incur no new initial burdens 
or costs to retain the records made pursuant to proposed Regulation Best Execution.  Separately, 
the Commission estimates that the approximate ongoing burden associated with the 
recordkeeping requirements of proposed Rule 17a-4(b)(17) for any records made in compliance 
will proposed Rule 1101 pursuant to the proposed rule would be three burden hours per small 
entity for an ongoing aggregate annual burden for all small entities of approximately 2,283 
                                                 
698
  See supra note 655. 

   
419 
 
hours.  The Commission does not believe that the ongoing costs associated with ensuring 
compliance with retention schedule would change from the current costs of ensuring compliance 
with existing Rule 17a-4.  
2. Annual Report    
 As discussed above in sections VI, the Commission believes small entities would 
primarily rely on outside counsel to update their existing compliance procedures for the annual 
reviews and assessments under proposed Rule 1102.  The Commission estimates that small 
entities would require approximately 10 hours of outside legal counsel services to update the 
compliance procedures, for total one-time costs of $4,960 per small entity, and an aggregate cost 
of $3.77 million for all small entities.
699
    
Additionally, the Commission believes that the in-house compliance personnel would 
require approximately five hours to review and approve the updated compliance procedure for an 
aggregate burden of 3,805 hours.
700
    
The Commission preliminarily estimates that outside legal counsel would require 
approximately five hours to conduct and document annual reviews and assessments for an 
approximate cost of $2,480 per year for each small entity.
701
  The estimated aggregate, ongoing 
cost for outside legal counsel to conduct and document the annual reviews and assessments 
                                                 
699
  See supra notes 664-665. 
700
  See supra note 666. 
701
  See supra note 670. 

   
420 
 
would be approximately $1.88 million.
702
  Additionally, the Commission expects that an 
additional 10 hours of outside compliance services would be required to conduct and document 
its annual reviews and assessments, for an ongoing cost of approximately $3,040 per small entity 
each year and an aggregate ongoing cost of approximately $2.31 million.
703
  Separately, the 
Commission preliminarily estimates that outside counsel would require approximately three 
hours to prepare the annual report, resulting in an annual cost of $1,488 per year, and an 
aggregate ongoing cost of approximately $1.13 million per year.
704
  In addition, the Commission 
preliminarily estimates that outside compliance services would require three hours per year to 
prepare the annual report, for an ongoing cost of approximately $912 per small entity each year 
and an aggregate ongoing cost of approximately $694,032 per year.
705
  Together the aggregate, 
ongoing cost for small entities subject to the proposed rule is estimated at approximately $6.01 
million per year.
706
   
 In addition to these costs, the Commission additionally estimates each small entity would 
incur an internal burden of approximately 12 hours for business-line personnel to conduct and 
document the annual reviews and assessments, and four hours per year for in-house compliance 
personnel to review the reviews and assessments and preparation of the annual report.  The 
Commission further estimates an internal burden of approximately two hours for an in-house 
                                                 
702
  See supra note 671. 
703
  See supra note 672-673. 
704
  See supra notes 674-675. 
705
  See supra notes 676-677.  
706
  See supra note 678. 

   
421 
 
compliance manager to review and approval the annual report for an ongoing, aggregate burden 
of 13,698 hours.  
 Finally, the Commission estimates that small entities would incur no new initial burdens 
or costs to retain the records made pursuant to proposed Rule 1102.  Additionally, the 
Commission estimates that the approximate ongoing burden associated with the recordkeeping 
requirement of proposed Rule 17a-4(b)(17) for any records made in compliance with proposed 
Rule 1102 would be one burden hour per small entity for an ongoing aggregate burden of 761 
hours. 
E. Duplicative, Overlapping, or Conflicting Federal Rules 
An analysis under the RFA requires a federal agency to identify, to the extent practicable, 
all relevant federal rules that may duplicate, overlap, or conflict with the proposed rules.  The 
Commission believes that there are no federal rules that duplicate, overlap, or conflict with 
proposed Regulation Best Execution and the proposed amendments to Rule 17a-4.    
F. Significant Alternatives 
An RFA analysis requires a discussion of alternatives to the proposed rule that would 
minimize the impact of small entities while accomplishing the stated objectives of the applicable 
statutes.  The analysis should include: (1) the establishment of differing compliance or reporting 
requirements or timetables that take into account the resources available to small entities; (2) the 
clarification, consolidation, or simplification of compliance and reporting under the rule for such 
small entities; (3) the use of performance rather than design standards; and (4) an exemption 
from coverage of the rule, or any part thereof, for such small entities. 
The Commission considered whether it would be necessary or appropriate to establish 
different compliance or reporting requirements or timetables; or to clarify, consolidate, or 

   
422 
 
simplify compliance and reporting requirements under the proposed rule for small entities.  
Because proposed Regulation Best Execution is designed to further enhance broker-dealers’ 
ability to maintain robust best execution practices and result in more vigorous efforts by broker-
dealers to achieve best execution, including in situations where broker-dealers have order 
handling conflicts of interest with retail customers, the Commission preliminarily believes that 
small entities should be covered by the proposed rules.  The proposed rule includes performance 
standards.  The Commission also preliminarily believes that the proposed rules are flexible 
enough for small broker-dealers to comply without the need for the establishment of different 
compliance or reporting requirements or timetables
707
 for small entities, or exempting them from 
the proposed rule’s requirements.   
However, the Commission is proposing that broker-dealers that meet the definition of 
introducing broker would be subject to different and more tailored requirements under proposed 
Rule 1101.  Specifically, under proposed Rule 1101(d), an entity that meets the definition of 
introducing broker and routes customer orders to an executing broker would not need to 
separately comply with proposed Rules 1101(a), (b), and (c), so long as the introducing broker 
establishes, maintains, and enforces policies and procedures that require the introducing broker 
to regularly review the execution quality obtained from such executing broker, compare it with 
the execution quality it might have obtained from other executing brokers, and revise its order 
                                                 
707
  Proposed Regulation Best Execution does not include different timetables for small 
broker-dealers because the Commission preliminarily believes that customers of small 
broker-dealers would benefit from the protections offered by proposed Regulation Best 
Execution, just as customers of broker-dealers that are not small entities. 

   
423 
 
handling practices accordingly.  As discussed above,
708
 the Commission believes that small 
broker-dealers would be more likely to qualify as introducing brokers.  As such, certain small 
entities would be exempt from complying with proposed Rules 1101(a), (b), and (c).  To the 
extent a small broker-dealer does not qualify as an introducing broker, the Commission believes 
a small broker-dealer would be less likely to engage in conflicted transactions and be subject to 
the additional obligations of proposed Rule 1101(b) than a large broker-dealer. 
The Commission also considered a number of potential regulatory alternatives to 
proposed Regulation Best Execution, including: (1) adoption of FINRA Rule 5310 and MSRB 
Rule G-18 best execution rules; (2) requiring order execution quality disclosure for other asset 
classes; (3) defining “introducing broker” to include those entities that quality for relief under 
FINRA and MSRB rules; (4) banning or restricting off-exchange payment for order flow; (5) 
requiring broker-dealers to utilize best execution committees; (6) requiring order-by-order 
documentation for conflicted or all transactions; and (7) providing staggered compliance dates 
for certain broker-dealers.  For a more detailed discussion of these regulatory alternatives, see 
Section V, supra. 
1. Adopt FINRA Rule 5310 and MSRB Rule G-18 Concerning Best 
Execution 
As discussed above, the Commission considered adopting FINRA Rule 5310 and MSRB 
Rule G-18 regarding best execution and their associated guidance.
709
  Under this alternative, the 
                                                 
708
  See supra section VI. 
709
  See supra section V. 

   
424 
 
overall costs and benefits to small entities would be lower than compared to the proposal.  This 
alternative would not include the additional requirements related to transactions with broker-
dealer conflicts of interest, which represent the majority of retail transactions in the equity, 
options, and fixed income markets.
710
  Under this alternative, conflicted broker-dealers that 
would qualify for relief under the current FINRA rule would experience lower compliance costs 
as they would not be required to develop or update their own policies and procedures or adjust 
their business model to de-conflict from their executing broker.  The cost of the proposal could 
provide an advantage to larger broker-dealers as compared to smaller broker-dealers.  The lower 
compliance cost under this alternative would increase competition among broker-dealers 
compared to the proposed rule by lowering barriers to entry for new broker-dealers and decrease 
the likelihood that smaller broker-dealers would exit the market.  
The Commission preliminarily believes that adopting FINRA or the MSRB’s best 
execution rules would be less effective than the proposed rule because broker-dealers (including 
small entities) would not be required to establish the comprehensive and detailed policies and 
procedures relating to all aspects of a broker-dealer’s best execution practices, including 
additional requirements for broker-dealers with conflicts of interest, that would be required under 
the proposal.  The Commission preliminarily believes that the proposed policies and procedures-
based best execution framework, along with regular reviews and related documentation, would 
help broker-dealers maintain robust best execution practices and result in vigorous efforts by 
broker-dealers to achieve best execution, including in situations where broker-dealers have order 
handling conflicts of interest with retail customers.  The Commission also preliminarily believes 
                                                 
710
  See section IV.C.2.a 

   
425 
 
that detailed policies and procedures, regular reviews, and related documentations would allow 
broker-dealers to effectively assess their best execution practices and assist the Commission and 
SROs to effectively examine and enforce broker-dealers’ compliance with the proposed rules.    
2. Require Order Execution Quality Disclosure for Other Asset Classes 
As discussed in section V, as an alternative, the Commission could require execution 
quality disclosures from market centers and broker-dealers in the options and fixed income 
markets.  In addition to execution quality data at the individual security-level, similar to Rule 
605 data, the execution quality disclosures could include aggregated standardized summary 
reports of key execution quality statistics, which could permit smaller and less sophisticated 
investors to analyze and compare their broker-dealers against other broker-dealers.  This 
alternative may permit investors to better evaluate execution quality for their orders within their 
broker-dealer’s overall executions in a given security and facilitate broker-to-broker comparisons 
of order execution beyond just the equities markets.  
Under the alternative, broker-dealers that engage in less efficient order handling practices 
may recognize the inadequacy when comparing their own execution quality statistics with those 
disclosed by more efficient broker-dealers, and improve the order handling practices accordingly 
to attract order flow.   
However, developing these execution quality disclosures may cause market centers and 
broker-dealers in the options and fixed income markets to incur higher startup costs relative to 
the proposal as market centers would need to develop systems to produce and post such reports.  
To the extent that certain market centers already have systems or infrastructures in place to 
produce execution quality metrics, they would incur costs to modify their current systems and/or 
the format of their current reports in order to comply with the potential execution quality 

   
426 
 
disclosure requirements.  Additionally, execution quality disclosures for the options and fixed 
income markets may be complex and difficult to produce for a number of reasons.
711
   
3. Define “Introducing Broker” to Include Those Entities That Qualify for 
Relief Under FINRA and MSRB Rules 
The Commission could alternatively propose to remove the requirements for introducing 
and executing brokers related to remuneration, carrying firm status, and affiliation.
712
  This 
alternative would more closely align with the FINRA and MSRB rules concerning a broker-
dealer that routes its order flow to another broker-dealer that has agreed to handle that order flow 
as agent or riskless principal for the customer.  Under this alternative, it is likely that most 
broker-dealers that currently qualify for relief under the FINRA and MSRB rules would continue 
to do so.  By categorizing to allow more broker-dealers to be classified as “introducing brokers,” 
the overall compliance cost carried by the market would be lower as compared to the proposal.  
This alternative would likely cause fewer small broker-dealers that currently qualify for relief 
under the FINRA or MSRB rule, and wish to continue to receive remuneration, carry customer 
accounts, or route to affiliates, to incur the expenses associated with the full obligations of 
proposed Regulation Best Execution.   
The broker-dealers who could benefit under this alternative are those that currently 
qualify for relief under the FINRA and MSRB rules but fail at least one of the criteria in 
proposed Rule 1101(d).  Thus, current “introducing brokers,” and to some extent their executing 
brokers, would have lower compliance costs since there would be no requirement to change their 
                                                 
711
  See supra section V. 
712
  See supra section IV.E. 

   
427 
 
business models or set-up their own best execution policies and procedures to comply with the 
proposal.  Additionally, this alternative may lower barriers to entry for some potential 
introducing brokers.  However, under this alternative, as discussed in section V above, the 
benefits of the proposed rule would be diminished.  The Commission preliminarily believes that 
instead of changing their business models, introducing brokers would be more likely to receive 
payment for order flow from their executing brokers or route customer orders to affiliated 
executing brokers.  Therefore, the benefits of the alternative would be lower since the incentive 
created by the payment for order flow or routing to an affiliated executing broker would still 
exist, leading to order routing which may benefit the broker-dealers at the expense of retail 
customers.     
4. Ban or Restrict Off-Exchange Payment for Order Flow 
Rather than requiring heightened best execution standards for transactions involving 
payment for order flow, alternatively the Commission could ban or restrict off-exchange 
payment for order flow in the equity and options markets.  Under this alternative, registered 
securities exchanges would still be allowed to pay rebates.   In contrast to the proposed rule, this 
alternative may reduce conflicts of interest and improve order handling practices by retail 
broker-dealers.  Separately, the Commission could impose specific restrictions on payment for 
order flow that could allow retail broker-dealers to pass through payments to end customers in 
cases where it would permit best execution.  A ban or restriction on payment for order flow 
could increase the likelihood of higher commissions for retail investors or an increase in the cost 
of other services offered by retail broker-dealers.  It may also reduce competition between 
broker-dealers as larger broker-dealers with more diversified business models may be more 

   
428 
 
likely to expand their market share and smaller broker-dealers who are more dependent on 
payment for order flow revenue streams may be more likely to exit the market.  
5. Require Broker-Dealers to Utilize Best Execution Committees 
The Commission considered requiring each broker-dealer to maintain a best execution 
committee to regularly review the broker-dealers’ best execution policies, procedures and the 
results of its efforts to secure best execution for its customers.  Requiring such a committee and 
defining its membership might improve execution quality by ensuring sufficient expertise is 
recruited to establish and monitor the broker-dealer’s best execution efforts.  Furthermore, 
requiring such a committee might increase executive attention on best execution, potentially 
improving execution quality for the broker-dealer’s customers. 
 Requiring such a committee and defining its membership would entail certain costs.  
First, if the Commission were to define the membership of the committee, it is likely that 
individual broker-dealers’ organizational structures would vary in ways that would make a 
defined membership structure a poor fit because of, for instance, a single employee performing  
multiple roles, or individual roles handled by groups rather than a single individual.  In addition, 
broker-dealers are diverse in their business plans and operations and a role that might be 
considered critical at one broker-dealer (such as managing fixed income executing brokers in 
thinly traded bonds) might be inapplicable at another broker-dealer that does not trade in these 
instruments.  If the Commission were to require the committee and not define its membership, 
broker-dealers might assign to the committee less senior staff or staff whose roles are not 
germane to achieving best execution for customer orders, significantly limiting the benefits of 
establishing such a committee.  Furthermore, based on its experience, the Commission believes 
that many broker-dealers, particularly large broker-dealers that are more likely to continue to 

   
429 
 
engage in conflicted transactions if the proposed rules are adopted, often have such a committee 
already established, further limiting the potential benefits of such a provision. 
6. Require Order-by-Order Documentation for Conflicted or All 
Transactions 
The Commission considered requiring each broker-dealer to document, for conflicted or 
all transactions, the data that it considered as it handled the order.  Such a requirement might 
offer two benefits.  First, it might improve the quality of the broker-dealer’s regular review of its 
execution practices compared to the proposed rules.  Because the broker-dealer could analyze 
orders on a case-by-case basis, it might identify routing practices that could be changed to 
improve customer order execution quality.  Second, it might improve regulators’ ability to 
supervise the broker-dealers efforts to provide best execution to its customers relative to the 
proposed rules as such records would be available to regulators during examinations of the 
broker-dealer or upon request for other regulatory purposes.   
 The Commission preliminarily believes that such a requirement would offer greater 
potential benefits for conflicted transactions because broker-dealers engaging in such 
transactions have greater incentives to route orders in a manner that might not result in the best 
prices for customers.  Based on its experience, the Commission believes that some broker-
dealers, particularly the largest broker-dealers that are likely to continue to engage in conflicted 
transactions if the proposed rules are adopted, already maintain this type of documentation for 
both internal review and operational purposes.  Nevertheless, the requirement would be costly.  
Broker-dealers that do not already retain this data likely have chosen not to do so because the 
data are not operationally valuable to them for business purposes, and they believe that they are 
satisfying their best-execution obligations based on other data that they have available for 

   
430 
 
review.  For these broker-dealers, the requirement could impose considerable costs.  For 
example, they would need to alter their information technology systems to capture this data, 
including contemporaneous pricing data and routing records, some of which (such as prices 
offered in response to a RFQ and information related to fixed income and crypto asset securities) 
is not incorporated into other regulatory data sources such as CAT and thus might be stored on 
systems not integrated with other order routing systems, or systems that capture regulatory data.  
Processing this data might be computationally demanding, particularly for broker-dealers who 
trade options, as they have very high quotation traffic.  Furthermore, creating and maintaining 
software to produce this documentation would require significant effort by highly skilled 
programmers which would further increase the costs associated with such a requirement.  As 
discussed previously,
713
 the Commission preliminarily believes that broker-dealers that elect to 
refrain from conflicted transactions if the proposed rules are adopted are more likely to be 
smaller broker-dealers and these costs, many of which are fixed, are more likely to result in the 
broker-dealer changing its business model or exiting the market, while the aggregate benefits to 
investors of such a requirement for smaller broker-dealers is likely to be smaller than for larger 
broker-dealers that handle more customer orders. 
7. Staggered Compliance Dates 
The Commission also considered whether there should be staggered compliance dates 
that take into consideration the concerns of smaller broker-dealers that may need additional time 
to comply with the proposed rule.  Because the Commission preliminarily believes that smaller 
                                                 
713
  See supra section V.C.2.ii. 

   
431 
 
broker-dealers would primarily rely on outside legal counsel to update existing policies and 
procedures and outside compliance services to conduct and document their quarterly reviews of 
execution quality and document their efforts to obtain best execution for conflicted transactions 
and payment for order flow arrangements, the Commission does not believe that the proposal 
would unduly burden a smaller broker-dealer’s internal resources.  Furthermore, the Commission 
believes small broker-dealers would be less likely to engage in conflicted transactions subject to 
the additional procedural obligations of proposed Rule 1101(b), and would be more likely to 
qualify as introducing brokers and be exempt from complying with proposed Rules 1101(a), (b), 
and (c), and therefore would need to develop a less extensive set of policies and procedures.     
G. General Request for Comment 
The Commission encourages written comments regarding this initial regulatory flexibility 
analysis.  In particular, the Commission seeks comment on the number of small entities that 
would be affected by proposed Regulation Best Execution, and whether the effect on small 
entities would be economically significant.  The Commission requests that commenters describe 
the nature of any impact on small entities and provide empirical data to support the extent of 
such impact.  The Commission also requests comment on the proposed compliance burdens and 
the effects these burdens would have on small entities. 
Statutory Authority and Text of the Proposed Rule 
Pursuant to the Exchange Act, 15 U.S.C. 78a et seq., and particularly sections 2, 3(b), 5, 10, 
11A, 15, 15A, 17, 23(a), 24, and 36 thereof, 15 U.S.C. 78b, 78c(b), 78e, 78j, 78k-1, 78o, 78o-1, 
78q, 78w(a), 78x, and 78mm, the Commission is proposing amendments to § 240.17a-4 and new  
§§ 242.1100 through 242.1102. 
List of Subjects  

   
432 
 
17 CFR Parts 240 and 242 
Brokers, Reporting and recordkeeping requirements, Securities.  
Text of the Proposed Rules 
In accordance with the foregoing, Title 17, Chapter II of the Code of Federal Regulations is 
proposed to be amended as follows: 
PART 240 – GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE 
ACT OF 1934 
1. The authority citation for part 240 continues to read as follows: 
Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 
77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 
78o, 78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 80a-20, 80a-23, 
80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 
5221(e)(3); 18 U.S.C. 1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-106, 
sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.  
2. Amend § 240.17a-4 by adding a new paragraph (b)(17) to read as follows:  
§ 240.17a-4 Records to be preserved by certain exchange members, brokers and dealers. 
 * * * * *  
(b)***  
(17) All records made pursuant to §§ 242.1101 and 242.1102, other than required policies and 
procedures, as applicable. 
* * * * * 
PART 242 – REGULATIONS M, SHO, ATS, AC, NMS, SBSR, AND BEST EXECUTION, 
AND CUSTOMER MARGIN REQUIREMENTS FOR SECURITY FUTURES 

   
433 
 
3. The authority citation for part 242 is amended to read as follows:  
Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c(b), 78e, 78g(c)(2), 78i(a), 78j, 78k-1, 
78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 78o-1, 78q, 78w(a), 78x, 78dd-1, 78mm, 80a-23, 80a-29, 
and 80a-37. 
4. The heading of part 242 is revised to read as set forth above. 
5. Part 242 is amended by adding Regulation Best Execution, §§ 242.1100 through 
242.1102, to read as follows:  
Regulation Best Execution 
Sec. 
242.1100 The best execution standard. 
242.1101 Required policies and procedures; related obligations. 
242.1102 Annual report.  
§ 242.1100 The best execution standard. 
In any transaction for or with a customer, or a customer of another broker, dealer, 
government securities broker, government securities dealer, or municipal securities dealer 
(collectively, for purposes of Regulation Best Execution, “broker or dealer”), a broker or dealer, 
or a natural person who is an associated person of a broker or dealer, shall use reasonable 
diligence to ascertain the best market for the security, and buy or sell in such market so that the 
resultant price to the customer is as favorable as possible under prevailing market conditions (for 
purposes of Regulation Best Execution, “most favorable price”).  A broker or dealer, or a natural 
person who is an associated person of a broker or dealer, is not subject to this standard when: 
(a ) Another broker or dealer is executing a customer order against the broker or dealer’s 
quotation;  

   
434 
 
(b) An institutional customer, exercising independent judgment, executes its order against 
the broker or dealer’s quotation; or  
(c ) The broker or dealer receives an unsolicited instruction from a customer to route that 
customer’s order to a particular market for execution and the broker or dealer processes that 
customer’s order promptly and in accordance with the terms of the order.  
§ 242.1101 Required policies and procedures; related obligations. 
A broker or dealer that engages in any transaction for or with a customer or a customer of 
another broker or dealer shall establish, maintain, and enforce written policies and procedures 
reasonably designed to comply with the best execution standard as set forth in § 242.1100 (for 
purposes of Regulation Best Execution, “best execution policies and procedures”).   
(a) Requirements.  Such policies and procedures shall address: 
(1) How the broker or dealer will comply with the best execution standard by: 
(i) Obtaining and assessing reasonably accessible information, including 
information about price, volume, and execution quality, concerning the markets 
trading the relevant securities;  
(ii) Identifying markets that may be reasonably likely to provide the most 
favorable prices for customer orders (“material potential liquidity sources”); and 
(iii) Incorporating material potential liquidity sources into its order 
handling practices, and ensuring that the broker or dealer can efficiently access 
each such material potential liquidity source. 
(2) How the broker or dealer will determine the best market and make routing or 
execution decisions for customer orders that it receives by: 

   
435 
 
(i ) Assessing reasonably accessible and timely information with respect to 
the best displayed prices, opportunities for price improvement, including midpoint 
executions, and order exposure opportunities that may result in the most favorable 
price; 
(ii) Assessing the attributes of customer orders and considering the trading 
characteristics of the security, the size of the order, the likelihood of execution, 
the accessibility of the market, and any customer instructions in selecting the 
market most likely to provide the most favorable price; and  
(iii) In determining the number and sequencing of markets to be assessed, 
reasonably balancing the likelihood of obtaining better prices with the risk that 
delay could result in a worse price. 
(b) Conflicts of Interest.  In any transaction for or with a retail customer, where the broker 
or dealer executes an order as principal, including riskless principal; routes an order to, or 
receives an order from, an affiliate for execution; or provides or receives payment for order flow 
as defined in § 240.10b-10(d)(8) of this chapter (each, a “conflicted transaction”):  
(1) The broker or dealer’s best execution policies and procedures additionally 
shall address how the broker or dealer will obtain and assess information beyond that 
required by paragraph (a)(1)(i) of this section, including additional information about 
price, volume, and execution quality, in identifying a broader range of markets beyond 
those identified as material potential liquidity sources;  
(2) The broker or dealer’s best execution policies and procedures additionally 
shall address how the broker or dealer will evaluate a broader range of markets, beyond 
those identified as material potential liquidity sources, that might provide the most 

   
436 
 
favorable price for customer orders, including a broader range of order exposure 
opportunities and markets that may be smaller or less accessible than those identified as 
material potential liquidity sources; and 
(3) The broker or dealer shall document its compliance with the best execution 
standard for conflicted transactions, including all efforts to enforce its best execution 
policies and procedures for conflicted transactions and the basis and information relied on 
for its determinations that such conflicted transactions would comply with the best 
execution standard.  Such documentation shall be done in accordance with written 
procedures.  The broker or dealer shall also document any arrangement, whether written 
or oral, concerning payment for order flow, including the parties to the arrangement, all 
qualitative and quantitative terms concerning the arrangement, and the date and terms of 
any changes to the arrangement.  
(4) For purposes of this paragraph (b):  
(i) “Any transaction for or with a retail customer”   means any transaction 
for or with the account of a natural person or held in legal form on behalf of a 
natural person or group of related family members.  For purposes of this 
definition, a “group of related family members” means a group of natural persons 
with any of the following relationships: child, stepchild, grandchild, great 
grandchild, parent, stepparent, grandparent, great grandparent, spouse, domestic 
partner, sibling, stepbrother, stepsister, niece, nephew, aunt, uncle, mother-in-law, 
father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, 
including adoptive and foster relationships; and any other natural person (other 

   
437 
 
than a tenant or employee) sharing a household with any of the foregoing natural 
persons;   
(ii) A broker or dealer executes an order as “riskless principal” if, after 
having received an order to buy from a customer, the broker or dealer purchases 
the security from another person to offset a contemporaneous sale to the customer 
or, after having received an order to sell, the broker or dealer sells the security to 
another person to offset a contemporaneous purchase from the customer; and   
(iii) “Affiliate” means, with respect to a specified person, any person that, 
directly or indirectly, controls, is under common control with, or is controlled by, 
the specified person.  For purposes of this definition, “control” means the power, 
directly or indirectly, to direct the management or policies of the broker or dealer 
whether through ownership of securities, by contract, or otherwise.  A person is 
presumed to control a broker or dealer if that person is a director, general partner, 
or officer exercising executive responsibility (or having similar status or 
performing similar functions); directly or indirectly has the right to vote 25 
percent or more of a class of voting securities or has the power to sell or direct the 
sale of 25 percent or more of a class of voting securities of the broker or dealer; or 
in the case of a partnership, has contributed, or has the right to receive upon 
dissolution, 25 percent or more of the capital of the broker or dealer. 
(c) Regular Review of Execution Quality. A broker or dealer shall, no less frequently than 
quarterly, review the execution quality of its transactions for or with customers or customers of 
another broker or dealer, and how such execution quality compares with the execution quality 
the broker or dealer might have obtained from other markets, and revise its best execution 

   
438 
 
policies and procedures, including its order handling practices, accordingly.  The broker or dealer 
shall document the results of this review. 
(d) Introducing Brokers.  An introducing broker that routes customer orders to an 
executing broker does not need to separately comply with paragraphs (a), (b), and (c) of this 
section so long as the introducing broker establishes, maintains, and enforces policies and 
procedures that require the introducing broker to regularly review the execution quality obtained 
from such executing broker, compare it with the execution quality it might have obtained from 
other executing brokers, and revise its order handling practices accordingly.  The introducing 
broker shall document the results of this review.  For purposes of this provision, introducing 
broker means a broker or dealer that: 
(1) Does not carry customer accounts and does not hold customer funds or 
securities; 
(2) Has entered into an arrangement with an unaffiliated broker or dealer that has 
agreed to handle and execute on an agency basis all of the introducing broker’s customer 
orders (“executing broker”)  (For purposes of this paragraph, principal trades by an 
executing broker with the introducing broker’s customer to fill fractional share orders in 
NMS stocks and riskless principal trades (as defined in paragraph (b)) by an executing 
broker in fixed income securities will be considered to be handled on an agency basis); 
and  
(3) Has not accepted any monetary payment, service, property, or other benefit 
that results in remuneration, compensation, or consideration from the executing broker in 
return for the routing of the introducing broker’s customer orders to the executing broker.   
§ 242.1102 Annual report.   

   
439 
 
A broker or dealer that effects any transaction for or with a customer or a customer of 
another broker or dealer shall, no less frequently than annually, review and assess t he design and 
overall effectiveness of its best execution policies and procedures, including its order handling 
practices.  Such review and assessment shall be conducted in accordance with written procedures 
and shall be documented.  The broker or dealer shall prepare a written report detailing the results 
of such review and assessment, including a description of all deficiencies found and any plan to 
address deficiencies.  The report shall be presented to the board of directors (or equivalent 
governing body) of the broker or dealer.   
 
By the Commission. 
December 14, 2022. 
 
J. Matthew DeLesDernier, 
Deputy Secretary. 
  

1 

 

Conformed to Federal Register version 

SECURITIES AND EXCHANGE COMMISSION  

17 CFR Parts 240 and 242 

[Release No. 34-96496; File No.  S7-32-22]                                 

RIN  3235-AN24 

Regulation Best Execution  

AGENCY: Securities and Exchange Commission.  

ACTION: Proposed rule.  

SUMMARY: The Securities and Exchange Commission (“Commission”) is proposing new rules 

under the Securities Exchange Act of 1934 (“Exchange Act”) relating to a broker-dealer’s duty 

of best execution.  Proposed Regulation Best Execution would enhance the existing regulatory 

framework concerning the duty of best execution by requiring detailed policies and procedures 

for all broker-dealers and more robust policies and procedures for broker-dealers engaging in 

certain conflicted transactions with retail customers, as well as related review and documentation 

requirements.  

DATES: Comments should be received on or before March 31, 2023.   

ADDRESSES: Comments may be submitted by any of the following methods:  

Electronic Comments: 

• Use the Commission’s internet comment form (https://www.sec.gov/regulatory-

actions/how-to-submit-comments); or  

• Send an email to [email protected]. Please include File Number S7-32-22 on the 

subject line. 

mailto:[email protected]


   

2 

 

Paper Comments: 

• Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street 

NE, Washington, DC 20549-1090.  

All submissions should refer to File Number S7-32-22.  This file number should be included on 

the subject line if email is used.  To help the Commission process and review your comments 

more efficiently, please use only one method of submission.  The Commission will post all 

comments on the Commission’s website (https://www.sec.gov/rules/proposed.shtml).  

Comments are also available for website viewing and printing in the Commission’s Public 

Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between 

the hours of 10 a.m. and 3 p.m.  Operating conditions may limit access to the Commission’s 

Public Reference Room.  All comments received will be posted without change.  Persons 

submitting comments are cautioned that the Commission does not redact or edit personal 

identifying information from comment submissions.  You should submit only information that 

you wish to make available publicly.  

Studies, memoranda, or other substantive items may be added by the Commission or staff 

to the comment file during this rulemaking.  A notification of the inclusion in the comment file 

of any materials will be made available on the Commission’s website.  To ensure direct 

electronic receipt of such notifications, sign up through the “Stay Connected” option at 

www.sec.gov to receive notifications by email. 

FOR FURTHER INFORMATION CONTACT:  David Dimitrious, Senior Special Counsel 

and Arisa Tinaves Kettig, Special Counsel at (202) 551-5500, Office of Market Supervision, 

Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE, 

Washington, DC 20549.  

https://www.sec.gov/rules/proposed.shtml


   

3 

 

SUPPLEMENTARY INFORMATION:  The Commission is proposing to add the following 

new rules under the Exchange Act:  (1) 17 CFR 242.1100 (Rule 1100 of Regulation Best 

Execution); (2) 17 CFR 242.1101 (Rule 1101 of Regulation Best Execution); and (3) 17 CFR 

242.1102 (Rule 1102 of Regulation Best Execution).  The Commission is also proposing to 

amend 17 CFR 240.17a-4 (Rule 17a-4 under the Exchange Act). 

Table of Contents 
I. Introduction ......................................................................................................................... 6 
II. Duty of Best Execution ..................................................................................................... 10 

A. Current Regulatory Framework ............................................................................ 11 

B. Prior Commission Statements ............................................................................... 13 

C. FINRA and MSRB Best Execution Rules ............................................................ 20 

III. Existing Order Handling Practices and Overview of Proposed Regulation Best Execution
 21 

A. Existing Order Handling Practices........................................................................ 21 

1. General Broker-Dealer Practices .............................................................. 21 
2. Order Handling Conflicts of Interest ........................................................ 28 
3. Crypto Asset Securities ............................................................................. 37 

B. Overview of Proposed Regulation Best Execution ............................................... 40 

IV. Discussion of Proposed Regulation Best Execution ......................................................... 48 
A. Proposed Rule 1100 – The Best Execution Standard ........................................... 49 

B. Proposed Rule 1101(a) – Best Execution Policies and Procedures ...................... 63 

1. Proposed Rule 1101(a)(1) – Framework for Compliance with the Best 
Execution Standard ............................................................................................... 65 
2. Proposed Rule 1101(a)(2) – Best Market Determination ......................... 80 

C. Proposed Rule 1101(b) – Policies and Procedures and Documentation for 
Conflicted Transactions ...................................................................................... 100 

1. Proposed Rules 1101(b)(1) and (2) – Policies and Procedures for 
Conflicted Transactions ...................................................................................... 110 
2. Proposed Rule 1101(b)(3) – Documentation for Conflicted Transactions
 115 



   

4 

 

3. Application of Proposed Rule 1101(b) to NMS Stock Market Conflicts of 
Interest122 
4. Application of Proposed Rule 1101(b) to the Options Market ............... 125 
5. Application of Proposed Rule 1101(b) to the Corporate and Municipal 
Bond Markets and Government Securities Markets ........................................... 128 

D. Proposed Rule 1101(c) – Regular Review of Execution Quality ....................... 130 

E. Proposed Rule 1101(d) – Introducing Brokers ................................................... 142 

1. Definition of Introducing Broker and Executing Broker ........................ 145 
2. Review of Executing Broker’s Execution Quality .................................. 151 

F. Proposed Rule 1102 – Annual Report ................................................................ 163 

G. Recordkeeping Requirements under Rule 17a-4 ................................................ 169 

V. Economic Analysis ......................................................................................................... 171 
A. Introduction ......................................................................................................... 171 

B. Baseline ............................................................................................................... 177 

1. Current Legal and Regulatory Framework ............................................. 178 
2. Best Execution Review Processes .......................................................... 195 
3. Description of Markets and Broker-Dealer Order Handling and Execution 
Practices .............................................................................................................. 199 
4. Broker-Dealer Services and Revenue ..................................................... 297 

C. Economic Effects and Effects on Efficiency, Competition, and Capital Formation
............................................................................................................................. 304 

1. Benefits ................................................................................................... 307 
2. Costs ........................................................................................................ 330 
3. Efficiency, Competition, and Capital Formation .................................... 350 

D. Reasonable Alternatives...................................................................................... 360 

1. SEC Adopts FINRA Rule 5310 and MSRB Rule G-18 Best Execution 
Rules 360 
2. Require Order Execution Quality Disclosure for Other Asset Classes... 361 
3. Utilize FINRA and MSRB Approach to Introducing Broker ................. 364 
4. Ban or Restrict Off-Exchange PFOF ...................................................... 365 
5. Require Broker-Dealers to Utilize Best Execution Committees ............. 367 



   

5 

 

6. Require Order-by-Order Documentation for Conflicted or All 
Transactions ........................................................................................................ 368 
7. Staggered Compliance Dates .................................................................. 370 

E. Request for Comments ........................................................................................ 371 

VI. Paperwork Reduction Act ............................................................................................... 382 
A. Summary of Collection of Information............................................................... 383 

1. Required Policies and Procedures and Related Obligations ................... 383 
2. Annual Report ......................................................................................... 387 

B. Proposed Use of Information .............................................................................. 387 

1. Required Policies and Procedures and Related Obligations ................... 388 
2. Annual Report ......................................................................................... 389 

C. Respondents ........................................................................................................ 389 

D. Total Initial and Annual Reporting and Recordkeeping Burdens ....................... 390 

1. Required Policies and Procedures and Related Obligations ................... 390 
2. Annual Report ......................................................................................... 399 

E. Total Paperwork Burden ..................................................................................... 407 

F. Collection of Information is Mandatory ............................................................. 409 

G. Confidentiality of Responses to Collection of Information ................................ 409 

H. Retention Period for Recordkeeping Requirements ........................................... 409 

I. Request for Comment ......................................................................................... 410 

VII. Consideration of Impact on the Economy ...................................................................... 411 
VIII. Initial Regulatory Flexibility Act Analysis ..................................................................... 411 

A. Reasons for and Objectives of the Proposed Action ........................................... 412 

B. Legal Basis .......................................................................................................... 415 

C. Small Entities Subject to the Proposed Rule....................................................... 415 

D. Projected Compliance Requirements of the Proposed Rule for Small Entities .. 416 

1. Required Policies and Procedures and Related Obligations ................... 416 
2. Annual Report ......................................................................................... 419 

E. Duplicative, Overlapping, or Conflicting Federal Rules .................................... 421 



   

6 

 

F. Significant Alternatives ...................................................................................... 421 

1. Adopt FINRA Rule 5310 and MSRB Rule G-18 Concerning Best 
Execution ............................................................................................................ 423 
2. Require Order Execution Quality Disclosure for Other Asset Classes... 425 
3. Define “Introducing Broker” to Include Those Entities That Qualify for 
Relief Under FINRA and MSRB Rules .............................................................. 426 
4. Ban or Restrict Off-Exchange Payment for Order Flow ........................ 427 
5. Require Broker-Dealers to Utilize Best Execution Committees ............. 428 
6. Require Order-by-Order Documentation for Conflicted or All 
Transactions ........................................................................................................ 429 
7. Staggered Compliance Dates .................................................................. 430 

G. General Request for Comment............................................................................ 431 

Statutory Authority and Text of the Proposed Rule .................................................................... 431 
 
 

I. Introduction 

The duty of best execution requires a broker-dealer to execute customers’ trades at the 

most favorable terms reasonably available under the circumstances,1 and customers benefit from 

broker-dealers’ robust considerations of execution opportunities that may provide customers with 

the most favorable terms.  Accordingly, promoting the best execution of customer orders is of 

fundamental importance to investors and the markets, and is an important aspect of investor 

protection.  The Financial Industry Regulatory Authority, Inc. (“FINRA”), a national securities 

association, and the Municipal Securities Rulemaking Board (“MSRB”) currently have rules and 

guidance directly addressing the duty of best execution.  The Commission has made statements 

concerning the duty over the years, but has never itself established a rule addressing best 

                                                 

1  See infra note 21 and accompanying text. 



   

7 

 

execution. While the Commission believes the existing regulatory framework concerning the 

duty of best execution has helped broker-dealers fulfill their duty to their customers, the 

Commission believes this regulatory framework can be made more effective.  In particular, while 

FINRA and the MSRB have established best execution rules and provided guidance on how 

broker-dealers should achieve best execution in a variety of contexts, and generally require 

broker-dealers to have procedures for compliance with relevant laws and rules, the Commission 

believes it is appropriate to propose its own comprehensive and detailed best execution 

requirements.  The Commission understands that, currently, broker-dealers’ best execution 

policies and procedures, and the documentation relating to their best execution practices, may 

vary.  However, as described in section III.A below, the Commission believes that customers 

would benefit from consistently robust best execution practices by broker-dealers, and the 

execution of retail customer orders by broker-dealers that have certain order handling conflicts of 

interest warrants heightened attention by those broker-dealers.2 

The Commission believes that having Commission rules providing a policies and 

procedures-based best execution framework, along with regular reviews and related 

documentation, would help broker-dealers maintain consistently robust best execution practices 

and result in vigorous efforts by broker-dealers to achieve best execution, including in situations 

where broker-dealers have order handling conflicts of interest with retail customers.  The 

Commission also believes that detailed policies and procedures, regular reviews, and related 

documentations would allow broker-dealers to effectively assess their best execution practices 

                                                 

2  See infra Section V.A (describing the “principal – agent” problem that may exist between 
a broker-dealer and its customer and how that can be exacerbated by other conflicts of 
interest).   



   

8 

 

and assist the Commission and self-regulatory organizations (“SROs”) to effectively examine 

and enforce broker-dealers’ compliance with the proposed rules.    

Proposed Regulation Best Execution would establish through a Commission rule a best 

execution standard for broker-dealers.3  Proposed Regulation Best Execution would also 

specifically require broker-dealers to establish, maintain, and enforce written policies and 

procedures reasonably designed to comply with that best execution standard.  Those policies and 

procedures would be required to address:  (1) how the broker-dealer will comply with the 

proposed standard of best execution, including by identifying material potential liquidity sources, 

incorporating material potential liquidity sources into its order handling practices, and ensuring 

that the broker-dealer can efficiently access each source, and (2) how the broker-dealer will 

determine the best market for customer orders received, including by assessing reasonably 

accessible and timely pricing information and opportunities for price improvement.   

 In addition, for retail customer transactions that present conflicts of interest, such as 

payment for order flow or internalization, that could create incentives for a broker-dealer to be 

less diligent in its search for better executions and potentially result in broker-dealers not 

providing best execution to customer orders, proposed Regulation Best Execution would require 

the broker-dealer’s policies and procedures to address how it will comply with the best execution 

standard in light of such conflicts, including how it would assess a broader range of markets than 

it would for non-conflicted transactions.  Proposed Regulation Best Execution would also require 

                                                 

3  The proposed best execution standard is consistent with the best execution standards set 
forth in FINRA and MSRB rules. 



   

9 

 

broker-dealers to document their compliance with the best execution standard and the basis for 

their determinations that best execution would be achieved through conflicted transactions.   

 Proposed Regulation Best Execution would also require broker-dealers to review the 

execution quality of their customer orders at least quarterly, compare it with the execution 

quality that might have been obtained from other markets, and revise their best execution 

policies and procedures accordingly.   

Proposed Regulation Best Execution would exempt from specified requirements under 

the proposed rules an introducing broker (as defined in the proposed rules) that establishes, 

maintains, and enforces policies and procedures that require it to regularly review the execution 

quality obtained from its executing broker, compares that execution quality with the execution 

quality it might have obtained from other executing brokers, and revises its order handling 

practices accordingly.   

Finally, proposed Regulation Best Execution would require broker-dealers to review and 

assess the overall effectiveness of their best execution policies and procedures, including their 

order handling practices, on at least an annual basis, and prepare a report detailing the results of 

such review and assessment that would be presented to the broker-dealer’s board of directors (or 

equivalent governing body).   

 The Commission recognizes the importance of providing a broker-dealer flexibility to 

exercise its expertise and judgment when executing customer orders, and proposed Regulation 

Best Execution primarily would be a policies and procedures-based rule, similar to the Order 



   

10 

 

Protection Rule,4 the Risk Management Controls for Brokers or Dealers with Market Access 

Rule,5 and Regulation Systems Compliance and Integrity.6  Under proposed Regulation Best 

Execution, a broker-dealer’s failure to achieve the most favorable price possible under prevailing 

market conditions (“most favorable price”) for customer orders would be part of the 

consideration of whether the broker-dealer’s policies and procedures are reasonably designed 

and whether the broker-dealer is enforcing its policies and procedures.  A broker-dealer’s failure 

to achieve the most favorable price for customer orders would not necessarily be a violation of 

the proposed best execution standard, because it may not be the result of a failure by the broker-

dealer to use reasonable diligence to ascertain the best market and to buy or sell in such market 

so that the customer receives the most favorable price.7  However, a failure to establish and 

maintain reasonably designed policies and procedures applicable to all customer orders, or a 

failure to enforce those policies and procedures, would be a violation of the policies and 

procedures requirement under proposed Regulation Best Execution.  

II. Duty of Best Execution  

                                                 

4  See 17 CFR 242.611. 
5  See 17 CFR 240.15c3-5. 
6  See 17 CFR 242.1001. 
7  See also MSRB Rule G-18.01 (“A failure to have actually obtained the most favorable 

price possible will not necessarily mean that the dealer failed to use reasonable 
diligence.”).  Whether a broker-dealer has met the proposed best execution standard 
would turn on an objective assessment of the facts and circumstances at the time of the 
broker-dealer’s transactions for or with the customer (and not in hindsight). 



   

11 

 

A. Current Regulatory Framework 

A broker-dealer has a legal duty to seek best execution of customer orders.  The duty of 

best execution predates the Federal securities laws and is derived from an implied representation 

that a broker-dealer makes to its customers.8  The duty is established from “common law agency 

obligations of undivided loyalty and reasonable care that an agent owes to [its] principal.”9  This 

obligation requires that a “broker-dealer seek to obtain for its customer orders the most favorable 

terms reasonably available under the circumstances.”10  While there is no Commission rule or 

standard addressing a broker-dealer’s duty of best execution, the duty is addressed in FINRA and 

MSRB rules, as described in sections II.C and IV below.11  

                                                 

8  See, e.g., Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 270 (3d 
Cir.), cert. denied, 525 U.S. 811 (1998). 

9  See id. 
10  See id.  See also Securities Exchange Act Release No. 37619A (Sept. 6, 1996), 61 FR 

48290 (Sept. 12, 1996) (“Order Execution Obligations Adopting Release”).  A Report of 
the Special Study of Securities Markets stated that, according to an NASD District 
Business Conduct Committee in a 1952 proceeding, “[t]he integrity of the industry can be 
maintained only if the fundamental principle that a customer should at all times get the 
best available price which can reasonably be obtained for him is followed.”  See SEC, 
Report of the Special Study of Securities Markets, H.R. Doc. No. 95, 88th Cong., 1st 
Sess. Pt. II, 624 (1963) (“Special Study”), available at 
https://www.sechistorical.org/collection/papers/1960/1963_SSMkt_Chapter_07_2.pdf.  

11  The Commission also oversees investment advisers, which have a similar duty.  As part 
of its duty of care, an investment adviser has a duty to seek best execution of a client’s 
transactions where the adviser has responsibility to select broker-dealers to execute client 
trades, and the Commission previously has described the contours of that duty.  See 
Commission Interpretation Regarding Standard of Conduct for Investment Advisers, 
Advisers Act Release No. 5248 (June 5, 2019), 84 FR 33669, 33674-75 (July 12, 2019).  
In addition, the Commission has brought a variety of enforcement actions against 
registered investment advisers in connection with their alleged failure to satisfy their duty 
to seek best execution.  See, e.g., In the Matter of Aventura Capital Management, LLC, 
Investment Advisers Act Release No. 6103 (Sept. 6, 2022) (settled action); In the Matter 

https://www.sechistorical.org/collection/papers/1960/1963_SSMkt_Chapter_07_2.pdf


   

12 

 

The Commission is proposing Regulation Best Execution pursuant to, among other 

provisions, sections 11A and 15 of the Exchange Act.12  In section 11A, Congress identified key 

national market system objectives, including the practicability of brokers executing investors’ 

orders in the best market.13  The Commission has rulemaking authority to further the section 11A 

objectives.14  Separately, section 15 of the Exchange Act provides authority for rules that are 

reasonably designed to prevent fraudulent acts or practices.  Specifically, section 15(c)(2)(A) 

provides that no broker or dealer may make use of the mails or any means or instrumentality of 

interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or 

sale of, any security (other than an exempted security15 or commercial paper, bankers’ 

acceptances, or commercial bills) otherwise than on a national securities exchange of which it is 

a member, in connection with which such broker or dealer engages in any fraudulent, deceptive, 

or manipulative act or practice, or makes any fictitious quotation.16  Section 15(c)(2)(B) 

prohibits brokers, dealers, and municipal securities dealers from engaging in such activity in 

                                                 

of Madison Avenue Securities, LLC, Investment Advisers Act Release No. 6036 (May 
31, 2022) (settled action).   

12  15 U.S.C. 78k-1; 15 U.S.C. 78o. 
13  15 U.S.C. 78k-1(a)(1)(C).  
14  15 U.S.C. 78k-1(a)(2).   
15  See 15 U.S.C. 78c(a)(12) (defining the term “exempted security” to include, among other 

things, government securities and municipal securities, as defined in sections 3(a)(42) 
and 3(a)(29) of the Exchange Act, respectively).  

16  15 U.S.C. 78o(c)(2)(A). 



   

13 

 

“any municipal security.”17  Section 15(c)(2)(C) prohibits government securities brokers and 

government securities dealers from engaging in such activity in any “government security.”18  

Section 15(c)(2)(D) authorizes the Commission to adopt rules that define, and prescribe means 

reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or 

manipulative and such quotations as are fictitious.19  When a broker-dealer violates its duty of 

best execution, it could be in violation of section 15(c) of the Exchange Act.20    

B. Prior Commission Statements 

The Commission has made statements concerning the duty of best execution in various 

contexts over the years.  The following are some of the statements that the Commission has 

made with respect to the duty of best execution.  The Commission solicits comment below, 

however, on whether any of these prior statements should be revised in light of the proposed 

rules.     

The Commission has previously stated that the duty of best execution requires a broker-

dealer to execute customers’ trades at the most favorable terms reasonably available under the 

                                                 

17  See 15 U.S.C. 78o(c)(2)(B).  See also 15 U.S.C. 78c(a)(29) (defining municipal 
securities). 

18  See 15 U.S.C. 78o(c)(2)(C).  See also 15 U.S.C. 78c(a)(42) (defining government 
securities). 

19  15 U.S.C. 78o(c)(2)(D). 
20  See, e.g., In the Matter of Knight Securities L.P., Securities Exchange Act Release No. 

50867 (Dec. 16, 2004) (settled action) (finding that the broker-dealer defrauded its 
institutional customers by failing to provide best execution in violation of section 15(c) of 
the Exchange Act). 



   

14 

 

circumstances, i.e., at the best reasonably available price.21  The Commission has also 

recognized that price is a critical concern for investors.22  In addition, the Commission has 

described a non-exhaustive list of factors that may be relevant to broker-dealers’ best execution 

analysis.  These factors include the size of the order, speed of execution, clearing costs, the 

trading characteristics of the security involved, the availability of accurate information affecting 

choices as to the most favorable market center for execution and the availability of technological 

aids to process such information, and the cost and difficulty associated with achieving an 

execution in a particular market center.23   

Over the years, the Commission has stated the need for broker-dealers to continue to 

modernize their best execution practices.  For example, the Commission has stated that broker-

dealer practices for achieving best execution, including the data, technology, and types of 

                                                 

21  Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37538 (June 
29, 2005) (“Regulation NMS Adopting Release”).  See also Geman v. SEC, 334 F.3d 
1183, 1186 (10th Cir. 2003) (“[T]he duty of best execution requires that a broker-dealer 
seek to obtain for its customer orders the most favorable terms reasonably available under 
the circumstances.”) (quoting Newton, supra note 8, 135 F.3d at 270); Kurz v. Fidelity 
Management & Research Co., 556 F.3d 639, 640 (7th Cir. 2009) (describing the “duty of 
best execution” as “getting the optimal combination of price, speed, and liquidity for a 
securities trade”). 

22  See Securities Exchange Act Release No. 43590 (Nov. 17, 2000), 65 FR 75414, 75418 
(Dec. 1, 2000) (“Order Execution and Routing Practice Release”) (“The Commission 
strongly believes, however, that most investors care a great deal about the quality of 
prices at which their orders are executed, and that an opportunity for more vigorous 
competition among market participants to provide the best quality of execution will 
enhance the efficiency of the national market system.”). 

23  See id., at 75422; Regulation NMS Adopting Release, supra note 21, 70 FR 37538. 



   

15 

 

markets they access, must constantly be updated as markets evolve.24  In particular, the 

Commission has stated that the scope of the duty of best execution must evolve as changes occur 

in the market that give rise to improved executions for customer orders, including opportunities 

to trade at more advantageous prices.25  As these changes occur, a broker-dealer’s procedures for 

seeking best execution for its customer orders also must be modified to consider price 

opportunities that become reasonably available.26  In doing so, broker-dealers must take into 

account price improvement opportunities27 and whether different markets may be more suitable 

for different types of orders or particular securities.28   

In addition, the Commission has expressed concerns regarding interpositioning and the 

duty of best execution.  Interpositioning can occur when a broker-dealer places a third party 

between itself and the best market for executing a customer trade in a manner that results in a 

                                                 

24  See Regulation NMS Adopting Release, supra note 21, 70 FR at 37538; Order Execution 
Obligations Adopting Release, supra note 10, 61 FR at 48322-23. 

25  See Order Execution Obligations Adopting Release, supra note 10, 61 FR 48323. 
26  See id.; Regulation NMS Adopting Release, supra note 21, 70 FR 37516 (stating that 

broker-dealers must examine their procedures for seeking best execution in light of 
market and technology changes and modify those practices if necessary to enable their 
customers to obtain the best reasonably available prices). 

27  See Order Execution Obligations Adopting Release, supra note 10, 61 FR 48323 n.357 
(stating that price improvement means the difference between execution price and the 
best quotes prevailing in the market at the time the order arrived at the market or market 
maker, and that any evaluation of price improvement opportunities would have to 
consider not only the extent to which orders are executed at prices better than the 
prevailing quotes, but also the extent to which orders are executed at inferior prices). 

28  See id. 



   

16 

 

customer not receiving the best available market price.29  Interpositioning can violate the broker-

dealer’s duty of best execution when it results in unnecessary transaction costs at the expense of 

the customer.30 

The Commission has also discussed its views with respect to the application of best 

execution to different order types.  With regard to the handling of limit orders, broker-dealers 

must take into account material differences in execution quality, such as the likelihood of execution 

among the various markets or market centers to which limit orders may be routed.31  Broker-

dealers are also subject to the duty of best execution when executing customer orders at the 

                                                 

29  See Edward Sinclair, et al., Securities Exchange Act Release No. 9115, 1971 WL 120487 
(Mar. 24, 1971) (Comm’n op.), aff’d, 444 F2d. 399 (2d Cir. 1971) (order clerk in OTC 
department of broker-dealer interposed a broker-dealer between his firm and best 
available market price in return for split of profits with the interposed broker); H.C. 
Keister & Co., et al., Securities Exchange Act Release No. 7988, 1966 WL 84120 (Nov. 
1, 1966) (Comm’n op.) (in exchange for payments, trader for a large broker-dealer 
interpositioned a small broker-dealer between its customers’ orders and the best available 
market prices); Synovus Securities, Inc., Securities Exchange Act Release No. 34313, 
1994 WL 323096 (July 5, 1994) (settled order) (broker-dealer and its president placed 
customer orders with person who was able to promptly sell the bonds to or buy the bonds 
from other brokers at a profit and customers did not get the best market price).  See also 
SEC v. Ridenour, 913 F.2d 515 (8th Cir. 1990) (a bond salesman violated the antifraud 
provisions based on his secret interpositioning of his personal trading account between 
his customers’ securities transactions and the fair market price of the trades).   

30  See Thomson & McKinnon, Securities Exchange Act Release No. 8310, 1968 WL 87637 
(May 8, 1968) (Comm’n op.) (a National Association of Securities Dealers (“NASD”) 
member firm interposed broker-dealers between itself and the best available market, and 
the added transaction cost was borne by its customers; the Commission found that, “[i]n 
view of the obligation of a broker to obtain the most favorable price for his customer, 
where he interposes another broker-dealer between himself and a third broker-dealer, he 
prima facie has not met that obligation and he has the burden of showing that the 
customer’s total cost or proceeds of the transaction is the most favorable obtainable under 
the circumstances”). 

31  See Order Execution Obligations Adopting Release, supra note 10, 61 FR 48323. 



   

17 

 

beginning of regular trading hours and should take into account alternative methods when 

considering how to execute these orders.32 

Moreover, the Commission has recognized practical challenges associated with the 

handling of a large volume of orders.  In particular, the Commission acknowledged in 1994 that 

although it may be impractical for a broker-dealer that handles a heavy volume of orders to make 

an individual determination regarding where to route each order it receives, the broker-dealer 

must use due diligence to seek the best execution possible given all facts and circumstances.33  

At that time, the Commission reasoned that, in such circumstances, the duty of best execution 

requires a broker-dealer to periodically assess the quality of competing markets to ensure that 

order flow is directed to the markets providing the most beneficial terms for its customer 

orders.34   

The Commission has further identified the types of data needed by broker-dealers to 

fulfill their duty of best execution.  For example, quotation information contained in the public 

quotation system must be considered in seeking best execution of customer orders.35  In adopting 

                                                 

32  See Order Execution and Routing Practice Release, supra note 22, 65 FR 75422 
(recognizing that customer orders in listed securities were executed at one opening price 
in an auction whereas customer orders in Nasdaq securities at the time traded at the 
quoted bids and offers resulting in a liquidity premium for a large number of orders that 
effectively cross each other at a single point in time). 

33  See Securities Exchange Act Release No. 34902 (Oct. 27, 1994), FR Document 94-27109 
(Nov. 2, 1994) (“Payment for Order Flow Release”). 

34  See id.  See also Regulation NMS Adopting Release, supra note 21, 70 FR 37516. 
35  See Order Execution Obligations Adopting Release, supra note 10, 61 FR 48324. 



   

18 

 

Rules 605 and 606 of Regulation NMS,36 the Commission recognized that the reports required of 

market centers would provide statistical disclosures regarding certain factors, such as execution 

price and speed of execution, relevant to a broker-dealer’s order routing decision and that these 

public disclosures of execution quality should help broker-dealers fulfill their duty of best 

execution.37  More recently, the Commission stated that broker-dealers should consider the 

availability of consolidated market data, including the various elements of data content and the 

timeliness, accuracy, and reliability of the data in developing and maintaining their best 

execution policies and procedures.38  However, recognizing that best execution analysis varies 

depending upon the characteristics of customers and orders handled and the large array of 

potential scenarios, the Commission stated that it cannot specify the data elements that may be 

relevant to every specific situation.39   

                                                 

36  See 17 CFR 242.605, 242.606. 
37  See Order Execution and Routing Practice Release, supra note 22, 65 FR 75418.  The 

Commission further stated that the rules were designed to generate uniform, general 
purpose statistics that will prompt more vigorous competition on execution quality.  The 
information provided by these reports is not, by itself, sufficient to support conclusions 
regarding the provision of best execution, and any such conclusions would require a more 
in-depth analysis of the broker-dealer’s order routing practices than will be available 
from the disclosures required by the rules.  See id. at 75420.  

38  See Securities Exchange Act Release No. 90610 (Dec. 9, 2020), 86 FR 18596, 18605-06 
(Apr. 9, 2021) (“MDI Adopting Release”).  The Commission stated that it was not 
establishing minimum data elements needed to achieve best execution nor mandating 
consumption of the expanded data content.  The Commission also acknowledged that 
different market participants and different trading applications have different market data 
needs.  See id. (citing Securities Exchange Act Release No. 88216 (Feb. 14, 2020), 85 FR 
16726, 16734, 16755 (Mar. 24, 2020) (“Market Data Infrastructure Proposing Release”)). 

39  See MDI Adopting Release, supra note 38, 86 FR at 18606. 



   

19 

 

The Commission has also stated the importance of price improvement opportunities in 

the context of listed and over-the-counter (“OTC”) equities.40  Simply routing customer order 

flow for automated executions or internalizing customer orders on an automated basis at the best 

bid or offer would not necessarily satisfy a broker-dealer’s duty of best execution for small 

orders in listed and OTC equities.41  Rather, broker-dealers handling small orders in listed and 

OTC equities should look for price improvement opportunities when executing these orders.42  

And the expectation of price improvement for customer orders is particularly important when 

broker-dealers receive payments in return for routing their customer orders.43    

                                                 

40  See Order Execution Obligations Adopting Release, supra note 10, 61 FR at 48323.  See 
also id. at 48323 n.357.   

41  See id. at 48323. 
42  See id. 
43  See Payment for Order Flow Release, supra note 33, 59 FR at 55008.  See also 17 CFR 

240.10b-10(d)(8) (defining “payment for order flow” as any monetary payment, service, 
property, or other benefit that results in remuneration, compensation, or consideration to 
a broker or dealer from any broker or dealer, national securities exchange, registered 
securities association, or exchange member in return for the routing of customer orders 
by such broker or dealer to any broker or dealer, national securities exchange, registered 
securities association, or exchange member for execution, including but not limited to: 
research, clearance, custody, products or services; reciprocal agreements for the provision 
of order flow; adjustment of a broker or dealer’s unfavorable trading errors; offers to 
participate as underwriter in public offerings; stock loans or shared interest accrued 
thereon; discounts, rebates, or any other reductions of or credits against any fee to, or 
expense or other financial obligation of, the broker or dealer routing a customer order that 
exceeds that fee, expense or financial obligation).  Retail broker-dealers receiving cash 
payments from wholesale market makers in return for routing their customers’ orders to 
the market maker for execution is a common example of payment for order flow.  See 
Memorandum to the SEC Equity Market Structure Advisory Committee from the SEC 
Division of Trading and Markets, Certain Issues Affecting Customers in the Current 
Equity Market Structure 5-6 (Jan. 26, 2016).  Staff reports, Investor Bulletins, and other 
staff documents (including those cited herein) represent the views of Commission staff 
and are not a rule, regulation, or statement of the Commission.  The Commission has 



   

20 

 

C. FINRA and MSRB Best Execution Rules 

FINRA, an SRO,44 has a best execution rule (Rule 5310) and has issued interpretive 

regulatory notices concerning its members’ duty to provide best execution to customer orders.45  

FINRA Rule 5310 states that, “[i]n any transaction for or with a customer or customer of another 

broker-dealer, a member and persons associated with a member must use reasonable diligence to 

ascertain the best market for the subject security and buy or sell in such market so that the 

resultant price to the customer is as favorable as possible under prevailing market conditions.”  

Over the years, FINRA and its predecessor, the NASD, have modified the rule and issued 

interpretations to account for changes in market practices and market structure, and to account 

for new technologies and new data available to broker-dealers that handle and execute customer 

orders.46   

                                                 

neither approved nor disapproved the content of these staff documents and, like all staff 
statements, they have no legal force or effect, do not alter or amend applicable law, and 
create no new or additional obligations for any person. 

44  While the MSRB is an SRO for only certain purposes of the Exchange Act, see Exchange 
Act section 3(a)(26), 15 U.S.C. 78c(a)(26), MSRB rules are rules of an SRO, see 
Exchange Act section 3(a)(28), 15 U.S.C. 78c(a)(28).  FINRA and the MSRB are both 
referred to herein as SROs. 

45  For ease of discussion and consistency, this release refers to FINRA members as broker-
dealers when discussing the FINRA rules that are applicable to FINRA members.   

46  See, e.g., FINRA Regulatory Notices 21-23 (June 23, 2021), 21-12 (Mar. 18, 2021), 18-
29 (Sept. 12, 2018), 15-46 (Nov. 2015), and 09-58 (Oct. 2009); NASD Notices to 
Members 01-22 (Apr. 2001), 00-42 (June 2000), and 99-12 (Feb. 1999).21 

 

Modeled on FINRA Rule 5310,47 MSRB Rule G-18 is the best execution rule for 

transactions in municipal securities48 and similarly requires broker-dealers to “use reasonable 

diligence to ascertain the best market for the subject security and to buy or sell in that market so 

that the resultant price to the customer is as favorable as possible under prevailing market 

conditions.”   

The Commission describes the elements in FINRA Rule 5310 and MSRB Rule G-18, as 

well as the differences between those rules and the proposed rules, in section IV below.           

III. Existing Order Handling Practices and Overview of Proposed Regulation Best 

Execution 

A. Existing Order Handling Practices   

1. General Broker-Dealer Practices 

In the past few decades, there has been a proliferation of markets and increasingly 

accessible prices across asset classes.  For example, broker-dealers have numerous execution 

                                                 

47  In proposing Rule G-18, the MSRB stated that a best execution rule should be generally 
harmonized with FINRA Rule 5310 for purposes of regulatory efficiency, but 
appropriately tailored to the characteristics of the municipal securities markets.  See 
Securities Exchange Act Release No. 73764 (Dec. 5, 2014), 79 FR 73658 (Dec. 11, 2014) 
(“MSRB Best Execution Approval Order”).  While proposed Regulation Best Execution 
does not include different requirements for markets with different characteristics, 
proposed Regulation Best Execution is designed to enable broker-dealers to tailor their 
compliance based on the different characteristics of the markets.   

48  MSRB Rule G-18 applies to brokers, dealers, and municipal securities dealers.  For ease 
of discussion and consistency, when discussing the MSRB rule, the release refers to these 
entities collectively as broker-dealers.  Furthermore, the term “municipal securities” 
throughout this release is referred to as either “municipal bonds” or “municipal 
securities.”   



   

22 

 

venues from which to choose in the NMS stock market.  These include 16 registered equities 

exchanges, an increase from 11 registered equities exchanges approximately 12 years ago.49  In 

the options markets, the number of options exchanges continues to increase, with 6 new options 

exchanges in the last 10 years and 16 registered options exchanges operating today.  In the 

corporate and municipal bond markets and government securities markets, traditional OTC voice 

trading protocols and customer liquidity provision by principal trading desks of broker-dealers 

are being supplemented by other methods of execution that are both electronic and multilateral in 

nature.  As of October 31, 2022, there are 21 corporate bond alternative trading systems 

(“ATSs”), 7 municipal securities ATSs, and 14 government securities ATSs, each operating 

pursuant to a Form ATS currently on file with the Commission.   

The Commission believes that customers would benefit from broker-dealers’ robust 

considerations of liquidity sources and price improvement opportunities, which may provide 

customers with the most favorable prices.  In the NMS stock market, for example, broker-dealers 

that primarily service the accounts of individual investors (“retail broker-dealers”) route more 

than 90% of their customers’ marketable orders to a small group of off-exchange dealers, known 

as wholesalers,50 and the Commission believes that customers would benefit from considerations 

by these retail broker-dealers of whether other markets may provide customer orders, or a 

portion of those orders, with potentially better executions than wholesalers.   

                                                 

49  See Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594 (Jan. 21, 
2010 (“Concept Release on Equity Market Structure”). 

50  See Table 8, infra section V.B.3.a).i.d..  



   

23 

 

For NMS stock orders that receive price improvement from wholesalers, approximately 

18.6% of those shares receive an amount of price improvement of less than 0.1 cent per share 

when executed by the wholesaler.51  Moreover, for stocks priced higher than $30, between 

approximately 46-63% of shares executed by wholesalers received price improvement that was 

less favorable than the midpoint of the prevailing national best bid and offer (“NBBO”) at the 

time the wholesaler received the order.52  For stocks priced higher than $30, it appears that for 

between 60-93% of the shares executed by the wholesaler in a principal capacity at a price less 

favorable than the NBBO midpoint there was midpoint liquidity that was available on exchanges 

and ATSs at the time the wholesaler executed the order.53  Retail broker-dealers often do not 

route customer orders to execute against midpoint liquidity that may be present on other markets 

prior to routing for execution by wholesalers.54  While a retail broker-dealer’s decision to route 

orders to a wholesaler that provides price improvement may indeed be consistent with its duty of 

                                                 

51  See Table 8, infra section V.B.3.a).i.d. 
52  The percentage ranges are based on stock prices, the liquidity of the stock, whether or not 

the stock was in the S&P 500 Index, and whether or not the stock is an exchange-traded 
fund (“ETF”).  See Table 8, infra section V.B.3.a).i.d (analysis showing that depending 
on the type of NMS stock, its price, and liquidity, between 46% and 73% of retail 
marketable order shares are internalized by a wholesaler at a price worse than the NBBO 
midpoint).  

53  See Table 8, infra section V.B.3.a).i.d (analysis showing that, depending on the type of 
NMS stock, its price, and its liquidity, between 40% and 93% of the shares in marketable 
retail orders that wholesalers internalize at prices less favorable than the NBBO midpoint 
had midpoint liquidity available at a better price on an exchange or ATS).  

54  See Table 3, infra section V.B.3.a).i.d (according to Table 3, retail brokers appear to 
outsource handling of over 87% of customer orders and over 90% of customer 
marketable orders to wholesalers). 



   

24 

 

best execution in many cases,55 the Commission believes that customers would benefit from 

robust considerations by retail broker-dealers regarding, for example, the possibility of available 

liquidity priced at the midpoint of the NBBO at other markets.     

Similar considerations are present with the order handling and routing practices of 

wholesalers in the NMS stock market.56  While the prices that wholesalers provide to a customer 

may often justify the determination by the wholesaler that it is the best market for the customer 

order, the specific amount of price improvement for orders that are executed internally is largely 

within the discretion of the wholesaler.  The wholesaler typically first determines whether or not 

it desires to transact with a particular customer order in a principal capacity.  Should it choose to 

do so, the wholesaler determines what amount of price improvement it will provide for the order, 

and the data described above shows that wholesalers often do not execute customer orders at the 

NBBO midpoint.  When the wholesaler has determined that it does not want to transact with a 

customer order in a principal capacity, the wholesaler may attempt to route such order to other 

markets. 

As discussed in section III.A.2, the Commission believes that customers would benefit 

from robust considerations by broker-dealers of liquidity sources and price improvement 

                                                 

55  For example, wholesalers appear to provide customers with executions in NMS stocks at 
the midpoint or better (based on the NBBO at the time the wholesaler received the order)  
for almost 46% of the customer orders executed by the wholesaler in a principal capacity.  
See Table 7, infra section V.B.3.a).i.d .  But see supra note 53 and accompanying text 
(describing that for stocks priced higher than $30, it appears that between 60-93% of the 
shares executed by the wholesaler in a principal capacity at a price less favorable than the 
NBBO midpoint had liquidity available at the NBBO midpoint on an exchange or ATS). 

56  Wholesalers owe a duty of best execution to the customers of retail broker-dealers under 
FINRA Rule 5310.  See FINRA Rule 5310(a) (applying its best execution requirements 
to any transaction for or with a customer or a customer of another broker-dealer). 



   

25 

 

opportunities in the options market, particularly with respect to transactions that involve order 

handling conflicts of interest. 

The corporate and municipal bond markets and the government securities markets are 

different from the NMS stock market in substantial ways that can impact how a broker-dealer 

fulfills its duty of best execution.  For example, market participants do not have the same level of 

price transparency in these markets as they do in the NMS stock market.  While the corporate 

and municipal bond markets disseminate post-trade price information, this information often is 

not available immediately upon execution of a bond transaction as FINRA and MSRB rules 

permit a trade to be reported within 15 minutes of the transaction.57  In the government securities 

market, there is no real-time public dissemination of post-trade price information.  Despite the 

increase in electronic trading and the use of ATSs, these markets are decentralized with most 

trading occurring through broker-dealers that make markets in securities they have underwritten 

or hold in inventory.58  There is virtually no exchange trading of these bonds.59  Generally, trades 

                                                 

57  However, both FINRA and the MSRB recently solicited comment about shortening the 
applicable transaction reporting window to one minute.  See FINRA Regulatory Notice 
22-17 (Aug. 2, 2022); MSRB Notice 2022-07 (Aug. 2, 2022).  

58  See, e.g., Maureen O’Hara & Xing (Alex) Zhou, Anatomy of a Liquidity Crisis: 
Corporate Bonds in the COVID-19 Crisis, 142 J. Fin. Econ. 46 (2021). 

59  A small percentage of corporate bonds are exchange-traded on trading systems such as 
NYSE Bonds and the Nasdaq Bond Exchange.  See generally, 
https://www.nyse.com/markets/bonds and https://www.nasdaq.com/solutions/nasdaq-
bond-exchange.  Trading volume in exchange-traded bonds was reported to be around 
$19 billion as of January 2020.  See Securities Exchange Act Release No. 94062 (Jan. 26, 
2022), 87 FR 15496 (Mar. 18, 2022) (“Government Securities ATS Proposing Release”), 
at 15604 n.863 (citing Eric Uhlfelder, A Forgotten Investment Worth Considering: 
Exchange-Traded Bonds, Wall St. J. (Jan. 5, 2020), https://www.wsj.com/articles/a-
forgotten-investment-worth-considering-exchange-traded-bonds-11578279781). 

https://www.nyse.com/markets/bonds
https://www.nasdaq.com/solutions/nasdaq-bond-exchange
https://www.nasdaq.com/solutions/nasdaq-bond-exchange
https://www.wsj.com/articles/a-forgotten-investment-worth-considering-exchange-traded-bonds-11578279781
https://www.wsj.com/articles/a-forgotten-investment-worth-considering-exchange-traded-bonds-11578279781


   

26 

 

occur both by voice and through the use of electronic systems that provide trading facilities and 

communication protocols with varying degrees of execution functionality and access to pre-trade 

pricing information.60  However, market participants in the corporate and municipal bond 

markets and the government securities markets are increasingly utilizing technology to trade 

these securities, and electronic trading is growing.61  The lower level of price transparency in, 

and the decentralized nature of, the corporate and municipal bond and government securities 

markets make it more difficult for customers to evaluate their transactions and highlights the 

importance of robust best execution considerations by broker-dealers in these markets. 

Commission analysis shows significant differences in the variability of execution prices 

among interdealer trades62 compared to the variability of execution prices among customer 

trades in the same bonds on the same trading day.  For example, in the corporate bond market, 

the dispersion, or standard deviation, of customer execution prices for transactions under 

$100,000 was almost 3 times more than that of interdealer execution prices.63  Similarly, in the 

municipal bond market, the dispersion of customer execution prices for transactions under 

$100,000 was more than 4 times greater than that of interdealer trades.64  And in the government 

                                                 

60  See Government Securities ATS Proposing Release, supra note 59, 87 FR 15606. 
61  For example, according to one industry group, approximately 32% of investment-grade 

and 23% of high-yield corporate bond daily dollar volumes are executed electronically.  
See id., at 15606 n.890. 

62  It is well-established that interdealer prices can reflect the prevailing market value for a 
bond.  See, e.g., FINRA Rule 2121. 

63  See Table 17, infra section V.B.3.b.i.  
64  See Table 17, infra section V.B.3.b.i and V.B.3.b.ii.    



   

27 

 

securities market, the dispersion of customer execution prices for transactions under $100,000 

was almost 40 percent greater than that of interdealer trades.65  The variability of prices for 

customer transactions suggests that some customers may be paying or receiving worse prices 

than other customers in the same security on the same day because their broker-dealers may not 

be evaluating as many markets for those transactions as other broker-dealers.  While it is possible 

that some of the variability of prices paid by customers may be attributable to variations in 

broker-dealer compensation as reflected in the markups or markdowns charged by broker-dealers 

when they transact with customers in a principal capacity, the Commission does not believe that 

this is the only reason for customer price dispersion in the same bonds on the same day.66  For 

example, Commission analysis shows that in the corporate bond market, for trades that were 

reported by the broker-dealer as not involving any collection of commissions, markups or 

markdowns, the dispersion of customer execution prices was still 65% greater than that of 

interdealer trades.67  Because the variability in the customer execution prices suggests that some 

broker-dealers may not be exercising as much diligence in identifying the best market for 

                                                 

65  See Table 17, infra section V.B.31.b.i and V.B.3.b.iii .  
66  See, e.g., John M. Griffin, Nicholas Hirschey, and Samuel Kruger, Do Municipal Bond 

Dealers Give their Customers ‘Fair and Reasonable’ Pricing? J. Fin., Forthcoming (Aug. 
4, 2022) (“Instead of delivering uniform pricing, dealer transactions with customers take 
place at highly variable markups relative to both reoffering prices and dealer costs.  On 
the same day, customers frequently buy the same bond at different prices from different 
dealers, and prices even vary across different customers purchasing the same bond from 
the same dealer on the same day.  These price differences are not explained by trade 
characteristics or by dealer costs.  Some dealers provide customers with low and 
consistent markups, but this does not appear to be the industry norm.  Pricing at quarter 
or eighth price or yield increments is common and is seemingly a method to deliver 
higher markups.”). 

67  See infra note 478. 



   

28 

 

customer orders, the Commission believes that customers would benefit from consistently robust 

best execution considerations by broker-dealers, including considerations of the various markets 

that may provide their customers with the most favorable prices.   

2. Order Handling Conflicts of Interest  

The Commission also believes that execution of retail customer orders by broker-dealers 

that have order handling conflicts of interest warrants heightened attention by those broker-

dealers.  These order handling conflicts of interest include payment for order flow, principal 

trading, and routing customer orders to affiliates.   

Payment for order flow68 creates a conflict of interest because it creates an incentive for a 

broker-dealer to send customer orders to a market, such as a wholesaler or an exchange, which 

agrees to pay the broker-dealer for sending its customer orders.69  Payment for order flow may 

                                                 

68  When discussing payment for order flow in the context of the proposed rules, the 
Commission uses the term as defined in Exchange Act Rule 10b-10(d)(8).  This 
definition includes payment for order flow from wholesalers to retail broker-dealers, as 
well as exchange rebates that are paid to broker-dealers in return for sending orders to the 
exchange.  See 17 CFR 240.10b-10 (defining payment for order flow and requiring a 
broker-dealer to disclose to the customer whether payment for order flow is received by 
the broker-dealer for the customer transaction and the fact that the source and nature of 
the compensation received in connection with the particular transaction will be furnished 
upon written request of the customer). 

69  See, e.g., Payment for Order Flow Release, supra note 33, FR Doc No: 94-27109; FINRA 
Regulatory Notice 21-23; Robinhood Financial, LLC, Letter of Acceptance, Waiver and 
Consent (FINRA Case No. 2017056224001) (Dec. 2019) (“Robinhood FINRA”) 
(describing violations of FINRA’s best execution rule where the firm routed its 
customers’ orders to four broker-dealers that all paid for order flow and “did not exercise 
reasonable diligence to ascertain whether these four broker-dealers provided the best 
market for the subject securities to ensure its customers received the best execution 
quality from these as compared to other execution venues”); In the Matter of Robinhood 
Financial, LLC, Securities Exchange Act Release No. 90694 (Dec. 17, 2020) (settled 
action) (“Robinhood SEC”).  Broker-dealers that accept payment for order flow must 



   

29 

 

harm customers because the broker-dealer may be making order handling decisions to benefit 

itself at the expense of its customer.70  Because payment for order flow is a form of economic 

inducement that has the potential to influence the way a broker-dealer handles customer orders, 

the Commission has stated that such arrangements must be considered as part of a broker-

dealer’s best execution assessment.71   

While the Commission has stated that a broker-dealer’s receipt of payment for order flow 

is not a violation of its duty of best execution as long as it periodically assesses the quality of the 

markets to which it routes order flow, a broker-dealer must not allow payment for order flow to 

interfere with its efforts to obtain best execution.72  Likewise, FINRA has stated that broker-

dealers may not negotiate the terms of order routing arrangements for customer orders in a 

manner that reduces the price improvement opportunities that, absent payment for order flow, 

otherwise would be available to those customer orders.73  FINRA has also stated that obtaining 

price improvement is a heightened consideration when a broker-dealer receives payment for 

order flow and it is especially important to determine that customers are receiving the best price 

                                                 

disclose certain information concerning the payments publicly.  See 17 CFR 
242.606(a)(1)(iv) (requiring a description of any arrangement for payment for order flow 
and any profit-sharing relationship and a description of any terms of such arrangements, 
written or oral, that may influence a broker-dealer’s order routing decision).  

70  See, e.g., Robinhood FINRA, supra note 69; Robinhood SEC, supra note 69 (finding that 
the retail broker-dealer explicitly offered to accept less price improvement for its 
customers than what the wholesalers were offering, in exchange for receiving a higher 
rate of payment for order flow for itself). 

71  See Payment for Order Flow Release, supra note 33, FR Doc No: 94-27109.   
72  See id. 
73  See FINRA Regulatory Notice 21-23 (June 23, 2021). 



   

30 

 

and execution quality opportunities notwithstanding the payment for order flow.74  Accordingly, 

the Commission believes that the receipt of payment for customer order flow continues to 

warrant heightened attention by broker-dealers.75 

A significant portion of retail orders in the NMS stock and listed options market is routed 

in return for payment for order flow.  In the first quarter of 2022, wholesalers paid more than 

$796 million dollars to retail broker-dealers for order flow in NMS stocks and listed options.76  

Listed options represented approximately 70% of the total payment for order flow with more 

than $561 million paid to retail broker-dealers by wholesalers.77  Payment for order flow creates 

                                                 

74  See id., at 3-4.  FINRA has also stated that “inducements such as payment for order flow 
and internalization may not be taken into account in analyzing market quality.”  See id. at 
4.  

75  Commission staff, in a recent report, stated that wholesaler payment for order flow to 
retail broker-dealers is “individually negotiated prior to trading between the retail broker-
dealer and the [wholesaler], and the rates and amounts can vary substantially depending 
on the broker-dealer and its customer order flow.  [Wholesalers] may give the retail 
broker the choice of how to allocate those funds — either by applying some or all of that 
payment to improve the prices of its customers’ orders or by allowing the retail broker-
dealer to keep part of the payment for itself.”  Commission staff stated that these 
payments can create a conflict of interest for the retail broker-dealer.  See Staff Report on 
Equity and Options Market Structure Conditions in Early 2021 (Oct. 14, 2021), available 
at https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-
early-2021.pdf.  Additionally, Rule 606(a) of Regulation NMS requires broker-dealers to 
make publicly available on a quarterly basis certain aggregated order routing disclosures 
for held orders that provide, among other things, detailed disclosure of payments received 
from or paid to certain trading centers, as well as a discussion of the material aspects of 
broker-dealers’ relationships with those trading centers, including a description of any 
arrangements for payment for order flow and any profit-sharing relationships and a 
description of any terms of such arrangements, written or oral, that may influence broker-
dealers’ order routing decisions.  See 17 CFR 242.606(a). 

76  See Table 12, infra section V.B.3.a).iii.a. 
77  See id.  See also Thomas Ernst & Chester S. Spatt, Payment for Order Flow and Asset 

Choice, 40 (NBER Working Paper No. w29883, May 2022), 

https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf
https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf


   

31 

 

an incentive for the retail broker-dealer to adopt order handling and execution practices that may 

not result in best execution for their customers.78  For example, as discussed more fully in 

section V, analysis in the NMS stock market appears to show that payment for order flow can 

                                                 

https://ssrn.com/abstract=4068065 (retrieved from Elsevier database) (finding that 
approximately 65% of all payment for order flow is attributable to the options market).  
In addition to payment for order flow paid by wholesalers to retail broker-dealers, some 
exchanges administer “marketing fee” programs pursuant to rules filed with the 
Commission, that result in payment for order flow directed by exchange market makers 
to order flow providers, which can include retail broker-dealers.  See, e.g., Nasdaq Phlx 
LLC Options 7, Section 4; Miami International Securities Exchange LLC Fee Schedule 
Section (1)(a)(xi); NYSE American LLC Options Fee Schedule Section I.A.  Under these 
programs, the exchanges assess fees on market makers who then typically direct the 
disbursement of some or all of the marketing fees to selected market participants in return 
for retail order flow directed to the market makers from the broker-dealer recipients of 
the marketing fees.  If the directed market maker is quoting at the NBBO when the order 
is received, exchange rules typically guarantee the market maker a certain allocation of 
the incoming directed order, typically determined by the number of other market makers 
quoting at the NBBO at the time the order is received.  See, e.g., PHLX Options 3, 
Section 10(a)(1)(C) (describing the directed market maker priority). 

78  The Commission and FINRA settled claims against a retail broker-dealer for, among 
other things, failing to provide best execution to customer orders for which it received 
payment for order flow.  See supra note 69.  The inherent trade-off between payment for 
order flow for a retail broker-dealer and price improvement for their customers was 
discussed in the Commission’s settled enforcement action against the retail broker.  See 
Robinhood SEC, supra note 69.  The Commission found that the retail broker-dealer had 
negotiated with a number of wholesalers about potentially routing customer orders to 
those firms and that, in the course of those negotiations, certain of the wholesalers told 
the retail broker-dealer that there was a trade-off between payment for order flow on the 
one hand and price improvement on the other.  See id.  The Commission also found that 
the retail broker-dealer explicitly offered to accept less price improvement for its 
customers than what the wholesalers were offering, in exchange for receiving a higher 
rate of payment for order flow for itself.  See id.  Subsequently, the retail broker-dealer 
conducted a more extensive internal analysis, which showed that its execution quality and 
price improvement metrics were substantially worse than other retail broker-dealers in 
many respects, including the percentage of orders that received price improvement and 
the amount of price improvement, measured on a per order, per share, and per dollar 
traded basis.  See id.   

https://ssrn.com/abstract=4068065


   

32 

 

harm customer execution quality.  More specifically, the orders of broker-dealers that receive 

more payment for order flow from wholesalers are internalized by wholesalers with (1) higher 

effective spreads, (2) higher execution quality ratios, and (3) slightly smaller price improvement 

when compared with the orders of broker-dealers that do not receive payment for order flow and 

that are internalized by wholesalers.79  In the context of exchange rebates in the options market, 

one study finds that some brokers seemingly route non-marketable orders to exchanges that offer 

large liquidity rebates to maximize the value of order flow and suggests that broker-dealers can 

enhance non-marketable limit order execution quality by routing those orders to exchanges that 

do not offer liquidity rebates to non-marketable limit orders.80  

The Commission has also acknowledged that the opportunity for a broker-dealer to trade 

with a customer order as principal is an order routing inducement that could interfere with the 

broker-dealer’s duty of best execution.81  Internalizing customer orders may create a conflict of 

interest because broker-dealers do so for the opportunity to capture the spread,82 and may 

thereby provide broker-dealers an incentive to trade with orders as principal.  In the NMS stock 

market and listed options market, principal trading with retail customers is a common practice.  

                                                 

79  See Table 16, infra section V.B.3.b..iii.b.   
80  See Robert Battalio et al., Do (Should) Brokers Route Limit Orders to Options 

Exchanges That Purchase Order Flow?, 56 J. Fin. & Quantitative Analysis 183 (2020). 
81  See Order Execution Obligations Adopting Release, supra note 10, 61 FR 48323. 
82  See Internalized/Affiliate Practices, Payment for Order Flow and Order Routing 

Practices, Securities Exchange Act Release No. 34903 (Oct. 27, 1994), 59 FR 55014, 
55014 (Nov. 2, 1994) (recognizing several commenters who described this conflict of 
interest). 



   

33 

 

As stated above in section III.A.1, a significant portion of retail customer orders are routed to 

wholesalers for handling and execution.  Once the wholesaler receives retail customer orders for 

handling and execution, it often trades with those customer orders as principal.  Wholesalers 

internalize over 90% of the dollar value of the marketable order flow retail broker-dealers send 

them.83  The Commission believes that the incentive to trade in a principal capacity at a price 

most advantageous for the wholesaler itself rather than the customer warrants heightened 

attention by the wholesaler.  

Principal trading in the listed options market is also common.  Options exchange trading 

and priority rules, which must be filed with the Commission under section 19(b) of the Exchange 

Act84 and Rule 19b-4 thereunder,85 provide wholesalers with a number of methods to internalize 

customer orders.  For example, the wholesaler or an affiliate is often either a specialist or 

directed market maker on one or more of the options exchanges.  Exchange rules typically 

provide the specialist or directed market maker with the right to trade with a certain portion of 

incoming order flow regardless of whether other market participants may also be quoting at the 

same price as the specialist or directed market maker.86  These “allocation guarantees” 

effectively allow the wholesaler to internalize a minimum amount of the customer orders by 

                                                 

83  See Table 7, infra Section V.B.3.a.i.d. 
84  15 U.S.C. 78s(b). 
85  17 CFR 240.19b-4.  
86  See, e.g., BOX Exchange LLC Rule 7135(c); Miami International Securities Exchange 

LLC Rule 514(g)-(i); Nasdaq Phlx LLC Options 3, Section 10(a)(1); Nasdaq ISE, LLC 
Options 3, Section 10(c)(1); NYSE American LLC Rule 964NY(b)(2).   



   

34 

 

routing the customer orders to exchanges where the wholesaler or its affiliate is designated as a 

specialist or directed market maker.  Similarly, many options exchanges provide small order 

guarantees that permit the specialist (which potentially can be an affiliate of the wholesaler) to 

trade with 100% of all orders sent to the exchange for five contracts or less.87  Moreover, options 

exchanges’ two-sided auctions (“price improvement auctions”) allow a wholesaler to internalize 

a customer order by submitting a proposed transaction between the wholesaler and a customer at 

a specified price.88  Other market participants are permitted to compete with the wholesaler for 

the opportunity to trade with the customer order.  These price improvement auctions, however, 

generally afford the wholesaler with certain advantages over other market participants that may 

be interested in competing for the right to trade with a customer order.89  The Commission 

estimates that wholesalers in the listed options market generally internalize approximately 31% 

of the executed orders routed to option exchanges, with approximately 73% of orders routed to 

price improvement auctions being internalized and approximately 17% of orders routed to the 

limit order book being internalized.90  The Commission believes that the incentive to trade in a 

                                                 

87  See, e.g., Nasdaq ISE, LLC Options 3, Section 10(c)(1)(D); Nasdaq Phlx LLC Options 3, 
Section 10(a)(1)(D); BOX Exchange LLC Rule 7135(c)(2)(iii); NYSE American LLC 
Rule 964NY(b)(2)(C)(iv).   

88  Customer orders that are submitted into price improvement auctions are guaranteed 
complete execution at a minimum execution price and are electronically auctioned for 
price improvement.  See, e.g., Nasdaq ISE, LLC Options 3, Section 13; Nasdaq Phlx 
LLC Options 3, Section 13; Miami International Securities Exchange LLC Rule 515A; 
BOX Exchange LLC Rule 7150; NYSE American LLC Rule 971.1NY; Cboe Exchange, 
Inc. Rule 5.37. 

89  See infra notes 137-140 and accompanying text.  
90 See infra Section V.B.3.a.ii. 



   

35 

 

principal capacity at a price most advantageous for the wholesaler itself rather than the customer 

warrants heightened attention by the wholesaler.  

Finally, the practice of routing customer orders to affiliates raises a conflict of interest for 

the broker-dealer.  When a broker-dealer chooses to route customer orders to an affiliate, it may 

do so because of financial incentives, and these incentives can vary depending on the business 

model or business lines of the broker-dealer.  For example, broker-dealers may have conflicts of 

interest to the extent that they operate or are affiliated with an entity that operates a trading 

venue, such as an ATS, because the broker-dealer or its affiliate receives financial benefits when 

the broker-dealer operator chooses to route customer orders to its ATS for execution (e.g., by 

routing an order to its ATS, a broker-dealer operator that does not pass through trading fees to its 

customers may be able to avoid paying fees that it otherwise would have to pay when routing 

and executing orders on unaffiliated trading venues).91  A broker-dealer operator also benefits by 

routing to its ATS because it creates higher volume on the ATS, which can attract additional 

order flow to the ATS, ultimately increasing the ATS’ market share and associated revenue.92  

Another example of affiliate routing conflicts of interest relates to a financial services firm that 

                                                 

91  See Amber Anand et al., Institutional Order Handling and Broker-Affiliated Trading 
Venues, 34 Rev. Fin. Stud. 3364, 3366 (July 2021) (“Anand”) (recognizing the conflict 
between obtaining the best outcome for the customer and maximizing the broker-dealer’s 
revenue due to avoiding a fee that is typically borne by the broker-dealer).  This study 
found that “institutional brokers who route more orders to affiliated [ATSs] are 
associated with lower execution quality (i.e., lower fill rates and higher implementation 
shortfall costs).”  Id.  See also Regulation of NMS Stock Alternative Trading Systems, 
Securities Exchange Act Release No. 83663 (July 18, 2018), 83 FR 38768, 38775, 38834 
(Aug. 7, 2018). 

92  See Anand, supra note 91, at 3366. 



   

36 

 

may have an organizational structure that separates its retail facing business from its order 

handling and execution business.  The retail broker-dealer that receives a customer order may 

have a financial incentive to send the customer order to its affiliated executing broker-dealer 

because the affiliated executing broker-dealer may wish to trade as principal with the customer 

order.  While an affiliated executing broker-dealer could provide best execution for customer 

orders, the incentive to send customer orders to an affiliate may influence the broker-dealer to 

route the customer order in a manner that maximizes the broker-dealer’s interest, rather than 

route the customer order to another market consistent with its duty of best execution.93  

                                                 

93  Recently, FINRA has entered into settlements with broker-dealers for best execution 
violations of FINRA rules involving affiliated routing practices.  In one case, FINRA 
found that the broker-dealer “failed to consider whether alternate routing arrangements 
could have provided price improvement opportunities and better speed of execution” for 
customer orders despite its consideration of certain execution quality factors for orders 
routed to an affiliated ATS.  FINRA also stated that “although [the firm] reviewed fill 
rates in [its affiliated ATS] during the relevant period, the firm failed to consider alternate 
routing arrangements when the firm showed that fill rates in [its affiliated ATS] were 
inferior to fill rates at some competing execution venues.”  FINRA found that this 
practice violated FINRA’s best execution rule.  See Barclays Capital Inc., Letter of 
Acceptance, Waiver, and Consent No. 2014041808601 (Oct. 4, 2022), available at 
https://www.finra.org/sites/default/files/2022-10/Barclays-Capital-AWC-100522.pdf.  In 
another case, FINRA found that the broker-dealer routinely routed institutional customer 
orders to its affiliated ATS prior to routing such orders to exchanges or to other ATSs.  
According to FINRA’s findings, the broker-dealer routed to its affiliated ATS despite 
having evidence that (1) orders that were sent to the affiliated ATS had lower fill rates as 
compared to orders sent directly to exchanges, and (2) other ATSs consistently ranked 
higher in the firm’s rankings for execution quality than the affiliated ATS.  FINRA found 
that this affiliated routing practice violated FINRA’s best execution rule 5310.  See 
Deutsche Bank Securities Inc., Letter of Acceptance, Waiver, and Consent No. 
2014041813501 (Mar.7, 2022), available at 
https://www.finra.org/sites/default/files/2022-03/deutsche-bank-awc-030722.pdf.   

https://www.finra.org/sites/default/files/2022-10/Barclays-Capital-AWC-100522.pdf
https://www.finra.org/sites/default/files/2022-03/deutsche-bank-awc-030722.pdf


   

37 

 

Accordingly, the Commission believes that the impact of this practice on customer orders 

continues to warrant heightened attention by broker-dealers.    

3. Crypto Asset Securities 

As discussed in section II.A above, a broker-dealer has a legal duty to seek best execution 

of customer orders in securities.  Proposed Regulation Best Execution would apply to all 

securities, including any digital asset that is a security or a government security under the Federal 

securities laws.  The term “digital asset” refers to an asset that is issued and/or transferred using 

distributed ledger or blockchain technology (“distributed ledger technology”), including, but not 

limited to, so-called “virtual currencies,” “coins,” and “tokens.”94   

Unlike securities that are not issued or transferred using distributed ledger technology, 

the Commission has limited information about the order handling and best execution practices of 

broker-dealers that engage in transactions for or with customers in crypto asset securities.95  This 

                                                 

94  See Custody of Digital Asset Securities by Special Purpose Broker-Dealers, Securities 
Exchange Act Release No. 90788 (Dec. 23, 2020), 86 FR 11627, 11627 n.1 (Feb. 26, 
2021) (“Crypto Asset Securities Custody Release”).  A digital asset may or may not meet 
the definition of a “security” under the Federal securities laws.  See, e.g., Report of 
Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The 
DAO, Securities Exchange Act Release No. 81207 (July 25, 2017) (“DAO 21(a) 
Report”), available at https://www.sec.gov/litigation/investreport/34-81207.pdf.  See also 
SEC v. W.J. Howey Co., 328 U.S. 293 (1946).  To the extent digital assets rely on 
cryptographic protocols, these types of assets also are commonly referred to as “crypto 
assets” and “digital asset securities” can be referred to as “crypto asset securities.” For 
purposes of this release, the Commission does not distinguish between the terms “digital 
asset securities” and “crypto asset securities.” 

95  See, e.g., Fin. Stability Oversight Council, Report on Digital Asset Financial Stability 
Risks and Regulation 119 (2022) (“FSOC Report”), available at 
https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf (“The 
crypto-asset ecosystem is characterized by opacity that creates challenges for the 
assessment of financial stability risks.”); U.S. Dep’t of the Treasury, Crypto-Assets: 

https://www.sec.gov/litigation/investreport/34-81207.pdf
https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf


   

38 

 

information limitation is, in part, due to the fact that only a small portion of crypto asset security 

trading activity is occurring within entities that are registered with the Commission and any of 

the SROs.  For example, there are currently no special purpose broker-dealers authorized to 

maintain custody of crypto asset securities.96  Similarly, only a limited amount of crypto asset 

                                                 

Implications for Consumers, Investors, and Businesses 12 (Sept. 2022) (“Crypto-Assets 
Treasury Report”), available at 
https://home.treasury.gov/system/files/136/CryptoAsset_EO5.pdf (finding that data 
pertaining to “off-chain activity” is limited and subject to voluntary disclosure by trading 
platforms and protocols, with protocols either not complying with or not subject to 
obligations “to report accurate trade information periodically to regulators or to ensure 
the quality, consistency, and reliability of their public trade data”); Fin. Stability Bd., 
Assessment of Risks to Financial Stability from Crypto-assets 18-19 (Feb. 16, 2022) 
(“FSB Report”), available at https://www.fsb.org/wp-content/uploads/P160222.pdf 
(finding that the difficulty in aggregating and analyzing available data in the digital asset 
space “limits the amount of insight that can be gained with regard to the [digital asset] 
market structure and functioning,” including who the market participants are and where 
the market’s holdings are concentrated, which, among other things, limits regulators’ 
ability to inform policy and supervision); Raphael Auer et al., Banking in the Shadow of 
Bitcoin? The Institutional Adoption of Cryptocurrencies 4, 9 (Bank for Int’l Settlements, 
Working Paper No. 1013, May 2022), available at 
https://www.bis.org/publ/work1013.pdf (stating that data gaps, which can be caused by 
limited disclosure requirements, risk undermining the ability for holistic oversight and 
regulation of cryptocurrencies); Int’l Monetary Fund, The Crypto Ecosystem and 
Financial Stability Challenges, in Global Financial Stability Report 41, 47 (Oct. 2021), 
available at https://www.imf.org/-
/media/Files/Publications/GFSR/2021/October/English/ch2.ashx (finding that digital 
asset service providers provide limited, fragmented, and, in some cases, unreliable data, 
as the information is provided voluntarily without standardization and, in some cases, 
with an incentive to manipulate the data provided). 

96  For background on Rule 15c3-3, 17 CFR 240.15c3-3, as it relates to digital asset 
securities, see U.S. Sec. & Exch. Comm’n, Joint Staff Statement on Broker-Dealer 
Custody of Digital Asset Securities (July 8, 2019), https://www.sec.gov/news/public-
statement/joint-staff-statement-broker-dealer-custody-digital-asset-securities; Fin. Indus. 
Regul. Auth., SEC Staff No-Action Letter, ATS Role in the Settlement of Digital Asset 
Security Trades (Sept. 25, 2020), available at 
https://www.sec.gov/divisions/marketreg/mr-noaction/2020/finra-ats-role-in-settlement-
of-digital-asset-security-trades-09252020.pdf.  To date, five offerings of crypto asset 

https://home.treasury.gov/system/files/136/CryptoAsset_EO5.pdf
https://www.fsb.org/wp-content/uploads/P160222.pdf
https://www.bis.org/publ/work1013.pdf
https://www.imf.org/-/media/Files/Publications/GFSR/2021/October/English/ch2.ashx
https://www.imf.org/-/media/Files/Publications/GFSR/2021/October/English/ch2.ashx
https://www.sec.gov/news/public-statement/joint-staff-statement-broker-dealer-custody-digital-asset-securities
https://www.sec.gov/news/public-statement/joint-staff-statement-broker-dealer-custody-digital-asset-securities
https://www.sec.gov/divisions/marketreg/mr-noaction/2020/finra-ats-role-in-settlement-of-digital-asset-security-trades-09252020.pdf
https://www.sec.gov/divisions/marketreg/mr-noaction/2020/finra-ats-role-in-settlement-of-digital-asset-security-trades-09252020.pdf


   

39 

 

security volume is executed on trading venues under the Commission’s ATS framework.97  This 

information limitation is also, in part, due to the significant trading activity in crypto asset 

securities that may be occurring in non-compliance with the Federal securities laws.98      

                                                 

securities have been registered or qualified under the Securities Act of 1933, and five 
classes of crypto asset securities have been registered under the Exchange Act.  The 
Commission issued a statement describing its position that, for a period of five years, 
special purpose broker-dealers operating under the circumstances set forth in the 
statement will not be subject to a Commission enforcement action on the basis that the 
broker-dealer deems itself to have obtained and maintained physical possession or control 
of customer fully paid and excess margin digital asset securities for purposes of Rule 
15c3-3(b)(1) under the Exchange Act.  See Crypto Asset Securities Custody Release, 
supra note 94.  To date, no such special purpose broker-dealer registration applications 
have been granted by FINRA.   

97  ATSs that do not trade NMS stocks file with the Commission a Form ATS notice, which 
the Commission does not approve.  Form ATS requires, among other things, that ATSs 
provide information about:  classes of subscribers and differences in access to the 
services offered by the ATS to different groups or classes of subscribers; securities the 
ATS expects to trade; any entity other than the ATS involved in its operations; the 
manner in which the system operates; how subscribers access the trading system; 
procedures governing entry of trading interest and execution; and trade reporting, 
clearance, and settlement of trades on the ATS.  In addition, all ATSs must file quarterly 
reports on Form ATS-R with the Commission.  Form ATS-R requires, among other 
things, volume information for specified categories of securities, a list of all securities 
traded in the ATS during the quarter, and a list of all subscribers that were 
participants.  To the extent that an ATS trades crypto asset securities, the ATS must 
disclose information regarding its crypto asset securities activities as required by Form 
ATS and Form ATS-R.  Form ATS and Form ATS-R are deemed confidential when filed 
with the Commission.  Based on information provided on these forms, a limited number 
of ATSs have noticed on Form ATS their intention to trade certain crypto asset securities 
and a subset of those ATSs have reported transactions in crypto asset securities on their 
Form ATS-R. 

98  See also FSOC Report, supra note 95, at 5, 87, 94, 97 (emphasizing the importance of the 
existing financial regulatory structure while stating that certain digital asset platforms 
may be listing securities while not in compliance with exchange, broker-dealer, or other 
registration requirements, which may impose additional risk on banks and investors and 
result in “serious consumer and investor protection issues”); Crypto-Assets Treasury 
Report, supra note 95, at 26, 29, 39, 40 (stating that issuers and platforms in the digital 



   

40 

 

The Commission believes that it is appropriate for a broker-dealer that engages in 

transactions for or with customers or customers of another broker-dealer in crypto asset 

securities to be subject to proposed Regulation Best Execution.  As discussed in section I above, 

the duty of best execution is of fundamental importance to investors and the markets, including 

investors in, and the market for, crypto asset securities.  For example, a customer transacting in 

crypto asset securities should receive the protections afforded by the requirement that broker-

dealers exercise reasonable diligence to ascertain the best market for the crypto asset securities 

and buy and sell in such market so that the price to the customer is as favorable as possible under 

prevailing market conditions.  In doing so, broker-dealers should be taking steps to ensure that 

they are evaluating the range of markets that trade crypto asset securities and appropriately 

identifying those markets that may be likely to provide customers with the most favorable prices.   

B. Overview of Proposed Regulation Best Execution 

The Commission believes that proposed Regulation Best Execution would further the 

Congressional goal set forth in Exchange Act Section 11A(a)(1)(C)(iv) regarding executing 

investors’ orders in the best market and reinforce broker-dealer obligations concerning the duty 

of best execution.  In particular, proposed Regulation Best Execution would identify specific 

                                                 

asset ecosystem may be acting in non-compliance with statutes and regulations governing 
traditional capital markets, with market participants that actively dispute the application 
of existing laws and regulations, creating risks to investors from non-compliance with, in 
particular, extensive disclosure requirements and market conduct standards); FSB Report, 
supra note 95, at 4, 8, 18 (stating that some trading activity in crypto assets may be failing 
to comply with applicable laws and regulations, while failing to provide basic investor 
protections due to their operation outside of or in non-compliance with regulatory 
frameworks, thereby failing to provide the “market integrity, investor protection or 
transparency seen in appropriately regulated and supervised financial markets”).41 

 

factors that must be addressed by a broker-dealer’s policies and procedures on best execution, 

impose additional requirements for conflicted transactions, and impose best execution-specific 

review and documentation requirements, all of which should better protect investors by 

promoting consistently robust order handling and execution practices.99   

Proposed Rule 1100 would set forth the standard of best execution, requiring a broker-

dealer to use reasonable diligence to ascertain the best market for a security, and buy or sell in 

such market so that the resultant price to the customer is as favorable as possible under 

prevailing market conditions.  Proposed Rule 1101 would require a broker-dealer to establish, 

maintain, and enforce written policies and procedures that address specific elements that are 

designed to promote the best execution of customer orders, and comply with certain execution 

quality review and documentation requirements.   

More specifically, proposed Rule 1101(a)(1) would require that a broker-dealer’s policies 

and procedures address how it will comply with the best execution standard in proposed Rule 

1100.  In particular, a broker-dealer’s policies and procedures would be required to address how 

it will:  (1) obtain and assess reasonably accessible information concerning the markets trading 

the relevant securities; (2) identify markets that may be reasonably likely to provide the most 

favorable prices for customer orders (“material potential liquidity sources”); and (3) incorporate 

the material potential liquidity sources into its order handling practices and ensure efficient 

                                                 

99  See section IV for discussions of the differences between the proposed rules and the 
existing FINRA and MSRB rules on best execution.  As discussed in detail in section IV, 
proposed Regulation Best Execution is consistent with the FINRA and MSRB best 
execution rules in some respects and, in some other respects, goes beyond those rules 
imposing additional and/or more specific requirements. 

 



   

42 

 

access to each such material potential liquidity source.  The Commission believes this aspect of 

the proposal would promote consistently robust order handling practices by requiring each 

broker-dealer to establish a detailed framework to achieve best execution, which involves an 

analysis of relevant information, an evaluation of the range of liquidity sources, and the 

identification of and ability to efficiently access liquidity sources.       

Proposed Rule 1101(a)(2) would require a broker-dealer’s policies and procedures to 

address how it will determine the best market and make routing and execution decisions for the 

customer orders that it receives.  In particular, a broker-dealer’s policies and procedures would 

be required to address how it will:  (1) assess reasonably accessible and timely information, 

including information with respect to the best displayed prices, opportunities for price 

improvement, and order exposure opportunities that may result in the most favorable price; (2) 

assess the attributes of customer orders and consider the trading characteristics of the security, 

the size of the orders, the likelihood of execution, and the accessibility of the market, and any 

customer instructions in selecting the market most likely to provide the most favorable price; and 

(3) reasonably balance the likelihood of obtaining a better price with the risk that delay could 

result in a worse price when determining the number and sequencing of markets to be assessed.  

These considerations have been recognized as relevant for a broker-dealer’s duty of best 

execution.100   

As discussed in section IV.B below, the factors that must be included in a broker-dealer’s 

policies and procedures under proposed Rule 1101(a) are generally consistent with the factors 

                                                 

100  See, e.g., supra notes 21-23 and accompanying text; FINRA Rules 5310(a)(1) and 
5310.09(b)(1).   



   

43 

 

that FINRA and the MSRB have identified as relevant to a broker-dealer’s best execution 

determinations.  The Commission understands that, currently, some broker-dealers incorporate 

various best execution factors from the FINRA and MSRB best execution rules in their policies 

and procedures.  However, by requiring broker-dealers’ best execution policies and procedures to 

explicitly address these factors, proposed Rule 1101(a) would help ensure that broker-dealers 

have established processes in place for considering these factors and that broker-dealers follow 

these processes when transacting for or with customers, which should promote consistently 

robust order handling practices among broker-dealers.101 

Proposed Rule 1101(b) would require broker-dealers that have certain conflicts of interest 

to establish additional policies and procedures to better position them to meet the best execution 

standard in these circumstances.  In particular, a broker-dealer’s policies and procedures for 

conflicted transactions would be required to address how it will:  (1) obtain and assess 

information beyond that required by proposed Rule 1101(a)(1)(i) in identifying a broader range 

of markets beyond the material potential liquidity sources; and (2) evaluate a broader range of 

markets beyond the material potential liquidity sources.  Proposed Rule 1101(b) would also 

require broker-dealers to document their compliance with the best execution standard for 

conflicted transactions, including all efforts taken to enforce their policies and procedures, and 

their basis and information relied on for determining that their conflicted transactions would 

                                                 

101  Moreover, requiring broker-dealers’ best execution policies and procedures to address 
factors similar to those that FINRA and the MSRB have already identified as relevant to 
best execution determinations would mitigate compliance costs associated with the 
proposed rules. 



   

44 

 

comply with the proposed best execution standard.  Such documentation would be required to be 

done in accordance with written procedures.  Proposed Rule 1101(b) would also require broker-

dealers to document any arrangements concerning payment for order flow.102  These 

requirements for conflicted transactions would be in addition to the current FINRA and MSRB 

best execution rules, although the Commission understands that some broker-dealers currently 

preserve information that allows them to support their best execution determinations (e.g., 

information to recreate the pricing information that was available at the time an order was 

received).  The Commission believes that these requirements would encourage broker-dealers to 

exercise additional diligence with respect to conflicted transactions in light of the incentives to 

handle conflicted transactions in a manner that prioritizes their own interests over their 

customers’ interests, and are part of the Commission’s ongoing efforts to protect investors when 

conflicts of interest exist.  

Proposed Rule 1101(c) would require broker-dealers to review the execution quality of 

customer orders at least quarterly, and how such execution quality compares with the execution 

quality that might have been obtained from other markets, and revise their best execution 

policies and procedures, including order handling practices, accordingly.  The Commission 

understands that, currently, broker-dealers’ reviews of execution quality vary in rigor,103 and the 

Commission preliminarily believes that the proposed review requirement would further ensure 

                                                 

102  See infra section IV.C.2 (discussing the proposed requirement to document payment for 
order flow arrangements). 

103  See infra note 210 (discussing FINRA exam findings relating to execution quality 
reviews). 



   

45 

 

that broker-dealers evaluate the effectiveness of their current order handling practices and enable 

broker-dealers to make informed judgments regarding whether their policies and procedures or 

practices need to be modified.  This review requirement would also apply to a broader range of 

broker-dealers than FINRA’s rule that governs the review of execution quality,104 and would be 

in addition to the current MSRB best execution rule.   

Proposed Rule 1101(d) would exempt an introducing broker that routes customer orders 

to an executing broker from separately complying with proposed Rules 1101(a), (b), and (c), so 

long as the introducing broker establishes, maintains, and enforces policies and procedures that 

require the introducing broker to regularly review the execution quality obtained from its 

executing broker, compare it with the execution quality it might have obtained from other 

executing brokers, and revise its routing practices accordingly.  This provision would 

provide a tailored exemption from certain provisions of proposed Regulation 

Best Execution for broker-dealers that do not make decisions or exercise 

discretion regarding the manner in which their customer orders are handled 

and executed, beyond their determinations to engage the services of 

executing brokers.  This exemption would be provided to a narrower group of broker-

dealers than similar exemptions provided by FINRA and the MSRB, and would require 

additional specific policies and procedures that are not required under the FINRA and MSRB 

rules.105 

                                                 

104  See infra section IV.D (discussing the proposed execution quality review requirement, 
including the scope of the proposed requirement). 

105  See infra section IV.E (describing the applicability of the proposed exemption under 
proposed Rule 1101(d)). 



   

46 

 

Proposed Rule 1102 would require each broker-dealer to review and assess the design 

and overall effectiveness of their best execution policies and procedures, including their order 

handling practices, on at least an annual basis, and document such review and assessment in an 

annual report that would be provided to the broker-dealer’s governing body.  The Commission 

understands that, currently, broker-dealers periodically review their policies and procedures 

(including those related to best execution), although the frequency of review may vary.106  

However, proposed Rule 1102 would require the broker-dealer to review and assess the policies 

and procedures it established under proposed Regulation Best Execution, and the Commission 

believes that these requirements would help ensure the effectiveness of broker-dealers’ best 

execution policies and procedures that are adopted pursuant to the proposed rules.   

Finally, the Commission is proposing to amend Rule 17a-4 under the Exchange Act107 to 

include record preservation requirements for records made under proposed Regulation Best 

Execution.   

The Commission believes that proposed Regulation Best Execution would also enhance 

its oversight of broker-dealers through the broker-dealers’ best execution policies and procedures 

                                                 

106  See infra notes 222, 223, and 224 and accompanying text (describing the minimum 
frequency standards for review of execution quality under the FINRA and MSRB rules 
and how broker-dealers may need to review execution quality more frequently than the 
minimum requirements depending on the circumstances). 

107  17 CFR 240.17a-4. 



   

47 

 

required by the proposal, as well as broker-dealers’ documentation of their compliance with 

proposed Regulation Best Execution.108   

Request for Comment 

The Commission requests comment on its understanding of broker-dealers’ current best 

execution practices, and in particular: 

1. Do commenters agree with the Commission’s understanding that some broker-dealers 

currently incorporate various best execution factors from the FINRA and MSRB best 

execution rules in their policies and procedures?  Please explain whether, and the extent 

to which, broker-dealers currently incorporate those factors in their policies and 

procedures.  For example, do broker-dealers currently incorporate all of the best 

execution factors from the FINRA and MSRB rules in their policies and procedures? 

2. Do commenters agree with the Commission’s understanding that some broker-dealers 

currently preserve information that allows them to support their best execution 

determinations, such as information to recreate the pricing information that was available 

at the time of an execution?  Please explain whether broker-dealers currently preserve 

                                                 

108  The Commission believes that Proposed Regulation Best Execution will also provide 
certain investor protection benefits.  As discussed in Section V below, by having its own 
rule, the Commission will be able to seek certain remedies and other sanctions for 
violations of the Commission rule best execution violations that are not necessarily 
available under the current regulatory framework.  In general, a best execution rule 
promulgated pursuant to the Exchange Act will expand and enhance the Commission’s 
flexibility when pursuing best execution violations and produce efficiencies resulting 
from that greater flexibility.   

 



   

48 

 

information that allows them to support their best execution determinations, and if so, the 

type of information that they preserve.   

3. Do commenters agree with the Commission’s understanding that, currently, broker-

dealers’ reviews of execution quality vary in rigor?  Please explain how broker-dealers 

currently conduct execution quality reviews of customer orders. 

4. Do commenters agree with the Commission’s understanding that, currently, broker-

dealers periodically review their best execution policies and procedures, but with varying 

frequency?  Please describe how frequently broker-dealers currently review their best 

execution policies and procedures. 

IV. Discussion of Proposed Regulation Best Execution 

As discussed in this section IV below, the Commission is proposing Regulation Best 

Execution, which is consistent with the FINRA and MSRB best execution rules in many respects 

and is different from those rules in some respects.  Proposed Regulation Best Execution would 

not affect a broker-dealer’s obligation to comply with the FINRA or MSRB best execution rule.  

Accordingly, a broker-dealer would be required to comply with proposed Regulation Best 

Execution, in addition to their existing obligations to comply with the FINRA and MSRB best 

execution rules, as applicable.109     

                                                 

109  For example, where proposed Regulation Best Execution would impose additional or 
more specific requirements as compared to the FINRA or MSRB rules, a broker-dealer 
would be required to comply with the additional or more specific requirements under the 
proposed rules.  See, e.g., infra section IV.A (discussing the application of proposed Rule 
1100 to transactions with sophisticated municipal market professionals, which are 
exempted from the MSRB’s best execution rule).  Similarly, where FINRA or the MSRB 
impose more specific requirement than proposed Regulation Best Execution, a broker-



   

49 

 

A. Proposed Rule 1100 – The Best Execution Standard 

Proposed Rule 1100 would set forth the best execution standard for broker-dealers.110  

Specifically, proposed Rule 1100 states that, in any transaction for or with a customer, or a 

customer of another broker-dealer, a broker-dealer, or a natural person who is an associated 

person of a broker-dealer,111 must use reasonable diligence to ascertain the best market for the 

security, and buy or sell in such market so that the resultant price to the customer is as favorable 

as possible under prevailing market conditions.112    

                                                 

dealer would be required to continue to comply with those requirements of FINRA and 
the MSRB.  See, e.g., infra note 223 and accompanying text (discussing the requirement 
under FINRA Rule 5310 for broker-dealers to conduct at least a quarterly review of 
execution quality). 

110  For purposes of this release and proposed Regulation Best Execution, “broker-dealer” 
refers to a broker, dealer, government securities broker, government securities dealer, and 
municipal securities dealer, unless specifically indicated otherwise. 

111  Section 3(a)(18) of the Exchange Act defines “person associated with a broker or dealer” 
to mean any partner, officer, director, or branch manager of the broker or dealer (or any 
person occupying a similar status or performing similar functions), any person directly or 
indirectly controlling, controlled by, or under common control with the broker or dealer, 
or any employee of the broker or dealer.  15 U.S.C. 78c(a)(18).  Any person associated 
with a broker or dealer whose functions are solely clerical or ministerial is not included in 
the meaning this term for purposes of section 15(b) the Exchange Act (other than 
paragraph 6 thereof).  See id.  Proposed Rule 1100 would apply to a natural person who 
is an associated person of a broker-dealer, and would avoid the application of proposed 
Rule 1100 to all associated persons of a broker-dealer, as all associated persons would 
capture affiliated entities of the broker-dealer and could extend the application of 
proposed Rule 1100 to entities that are not themselves broker-dealers. 

112  FINRA Rule 5310.09(a) states that “[n]o member can transfer to another person its 
obligation to provide best execution to its customers’ orders.”  The standard proposed by 
the Commission in Rule 1100 is consistent with the FINRA rule, and would not establish 
any exception to allow a broker-dealer to transfer its obligation to provide best execution 
to another person.  



   

50 

 

The proposed best execution standard would apply to securities transactions for or with a 

broker-dealer’s own customers, as well as securities transactions for or with customers of another 

broker-dealer.   A broker-dealer that initially receives customer orders may not necessarily be the 

broker-dealer that engages in transactions for or with those orders.  Instead, the broker-dealer 

receiving the customer orders may utilize the services of another broker-dealer to engage in 

transactions for or with those orders (e.g., a wholesaler, executing broker-dealer, or clearing firm 

that handles or executes those orders).  Even though the other broker-dealer does not have a 

direct relationship with the customers of the receiving broker-dealer, the other broker-dealer (or 

natural persons who are associated persons of that broker-dealer) would be required to comply 

with the proposed best execution standard because it would be engaged in transactions for or 

with a customer. 

In addition, the proposed best execution standard would apply to transactions for or with 

a customer, regardless of whether the broker-dealer is transacting for or with the customer on an 

agency basis or in a principal capacity.113  For example, the proposed best execution standard 

                                                 

113  The proposed application of the standard to both agency and principal trades is consistent 
with FINRA and MSRB rules.  See FINRA Rule 5310(e) (stating that the best execution 
obligations in FINRA Rule 5310(a)-(d) exist not only where the broker-dealer acts as 
agent for the account of its customer but also where transactions are executed as 
principal); MSRB Rule G-18(c) (stating that the best execution obligations in MSRB 
Rule G-18(a)-(b) apply to transactions in which the broker-dealer is acting as agent and 
transactions in which the broker-dealer is acting as principal).  In addition, the application 
of the existing duty of best execution in both agency and principal transactions is well-
established in common law.  See, e.g., Newton, 135 F.3d 266, 270 (3d Cir.), cert. denied, 
525 U.S. 811 (1998); E.F. Hutton & Co., Exchange Act Rel. No. 25887, 49 S.E.C. 829, 
832 (1988) (“A broker-dealer’s determination to execute an order as principal or agent 
cannot be ‘a means by which the broker may elect whether or not the law will impose 



   

51 

 

would apply to broker-dealers that internalize their customers’ orders, as well as to wholesalers 

or clearing firms that trade as principal with the customer orders routed to them from other 

broker-dealers.      

Proposed Rule 1100 would provide exemptions from the best execution standard for a 

broker-dealer, or a natural person who is an associated person of a broker-dealer, when the 

broker-dealer is (i) quoting a price for a security where another broker-dealer routes a customer 

order for execution against that quote or (ii) an institutional customer, exercising independent 

judgment, executes its order against the broker-dealer’s quotation.114  These exemptions 

                                                 

fiduciary standards upon him in the actual circumstances of any given relationship or 
transaction.’”) (citations omitted). 

114  The first proposed exemption is consistent with FINRA Rule 5310.04, which states that a 
broker-dealer’s duty to provide best execution does not apply in circumstances when 
another broker-dealer is simply executing a customer order against the broker-dealer’s 
quote, and MSRB Rule G-18.05, which states that a broker-dealer’s duty to provide best 
execution does not apply in circumstances when the other broker-dealer is simply 
executing a customer transaction against the broker-dealer’s quote.  The second proposed 
exemption is new.  Like the first proposed exemption, the second would exempt a broker-
dealer that is acting solely as a buyer or seller of a securities.  However, under the second 
exemption, the broker-dealer would be acting solely as a buyer or seller of securities in 
transactions directly with an institutional customer.  In the corporate and municipal bond 
and government securities markets, for example, institutional customers often handle and 
execute their own orders.  Institutional customers in these markets commonly request 
prices from broker-dealers for particular securities (prices for any given security are often 
not quoted and made widely available) and exercise their own discretion concerning the 
execution of a particular transaction.  In these instances, a broker-dealer is simply 
responding to the institutional customer’s request (e.g., through widely known request for 
quote (“RFQ”) mechanisms) and the institutional customer is exercising independent 
discretion over the handling and execution of its orders.  Accordingly, the Commission 
believes that the broker-dealer in these circumstances should be exempted from the best 
execution standard under proposed Rule 1100.  However, in these circumstances, the 
broker-dealer would still be subject, if applicable, to FINRA Rule 2121 and MSRB Rule 



   

52 

 

distinguish between a broker-dealer that is acting solely as the buyer or seller of securities (it 

would be exempt) from a broker-dealer that is accepting order flow from another broker-dealer 

or institutional customer for the purpose of facilitating the handling and execution of those orders 

(it would not be exempt).  

Proposed Rule 1100 would also provide a third exemption from the best execution 

standard for a broker-dealer or a natural person who is an associated person of a broker-dealer, 

when the broker-dealer receives an unsolicited instruction from a customer to 

route that customer’s order to a particular market for execution and the 

broker-dealer processes that customer’s order promptly and in accordance 

with the terms of the order.  In this scenario, the customer has determined the market 

where it wants to execute its order and is not relying on its broker-dealer to determine the best 

market for that order.115  

Under proposed Rule 1100, the term “market” could include broker-dealers (e.g., a 

broker-dealer’s principal trading desk), exchange markets, markets other than exchange markets, 

and any other venues that emerge as markets evolve.  The term “market” also could encompass 

                                                 

G-30 concerning fair prices and the fairness and reasonableness of commission rates and 
markups or markdowns.  See FINRA Rule 2121; MSRB Rule G-30. 

115  This exemption is consistent with FINRA and MSRB rules.  See FINRA Rule 5310.08 
(stating that if a member receives an unsolicited instruction from a customer to route that 
customer’s order to a particular market for execution, the member is not required to make 
a best execution determination beyond the customer’s specific instruction); MSRB Rule 
G-18.07 (stating that if a dealer receives an unsolicited instruction from a customer 
designating a particular market for the execution of the customer’s transaction, the dealer 
is not required to make a best-execution determination beyond the customer’s specific 
instruction). 



   

53 

 

the wide range of mechanisms operated by any given market that a broker-dealer may use to 

transact for or with customers.  For example, markets may include different execution protocols, 

such as limit order books (some of which may provide for midpoint liquidity), floor auction 

facilities, or electronic auction mechanisms.  This description of “market” is expansive and 

would require a broker-dealer to take into consideration a broad range of potential trading and 

market centers and venues that may provide the best market for customers’ orders so that the 

resulting prices to the customers are as favorable as possible under prevailing market 

conditions.116   

Proposed Rule 1100 would codify, in a Commission rule, a best execution standard that is 

consistent with how the Commission and the courts have described the duty of best execution 

                                                 

116  This expansive description of “market” is consistent with how FINRA and the MSRB 
describe the term in their rules, and therefore should be familiar to broker-dealers.  In 
particular, FINRA and the MSRB also broadly construe the term “market” for purposes 
of their best execution rules.  See FINRA Rule 5310.02 (stating that “market” 
encompasses a variety of different venues, including, but not limited to, market centers 
that are trading a particular security); MSRB Rule G-18.04 (stating that “market” 
encompasses a variety of different venues, including but not limited to broker’s brokers, 
alternative trading systems or platforms, or other counterparties, which may include the 
dealer itself as principal).  MSRB Rule G-18.04 also states that the term market “is to be 
construed broadly, recognizing that municipal securities currently trade over the counter 
without a central exchange or platform.  This expansive interpretation is meant both to 
inform dealers as to the breadth of the scope of venues that must be considered in the 
furtherance of their best-execution obligations and to promote fair competition among 
dealers (including broker’s brokers), alternative trading systems and platforms, and any 
other venue that may emerge, by not mandating that certain trading venues have less 
relevance than others in the course of determining a dealer’s best-execution obligations.”  
Pursuant to FINRA guidance, broker-dealers are also expected to consider new markets 
that become available as venues to which the broker-dealer could potentially route 
customer orders for execution.  See FINRA Regulatory Notice 15-46, at 5.  In doing so, 
broker-dealers should consider the execution quality of venues to which they are not 
connected and determine whether they should connect to new markets.  See id., at 4. 



   

54 

 

over the years.117  The proposed standard is also consistent with the best execution standards 

under FINRA Rule 5310118 and MSRB Rule G-18.119  However, with respect to municipal 

securities, while MSRB Rule G-48 exempts transactions with sophisticated municipal market 

participants (“SMMPs”)120 from the MSRB best execution rule, proposed Regulation Best 

                                                 

117  See, e.g., Regulation NMS Adopting Release, supra note 21, 70 FR 37538 (stating that 
the duty of best execution requires, among other things, a broker-dealer to execute 
customers’ trades at the most favorable terms reasonably available under the 
circumstances, i.e., at the best reasonably available price); Newton, supra note 8, 135 
F.3d at 270 (noting that a broker-dealer’s duty of undivided loyalty to its customer 
requires that it “seek to obtain for its customer orders the most favorable terms 
reasonably available under the circumstances”).  As discussed below throughout this 
section IV, the Commission is also proposing requirements designed to help ensure 
compliance with the proposed best execution standard.  

118  FINRA Rule 5310(a)(1) provides that, in any transaction for or with a customer or a 
customer of another broker-dealer, a member and persons associated with a member shall 
use reasonable diligence to ascertain the best market for the subject security and buy or 
sell in such market so that the resultant price to the customer is as favorable as possible 
under prevailing market conditions.  FINRA Rule 5310 applies to transactions by any 
FINRA member in government securities.  See FINRA Rule 0150(c).     

119 MSRB Rule G-18(a) provides that, in any transaction in a municipal security for or with a 
customer or a customer of another broker, dealer, or municipal securities dealer 
(“dealer”), a dealer must use reasonable diligence to ascertain the best market for the 
subject security and buy or sell in that market so that the resultant price to the customer is 
as favorable as possible under prevailing market conditions.  

120  MSRB Rule D-15 defines SMMP by three requirements:  the nature of the customer; a 
determination of sophistication by the dealer; and an affirmation by the customer.  
Specifically, the rule states that the customer must be:  (i) a bank, savings and loan 
association, insurance company, or registered investment company; (ii) an investment 
adviser registered either with the Commission under section 203 of the Investment 
Adviser Act of 1940 or with a state securities commission; or (iii) any other person or 
entity with total assets of at least $50 million.  To achieve a determination of customer 
sophistication, the broker-dealer must have a reasonable basis to believe that the 
customer is capable of evaluating investment risks and market value independently, both 
in general and with regard to particular transactions and investment strategies in 
municipal securities.  Finally, the customer must affirmatively indicate that it is 
exercising independent judgment in evaluating:  (a) the recommendations of the broker-



   

55 

 

Execution does not include a similar exemption for SMMPs from Rule 1100.121  Unlike the 

MSRB rules, proposed Rule 1100 is designed to apply broadly to transactions in all securities 

and is not limited to transactions in municipal securities.  The Commission also preliminary 

believes that customers that meet the MSRB’s definition of SMMP would benefit from the 

protections offered by proposed Regulation Best Execution, just as customers that do not meet 

the definition of SMMP or customers that transact in securities other than municipal securities 

would.122  At the same time, the Commission believes that proposed Regulation Best Execution 

contains several provisions that would mitigate the burdens on the broker-dealers that engage in 

                                                 

dealer; (b) the quality of execution of the customer’s transactions by the broker-dealer; 
and (c) the transaction price for non-recommended secondary market agency transactions 
as to which (i) the broker-dealer’s services have been explicitly limited to providing 
anonymity, communication, order matching, and/or clearance function and (ii) the 
broker-dealer does not exercise discretion as to how or when the transactions are 
executed.  The affirmation may be given orally or in writing, and may be given on a 
transaction-by-transaction basis, a type-of-municipal security basis, or an account-wide 
basis. 

121  Additionally, MSRB Rule G-18.09 states that Rule G-18 does not apply to municipal 
fund securities.  While proposed Regulation Best Execution does not contain a similar 
exemption for municipal fund securities, the Commission believes that the Commission’s 
proposal and MSRB Rule G-18 would result in similar treatment for municipal fund 
securities.  Transactions in municipal fund securities must be executed directly with the 
issuer.  For this reason, there is only one market that can be accessed to fill a customer 
order in this type of security and, therefore, only one way to comply with Rule 1100 with 
respect to the handling and execution of a customer order in a municipal fund security.   

122  When the Commission approved the MSRB’s exemption for transactions with SMMPs 
from its best execution rule, the Commission stated that the exemption “will facilitate 
transactions in municipal securities and help perfect the mechanism of a free and open 
market in municipal securities by avoiding the imposition of regulatory burdens if they 
are not needed.”  See MSRB Best Execution Approval Order, supra note 47, 79 FR 
73664.  For the reasons discussed in this section, the Commission believes that the 
proposed rules are designed to mitigate the regulatory burdens for broker-dealers that 
transact for or with SMMP customers, while providing the benefit of the protections 
offered by the proposed rules under appropriate circumstances.  



   

56 

 

transactions for or with customers that meet the MSRB’s definition of SMMP, and proposed 

Regulation Best Execution would result in similar treatment as MSRB Rule G-18 and G-48 in 

many instances.  For example, as discussed above in this section, a broker-dealer would be 

exempt from proposed Rule 1100 if an institutional customer is exercising independent judgment 

and executing its orders against a broker-dealer’s quotation, and is not providing the broker-

dealer with orders for handling and execution.  Additionally, a broker-dealer would be exempt 

from proposed Rule 1100 if a customer gave the broker-dealer an unsolicited instruction to send 

its order to a particular market and the broker-dealer processes that customer’s 

order promptly and in accordance with the terms of the order.  Finally, as 

discussed in section IV.B.2 below, if a customer provides the broker-dealer with other 

instructions concerning the handling of its orders, the broker-dealer’s compliance with the best 

execution standard would be informed by such customer instructions.     

Request for Comment 

The Commission requests comment on all aspects of proposed Rule 1100, and in 

particular: 

5. Is the proposed best execution standard appropriate?  Why or why not?  Has the 

Commission identified all the differences between the proposed best execution standard 

and the standards under FINRA Rule 5310 and MSRB Rule G-18?  If not, please explain 

any differences that the Commission has not identified and any potential issues resulting 

from those differences. 

6. Are the differences between the proposed best execution standard and the standards under 

FINRA Rule 5310 and MSRB Rule G-18 appropriate?  Why or why not?  



   

57 

 

7. Do commenters agree that proposed Rule 1100 is consistent with prior Commission 

statements, including those described in section II.B above?  Why or why not?  If not, 

should the Commission revise any of its statements in light of the proposal?  Please 

explain. 

8. Do commenters agree that the proposed best execution standard should apply to natural 

persons who are associated persons of a broker-dealer?  Why or why not?   

9. Are there alternative definitions of “natural person who is an associated person” that the 

Commission should use instead?  Is the application of proposed Rule 1100 appropriately 

limited to “a natural person who is an associated person” of a broker-dealer?  Please 

explain.    

10. Would the proposed best execution standard pose any challenges or burdens for entities 

that are dually-registered broker-dealers and investment advisers?  As discussed above,123 

an investment adviser has its own duty to seek best execution of a client’s transactions 

where the adviser has the responsibility to select broker-dealers to execute client trades.  

What effect, if any, would the proposed best execution standard have on investment 

advisers and their duty to seek best execution?  

11. Are there elements of an investment adviser’s duty to seek best execution that are 

relevant in assessing the proposed best execution standard for a broker-dealer?  

12. Is it appropriate to provide an exemption from the proposed best execution standard to a 

broker-dealer when another broker-dealer is executing a customer order against the first 

broker-dealer’s quote?  Why or why not?     

                                                 

123  See supra note 11. 



   

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13. Is it appropriate to provide an exemption from the proposed best execution standard to a 

broker-dealer when an institutional customer, exercising independent judgment, executes 

its order against the broker-dealer’s quotations?  Why or why not? 

14. Should the Commission define “institutional customer” for purposes of proposed Rule 

1100?  If so, how should “institutional customer” be defined?  For example, should the 

Commission define “institutional customer” as any person that is a qualified 

institutional buyer (“QIB”) as defined in Rule 144A under the Securities 

Act of 1933?124  Why or why not? 

15. Should the Commission define “institutional customer” to include a 

broader set of institutional customers than the QIB definition, such as 

those entities that are included in the FINRA definition of “institutional 

account” under FINRA Rule 4512(c)?125  Please explain. 

16. Should the exemption concerning institutional customers in proposed Rule 1100 be 

limited to situations where the broker-dealer seeking the exemption has a reasonable 

basis to believe that the institutional customer (i) has the capacity to evaluate 

                                                 

124  17 CFR 230.144A (defining “QIB” to mean a variety of entities such as insurance 
companies, investment companies registered under the Investment Company Act of 1940, 
and investment advisers registered under the Investment Advisers Act of 1940, among 
others, that in the aggregate own or invest on a discretionary basis at least $100 million). 

125  FINRA Rule 4512(c) defines “institutional account” as the account of:  (1) a bank, 
savings and loan association, insurance company or registered investment company; (2) 
an investment adviser registered either with the Commission under section 203 of the 
Investment Advisers Act or with a state securities commission (or any agency or office 
performing like functions); or (3) any other person (whether a natural person, 
corporation, partnership, trust or otherwise) with total assets of at least $50 million.   



   

59 

 

independently the prices offered by the broker-dealer and (ii) is exercising independent 

judgment in deciding to enter into the transaction, such as is provided for in FINRA Rule 

2121 concerning suitability for institutional customers?  Please explain. 

17. Should the Commission define “institutional customer” for purposes of 

the proposed exemption in Rule 1100 to be consistent with the MSRB’s 

definition of SMMP?  For example, should an institutional customer be required to make 

an affirmation to the broker-dealer concerning its exercise of independent judgment in 

evaluating the quality of execution of its transaction with the broker-dealer?  Are there 

other affirmations relevant to best execution that should be required?126  Please explain. 

18. If an institutional customer affirmation should be required, how should such affirmation 

be provided?  Should an institutional customer be permitted to provide the affirmation to 

the broker-dealer orally or in writing?  Should an institutional customer be permitted to 

provide its affirmation on a trade-by-trade basis, a type-of-transaction basis, a type-of-

security basis (e.g., municipal security, including general obligation, revenue, variable 

rate municipal security; corporate bond, including investment grade and non-investment 

grade; OTC equity; NMS security), or an account-wide basis?  Please explain.   

19. Should a broker-dealer seeking the exemption in proposed Rule 1100 in transactions with 

institutional customers be required to disclose to the institutional customer that it is not 

required to comply with the best execution standard of proposed Rule 1100 for the 

                                                 

126  For example, the MSRB’s definition of SMMP requires a variety of other affirmations 
(e.g., relating to suitability, access to timely information, fair pricing for agency 
transactions) as broker-dealers are also exempt from other non-best execution related 
obligations in transactions with SMMPs pursuant to MSRB Rules G-48(a)-(d).   



   

60 

 

relevant transactions?  Should this disclosure be provided in lieu of or in addition to a 

customer affirmation, if such affirmation should be provided by the institutional 

customer?  Please explain.  If disclosure should be required, what standards should apply 

to the disclosure?  For example, should a broker-dealer be required to make a disclosure 

to the institutional customer on a transaction-by-transaction basis?  If not, what would be 

the appropriate manner for this disclosure?  Please explain.  Should the disclosure be in 

writing or should a broker-dealer be permitted to provide the disclosure orally to the 

institutional customer?  Please explain. 

20. Should the proposed exemption concerning institutional customers in Rule 1100 be 

limited to only certain types of securities or only certain types of trading protocols where 

the institutional customer is executing against the broker-dealer’s quote?  For example, 

should the exemption be limited only to transactions in fixed income securities?  Should 

it be limited to transactions that occur through multilateral RFQ systems where the 

institutional customer is able to put multiple broker-dealers and other market participants 

in competition when soliciting quotes?  Should the exemption be available to a broker-

dealer that is responding to a request for quote by an institutional customer in a bilateral 

communication, whether over the phone or through another communication protocol?  

Please explain. 

21. Should the Commission provide a broader exemption from the proposed best execution 

standard for a broker-dealer when it engages in any transaction for or with institutional 

customers, similar to the exemption provided to broker-dealers under MSRB Rule G-

48(e) for SMMPs?  Please explain why such exemption should or should not be provided.61 

 

22. If a broader exemption for transactions with institutional customers should be provided, 

how should the Commission define “institutional customer”?  Similar to the requests for 

comment above, should the Commission define institutional customer as “QIB” as 

defined in Rule 144A under the Securities Act of 1933, an “institutional 

account” as defined in FINRA Rule 4512(c), or an SMMP as defined in MSRB Rule D-

15?  Is there another definition that would be appropriate?  Please explain.  Should other 

conditions apply to the exemption, as requested above, such as broker-dealer disclosure 

to the institutional customer, broker-dealer assessment of the institutional customer’s 

ability to evaluate the transaction, and institutional customer affirmations?  Please 

explain.   

23. What are the typical order handling practices of broker-dealers for the municipal bond 

orders of SMMPs?  Do these order handling practices vary depending on the type of 

SMMP under MSRB Rule D-15(a)?  Do SMMPs typically provide broker-dealers with 

orders to handle and execute, or do SMMPs typically handle and execute their own 

orders?  Please explain.  Do broker-dealers exercise any discretion in handling the orders 

of SMMPs, whether executing such order on an agency or principal basis?  Please 

explain. 

24. Do commenters agree that the proposed rules are designed to mitigate the regulatory 

burdens for broker-dealers that transact for or with SMMP customers, while providing 

the benefit of the protections offered by the proposed rules under appropriate 

circumstances?  Why or why not?  

25. Should the Commission provide an exemption from the proposed best execution standard 

for a broker-dealer that engages in transactions for or with sophisticated market 



   

62 

 

professionals in asset classes other than municipal securities?  Please explain why such 

exemption should or should not be provided. 

26. Is it appropriate to provide an exemption from the proposed best execution standard to a 

broker-dealer that receives an unsolicited instruction from a customer to 

route that customer’s order to a particular market for execution, where 

the broker-dealer processes that customer’s order promptly and in 

accordance with the terms of the order?  Why or why not? 

27. Should the Commission provide an exemption from the proposed best execution standard 

for transactions in municipal fund securities (which include interests in 529 college 

savings plans)?  Should such exemption only apply to municipal fund securities that are 

interests in 529 college savings plans?  If the Commission were to provide an exemption, 

should it apply similarly or differently to direct-sold and advisor-sold municipal fund 

securities?  Please explain why such exemption should or should not be provided.   

28. Should the Commission provide an exemption for mutual fund securities, such as equity 

and corporate bond mutual funds?  Should the Commission provide an exemption for any 

other type of security?  Please explain why such exemption should or should not be 

provided. 

29. Should the Commission provide any other exemptions from the proposed best execution 

standard?  If so, please explain. 

30. Should proposed Regulation Best Execution be the sole best execution rule applicable to 

broker-dealers?  Why or why not? 



   

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B. Proposed Rule 1101(a) – Best Execution Policies and Procedures  

Proposed Rule 1101(a) would require a broker-dealer that effects any transaction for or 

with a customer or a customer of another broker-dealer to establish, maintain, and enforce 

written policies and procedures reasonably designed to comply with the best execution standard 

under proposed Rule 1100 (“best execution policies and procedures”).  As discussed in sections 

IV.B.1 and 2 below, a broker-dealer’s best execution policies and procedures would be required 

to address:  (1) how the broker-dealer would comply with the best execution standard; and (2) 

how the broker-dealer would determine the best market for the customer orders that it receives.   

Proposed Rule 1101 does not include specific requirements regarding the manner in 

which broker-dealers would comply with the best execution standard.  Rather, proposed Rule 

1100 would require a broker-dealer to use reasonable diligence to ascertain the best market for a 

security, and buy or sell in such market so that the resultant price to the customer is as favorable 

as possible under prevailing market conditions, and proposed Rule 1101 would additionally 

require a broker-dealer to establish and maintain written policies and procedures reasonably 

designed to comply with the proposed standard.  The policies and procedures would be required 

to reflect the elements specified in proposed Rule 1101(a) (e.g., best displayed prices, 

opportunities for price improvement including midpoint executions, attributes of particular 

customer orders, the trading characteristics of the security).  For example, a broker-dealer could 

have policies and procedures that are tailored for different types of customers (e.g., retail 

customers, institutional customers) or for securities with different trading characteristics (e.g., 



   

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NMS stocks, municipal securities).127  All customer orders must be covered by a broker-dealer’s 

best execution policies and procedures, and the broker-dealer would be required to enforce such 

policies and procedures.   

While FINRA’s best execution rule does not require broker-dealers to have the same type 

of detailed best execution policies and procedures as proposed Rule 1101,128 FINRA Rule 

3110(b)(1)129 requires broker-dealers to have procedures for compliance with FINRA rules and 

Federal securities laws and regulations.  The MSRB’s best execution rule reflects a 

requirement for broker-dealers to have policies and procedures for 

determining the best available market for the executions of their customers’ 

                                                 

127  Similar to this proposal, FINRA and MSRB rules also recognize that broker-dealers’ best 
execution practices would be tailored for securities with different characteristics.  For 
example, FINRA Rule 5310 recognizes that the markets for different securities can vary 
and the standard of reasonable diligence must be assessed by examining specific factors, 
such as the character of the market for the security and the accessibility of the quotation.  
See, e.g., FINRA Rules 5310.03 (Best Execution and Debt Securities); 5310.06 (Orders 
Involving Securities with Limited Quotations or Pricing Information); 5310.07 (Orders 
Involving Foreign Securities).  See also MSRB Rule G-18.06 (Securities with Limited 
Quotations or Pricing Information) (recognizing that markets for municipal securities 
may differ dramatically and referring to heightened diligence with respect to customer 
transactions involving securities with limited pricing information or quotations). 

128  FINRA Rule 5310. 
129  FINRA Rule 3110(b)(1) requires a FINRA member to establish, maintain, and enforce 

written procedures to supervise the types of business in which it engages and the 
activities of its associated persons that are reasonably designed to achieve compliance 
with applicable securities laws and regulations, and with applicable FINRA rules.  
Separately, FINRA Rules 3130(b) and (c) require the chief executive officer (or 
equivalent officer) of a FINRA member to certify annually that the member has in place 
processes to establish, maintain, review, test and modify written compliance policies and 
written supervisory procedures reasonably designed to achieve compliance with 
applicable FINRA rules, MSRB rules, and Federal securities laws and regulations. 



   

65 

 

transactions.130  In addition, MSRB Rule G-28 requires broker-dealers to 

have procedures for compliance with MSRB rules and the Exchange Act and rules 

thereunder.131  The Commission understands that broker-dealers currently have 

policies and procedures relating to their compliance with the FINRA and 

MSRB best execution rules, as applicable.  However, unlike the FINRA and 

MSRB rules, proposed Rule 1101(a)(1) would require broker-dealers’ best 

execution policies and procedures to include specific elements, as discussed in sections 

IV.B.1 and 2 below. 

1. Proposed Rule 1101(a)(1) – Framework for Compliance with the Best 
Execution Standard   

Proposed Rule 1101(a)(1) would require a broker-dealer’s best execution policies and 

procedures to address how it will comply with the proposed best execution standard by:  (i) 

obtaining and assessing reasonably accessible information, including information about price, 

volume, and execution quality, concerning the markets trading the relevant securities; (ii) 

identifying markets that may be reasonably likely to provide material potential liquidity sources 

                                                 

130  MSRB Rule G-18.08 states that a broker-dealer must, at a minimum, conduct annual 
reviews of its policies and procedures for determining the best available market for the 
executions of its customers’ transactions, including assessing whether its policies and 
procedures are reasonably designed to achieve best execution, taking into account the 
quality of the executions the broker-dealer is obtaining under its current policies and 
procedures, among other things. 

131  MSRB Rule G-28 requires broker-dealers to adopt, maintain and enforce written 
supervisory procedures reasonably designed to ensure that the conduct of the municipal 
securities activities of the broker-dealer and its associated persons are in compliance with 
MSRB rules and the applicable provisions of the Exchange Act and rules thereunder.  



   

66 

 

(as defined above); and (iii) incorporating material potential liquidity sources into its order 

handling practices and ensuring that it can efficiently access each such material potential 

liquidity source. 

Proposed Rule 1101(a)(1)(i) would require a broker-dealer to have 

policies and procedures for obtaining and assessing reasonably accessible information 

regarding the markets trading the relevant securities.132  Market information is 

relevant to a broker-dealer’s best execution analysis,133 and the Commission has previously 

identified price and execution quality information as among the factors relevant to that 

                                                 

132  Proposed Rule 1101 would not establish minimum data elements needed to comply with 
the proposed best execution standard.  Rather, it would require broker-dealers to 
establish, maintain, and enforce policies and procedures reasonably designed to comply 
with the proposed best execution standard.  In implementing its policies and procedures 
(both for non-conflicted and conflicted transactions), including policies and procedures 
that address how the broker-dealer would obtain and assess reasonably accessible 
information or how the broker-dealer would obtain and assess other information for 
conflicted transactions (as discussed in section IV.C below), a broker-dealer may 
determine that it is appropriate to purchase certain proprietary data.  See also supra note 
38 (describing the Commission’s statements in the MDI Adopting Release that the 
Commission was not establishing minimum data elements needed to achieve best 
execution nor mandating consumption of certain data content, and acknowledging that 
different market participants and different trading applications have different market data 
needs).  

133  See, e.g., Order Execution Obligations Adopting Release, supra note 10, 61 FR at 48322-
23 (stating that a broker-dealer’s practices for achieving best execution, including the 
data, technology, and types of markets it accesses, must constantly be updated as markets 
evolve); Order Execution and Routing Practice Release, supra note 22, 65 FR at 75418 
(stating that quotation information contained in the public quotation system must be 
considered in seeking best execution of customer orders); MDI Adopting Release, supra 
note 38, 86 FR at 18605 (stating that broker-dealers should consider the availability of 
consolidated market data, including the various elements of data content and the 
timeliness, accuracy, and reliability of the data in developing and maintaining their best 
execution policies and procedures). 



   

67 

 

analysis.134  The Commission believes that the ability of markets to attract trading interest as 

measured by trading volume would also be relevant to a broker-dealer’s best execution analysis, 

because trading volume can be an indicator of whether sufficient interest exists on a particular 

market to execute customer orders.135 

More specifically with respect to execution quality, the Commission believes that the 

level of competition within a market can impact the execution quality of that market and, 

therefore, broker-dealers should generally consider including the level of competition of a 

market as an element of its best execution policies and procedures.136      

                                                 

134  See, e.g., Order Execution Obligations Adopting Release, supra note 10, 61 FR 48323 
(identifying price improvement and execution quality as among the relevant factors for a 
best execution analysis); MDI Adopting Release, supra note 38, 86 FR 18605 (identifying 
order size, trading characteristics of the security, speed of execution, clearing costs, and 
the cost and difficulty of executing an order in a particular market as relevant factors for a 
best execution analysis).   

135  FINRA Rule 5310(a)(1) and MSRB Rule G-18(a) set forth similar factors that are 
relevant to a best execution analysis, including the character of the market for the security 
(e.g., price, volatility, relative liquidity, and pressure on available communications).  
However, unlike proposed Rule 1101(a), FINRA and MSRB rules do not explicitly 
require relevant factors to be included in a broker-dealer’s best execution policies and 
procedures.  The considerations in FINRA and MSRB rules concerning volatility, relative 
liquidity, and pressure on available communications could be included as part of the best 
market policies and procedures in proposed Rule 1101(a)(2), which requires 
consideration of the trading characteristics of a security.  See also FINRA Rule 5310.09 
(requiring a member to conduct regular and rigorous reviews of the quality of the 
executions of its customers’ orders); MSRB Rule G-18.08 (requiring a dealer to conduct 
periodic reviews of its best execution policies and procedures, taking into account the 
quality of the executions the dealer is obtaining under its current policies and procedures, 
among other things).  

136  This could include considerations of auction features, such as allocation guarantees and 
fees, the types of market participants that can participate in an auction, the breadth of 
participation in an auction, and the accessibility of auction processes. This assessment of 
auction mechanisms would apply to a broker-dealer that is handling a customer order that 



   

68 

 

With respect to price improvement auctions offered by options exchanges, while the 

Commission believes that such auctions could provide better executions for customer orders than 

routing such orders to execute at the prevailing best bid or offer on an exchange, the selection of 

a particular price improvement auction could impact the execution quality of customer orders.  A 

broker-dealer should generally consider addressing in its policies and procedures how it would 

assess the features of options price improvement auctions, how those features might affect the 

level of competition and the execution quality offered by the auctions, and whether those 

features would allow an auction to provide the most favorable prices under prevailing market 

conditions.  For example, price improvement auctions have features, which have been 

implemented pursuant to proposed rule changes filed with the Commission, that allow a 

wholesaler to trade with much or all of the customer orders represented in an auction.137  The 

current fee structures for price improvement auctions may also affect market participants’ 

determination of whether to compete with a wholesaler for customer orders and provide more 

                                                 

is subject to the proposed requirements in the Order Competition Rule (known as a 
“segmented order”).  See Securities Exchange Act Release No. 34-96495 (Dec. 14, 
2022).  Were the Commission to adopt the proposed Order Competition Rule, a broker-
dealer that desires to trade as principal with a segmented order would, absent an 
exception, be required to expose certain orders to competition through use of “qualified 
auctions,” as defined by the proposed Order Competition Rule.  If the proposed Order 
Competition Rule were adopted, a broker-dealer when evaluating which qualified auction 
to use for segmented orders under proposed Regulation Best Execution (if adopted) 
would have to have policies and procedures addressing how the broker-dealer will assess 
the execution quality of different qualified auctions and identify those that are likely to 
result in the most favorable price for customer orders. 

137  See, e.g., Nasdaq ISE, LLC Options 3, Section 13; Nasdaq Phlx LLC Options 3, Section 
13; Miami International Securities Exchange LLC Rule 515A; BOX Exchange LLC Rule 
7150; NYSE American LLC Rule 971.1NY; Cboe Exchange, Inc. Rule 5.37.  



   

69 

 

favorable prices.138  As reflected in the table below, as of May 25, 2022, the vast majority of 

options exchanges charge market participants that may desire to compete for customer orders 

response fees of $0.50 per contract (for options classes priced in $0.01 increments (“penny 

classes”)) and $1.00 or more per contract (for options classes priced in $0.05 increments (“non-

penny classes”)).  These response fees are not charged to wholesalers that initiate the price 

improvement auctions.  

Exchange 
Fees for Initiating 

Orders 

Auction Market Maker 

Response Fees (Penny 

Classes) 

Auction Market Maker Response  

Fees (Non-Penny Classes) 

CBOE 0.07 0.50 1.05 

EDGX 0.05 0.50 1.05 

PHLX 0.07 0.25 0.40 

MRX 0.02 0.50 1.10 

ISE 0.10 0.50 1.10 

GEMX 0.05 0.50 0.94 

AMEX 0.05 0.50 1.05 

MIAX 0.05 0.50 1.10 

BOX 0.05 0.50 1.15 

                                                 

138  See Nasdaq ISE LLC Options 7, Section 3; Nasdaq GEMX LLC Options 7, Section 3; 
Nasdaq MRX LLC Options 7, Section 3.A.; Nasdaq Phlx LLC Options 7, Section 6.A.; 
BOX Exchange LLC Fee Schedule Section IV.B.; Miami International Securities 
Exchange LLC Fee Schedule Section (1)(a)(v); NYSE American LLC Options Fee 
Schedule Section I.G.; Cboe Exchange, Inc. Fee Schedule; Cboe EDGX Exchange, Inc. 
Options Fee Schedule n.6.     



   

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In addition, allocation guarantees, which permit the wholesaler to trade with a significant portion 

of the customer order, may affect competing market participants’ determinations of whether and 

how to participate in price improvement auctions.139  Likewise, “auto-match” features, which 

enable the wholesaler to automatically match the best prices submitted by competing market 

participants, may affect competing market participants’ determinations of whether and how to 

participate in price improvement auctions.140     

As another example, in considering RFQ systems as material potential liquidity sources 

for corporate and municipal bonds and government securities, a broker-dealer’s policies and 

procedures could assess the filtering practices that may be applied by the RFQ system operator 

and the impact that those practices may have on the execution quality of those markets.  If an 

RFQ system applies an automatic filter that prevents a broker-dealer that initiates the RFQ from 

sending that request to all participants on the RFQ system, a broker-dealer could evaluate the 

potential impact that may have on that market’s execution quality.  To the extent other RFQ 

systems do not apply such filters to the broker-dealer’s request, a broker-dealer could evaluate 

whether these other RFQ systems would be a better alternative for executing customer orders, 

taking into consideration other relevant information that the broker-dealer may obtain concerning 

the RFQ systems. 

                                                 

139  See supra note 137.   
140  See, e.g., Nasdaq ISE, LLC Options 3, Section 13(d)(3); Nasdaq Phlx LLC Options 3, 

Section 13(b)(1); Miami International Securities Exchange LLC Rule 515A(a)(2)(i)(A); 
BOX Exchange LLC Rule 7150(f); NYSE American LLC Rule 971.1NY(c)(1); Cboe 
Exchange, Inc. Rule 5.37(b)(5).   



   

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Proposed Rule 1101(a)(1)(ii) would require a broker-dealer’s policies and procedures to 

address how it will identify material potential liquidity sources, but it would not require a broker-

dealer to include in its policies and procedures a minimum number of markets that it would need 

to identify as material potential liquidity sources.  Rather, under proposed Rules 1101(a)(1)(i) 

and (ii), a broker-dealer would be required to follow its policies and procedures in assessing 

reasonably accessible information and determining material potential liquidity sources.  The 

Commission believes a broker-dealer’s identification of material potential liquidity sources could 

be influenced by the nature of the broker-dealer’s business operation and customer order flow.  

For example, some broker-dealers focus on the handling and execution of institutional orders or 

large-size orders, while some broker-dealers handle and execute retail orders or small-size 

orders.  These considerations may be relevant to the types of markets or market information that 

the broker-dealer assesses for purposes of identifying material potential liquidity sources.  The 

Commission further believes a broker-dealer’s assessment of market information and 

identification of material potential liquidity sources could vary depending on the trading 

characteristics of the relevant security, the level of transparency in the applicable market, and 

accessibility of a market, including the cost of maintaining connectivity, receiving market data, 

and transacting on the market.  For example, if a market charges unreasonably high fees for 

connectivity, market data, or transactions, a broker-dealer could consider whether such market’s 



   

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information is reasonably accessible and whether such market should be identified as a material 

potential liquidity source.141    

While proposed Rules 1101(a)(1)(i) and (ii) do not include an exhaustive list of the 

markets that might be considered material potential liquidity sources, or the potential sources of 

reasonably accessible information for different types of securities, some examples may be 

helpful.  For the NMS stock market, material potential liquidity sources could include exchanges, 

ATSs, and broker-dealers, including market makers and wholesalers.  It could also include 

trading protocols and auction mechanisms operated by these entities, including those that may 

provide price improvement opportunities, such as exchange limit order books, retail liquidity 

programs, midpoint liquidity, and wholesaler price improvement guarantees.  Concerning 

potential sources of reasonably accessible information, the Commission has stated that quotation 

data made publicly available must be considered by a broker-dealer when seeking best execution 

of customer orders.142  In addition, a broker-dealer generally should consider whether 

consolidated trade information, exchange proprietary data feeds, odd lot market data, and 

execution quality and order routing information contained in reports made pursuant to Rules 605 

                                                 

141  The Commission has previously described a non-exhaustive list of factors that may be 
relevant to broker-dealers’ best execution analysis.  These factors include the size of the 
order, speed of execution, clearing costs, the trading characteristics of the security 
involved, the availability of accurate information affecting choices as to the most 
favorable market center for execution and the availability of technological aids to process 
such information, and the cost and difficulty associated with achieving an execution in a 
particular market center.  See supra note 23 and accompanying text. 

142  See Order Execution Obligations Adopting Release, supra note 10, 61 FR 48324. 



   

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and 606 of Regulation NMS are readily accessible and needed in order for the broker-dealer to 

identify material potential liquidity sources for its customers’ orders.143   

In the OTC equities market, a broker-dealer could consider whether ATSs, wholesalers, 

and other OTC market makers may be potential material liquidity sources.  With regard to 

reasonably accessible information, a broker-dealer could consider obtaining data from ATSs and 

OTC market makers, in addition to obtaining the data concerning transaction prices in OTC 

equities made publicly available through the FINRA Over-the-Counter Reporting Facility 

(“ORF”).   

In the options market, material potential liquidity sources could include the options 

exchanges and the range of trading protocols and auction mechanisms made available by them.  

These could include quotes from market makers resting on exchange limit order books, price 

improvement auctions, liquidity resting between the best bid and offer that may be available on 

exchange limit order books, and floor trading facilities that may provide a broker-dealer with the 

opportunity to seek competitive prices from floor participants for larger or complex options 

orders.  Other broker-dealers in the options market could also represent a type of market that 

generally should be considered when assessing material potential liquidity sources.  Specifically, 

many options trades are arranged away from the exchanges by broker-dealers and are often 

                                                 

143  In a regulatory notice concerning its best execution rule, FINRA has provided guidance 
regarding the relevance of proprietary data feeds to a broker-dealer’s best execution 
assessment.  See FINRA Regulatory Notice 15-46, at 13 n.12 (“[A] firm that regularly 
accesses proprietary data feeds, in addition to consolidated data from the Securities 
Information Processors (SIPs), for its proprietary trading, would be expected to also use 
these data feeds to determine the best market under prevailing market conditions when 
handling customer orders.”). 



   

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brought to the exchanges for order exposure and potential price improvement prior to 

execution.144  Because options trades may be arranged in this fashion, a broker-dealer would 

need to consider whether other broker-dealers may represent material potential liquidity sources 

for its customers’ options orders.  With regard to reasonably accessible information, a broker-

dealer should consider whether proprietary data feeds and quarterly Rule 606 order routing 

reports are readily accessible and needed to identify material potential liquidity sources, in 

addition to consolidated trade and quotation data that is made publicly available. 

In addition, a number of markets could be considered for purposes of identifying material 

potential liquidity sources in the corporate and municipal bond markets and government 

securities markets.  These may include, for example, ATS and non-ATS electronic trading 

systems, RFQ systems, and other auction mechanisms.    Material potential liquidity sources in 

these fixed income markets could also include interdealer brokers and other broker-dealers 

willing to be a counterparty upon request.145  A broker-dealer’s own principal trading desk could 

                                                 

144  See, e.g., Nasdaq ISE, LLC, Options 3, Section 11(b)-(e) (providing exchange 
functionality for facilitation and solicitation auctions, which permit an exchange member 
to attempt to execute large-sized orders it represents as agent against principal interest or 
contra-side orders it has solicited).  See also, e.g., Miami International Securities 
Exchange LLC Rule 515A(b); Cboe Exchange, Inc. Rule 5.39.  The ability to attempt to 
execute an agency order against principal or solicited interest is also permitted in the 
options exchange price improvement auctions.  See supra note 137.  

145  For example, for less widely-traded securities, broker-dealers that have previously traded 
such securities or that are otherwise known to trade in the securities can be markets for 
certain segments of the fixed income market.  See, e.g., MSRB Implementation Guidance 
on MSRB Rule G-18, on Best Execution at Item VI.1. (updated as of Feb. 7, 2019). 



   

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also be a market for purposes of identifying material potential liquidity sources.146  With respect 

to reasonably accessible information, a broker-dealer could consider whether to obtain data from 

ATSs and other trading platforms, such as RFQ systems, interdealer brokers, and dealers that 

handle and execute customer orders, in addition to obtaining consolidated trade data in the 

corporate bond and municipal bond markets made publicly available through FINRA’s Trade 

Reporting and Compliance Engine (“TRACE”) and the MSRB’s Real-time Transaction 

Reporting System (“RTRS”).147  A broker-dealer could also consider obtaining relevant data 

from information sources that do not provide execution services, such as price aggregator 

services or evaluated pricing services. 

Proposed Rule 1101(a)(1)(iii) would require a broker-dealer to have 

policies and procedures that address how the broker-dealer will incorporate 

material potential liquidity sources into its order handling practices and ensure that it can 

efficiently access each such material potential liquidity source.  This requirement is designed to 

enhance a broker-dealer’s ability meet the proposed best execution standard by helping to ensure 

that the broker-dealer incorporates the identified material potential liquidity sources into its order 

handling practices so that it can execute customer orders in those markets as appropriate.148   

                                                 

146  Principal trading with a customer by a broker-dealer would be subject to more robust 
policies and procedures requirements under proposed Rule 1101(b). 

147  See, e.g., https://www.finra.org/filing-reporting/trace/data and https://emma.msrb.org/ 
148  FINRA Rule 5310(c) provides that a failure to maintain or adequately staff an OTC order 

room or other department assigned to execute customers’ orders is not a justification for a 
broker-dealer executing away from the best available market.  The provision further 
states that channeling orders through a third party as reciprocation for service or business 
does not relieve a broker-dealer of its obligation under FINRA Rule 5310.  FINRA Rule 

https://www.finra.org/filing-reporting/trace/data
https://emma.msrb.org/


   

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Efficient access to each material potential liquidity source, as specified by proposed Rule 

1101(a)(1)(iii), may require different order handling processes and arrangements in different 

markets, and would not necessarily require that a broker-dealer directly connect to a market, as it 

may be efficient in some circumstances for a broker-dealer to use another broker-dealer to access 

a particular market for a customer order.  However, interposing a third-party between the broker-

dealer and the market reasonably likely to provide the most favorable price for its customer 

would not be consistent with the concept of “efficient access,” if the broker-dealer could access 

the market directly but chose instead to access the market indirectly resulting in a worse 

execution for the customer.149  As stated above, interpositioning can violate the broker-dealer’s 

                                                 

5310(d) also provides that a broker-dealer through which orders are channeled and that 
knowingly is a party to an arrangement whereby the initiating member has not fulfilled its 
obligations under FINRA Rule 5310 will be deemed to have violated the rule.  Similarly, 
MSRB Rule G-18.02 states that a broker-dealer’s failure to maintain adequate resources 
is not a justification for executing away from the best available market.  The proposed 
rules likewise would not exempt these scenarios from the proposed best execution 
standard.  The Commission also believes that these provisions reflect the concept of 
efficient access to the best market so that the resulting price to a customer is as favorable 
as possible under prevailing market conditions, and therefore are consistent with the 
Commission’s proposal to require a broker-dealer’s best execution policies and 
procedures to address how the broker-dealer will efficiently access material potential 
liquidity sources.  

149  The proposed requirement that a broker-dealer’s policies and procedures address how it 
will be able to efficiently access any material potential liquidity source is consistent with 
FINRA and MSRB rules concerning interpositioning.  Specifically, FINRA Rule 
5310(a)(2) states that no broker-dealer or person associated with a broker-dealer may 
interject a third party between the broker-dealer and the best market for the subject 
security in a manner that would be inconsistent with FINRA’s best execution standard.  
FINRA Rule 5310(b) states that when a broker-dealer cannot execute directly with a 
market but must employ a broker’s broker or some other means in order to ensure an 
execution advantageous to the customer, the burden of showing the acceptable 
circumstances for doing so is on the broker-dealer.  And FINRA Rule 5310.05 states that 
examples of acceptable circumstances are where a customer’s order is “crossed” with 



   

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duty of best execution when it results in unnecessary transaction costs at the expense of the 

customer.150   

Request for Comment 

The Commission requests comment on all aspects of proposed Rule 1101(a)(1), and in 

particular: 

31. Do commenters believe that proposed Rule 1101(a)(1)(i) appropriately requires a broker-

dealer’s policies and procedures to reflect how it will obtain and assess reasonably 

accessible information, including information about price, volume, and execution quality, 

concerning the markets trading the relevant securities?  Why or why not? 

32. What factors would a broker-dealer consider in determining whether information is 

“reasonably accessible” for purposes of its best execution policies and procedures under 

the proposed rules?  Please explain.  

33. Should the Commission specify the types of information that would be “reasonably 

accessible” under proposed Rule 1101(a)(1)(i)?  For example, should the Commission 

specify that consolidated market data distributed by the securities information processors 

is a type of “reasonably accessible” information under the proposed rule?  Please explain. 

                                                 

another firm that has a corresponding order on the other side, or where the identity of the 
firm, if known, would likely cause undue price movements adversely affecting the cost or 
proceeds to the customer.  MSRB Rule G-18(b) similarly prohibits a broker-dealer from 
interjecting a third party between itself and the best market for the subject security in a 
manner inconsistent with the MSRB’s best execution standard.  However, unlike 
proposed Rule 1101(a), FINRA and MSRB rules do not require a broker-dealer’s best 
execution policies and procedures to explicitly address the incorporation of liquidity 
sources into its order handling practices or the efficient access of liquidity sources.   

150  See supra notes 29-30 and accompanying text. 



   

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34. Do commenters agree that proposed Rule 1101(a)(1) is consistent with prior Commission 

statements, including those described in section II.B above?  Why or why not?  If not, 

should the Commission revise any of its statements in light of the proposal?  Please 

explain. 

35. Do commenters believe that proposed Rule 1101(a)(1)(ii) appropriately requires a broker-

dealer’s policies and procedures to reflect how it will identify material potential liquidity 

sources?  Why or why not? 

36.  Do commenters believe the Commission has appropriately defined material potential 

liquidity sources in proposed Rule 1101(a)(1)(ii)?  Please explain. 

37. What factors would a broker-dealer consider in identifying material potential liquidity 

sources under the proposed rules?  Please explain.  

38. In identifying material potential liquidity sources, do broker-dealers consider market 

connectivity fees and other access and transaction fees?  Please explain. 

39. Do commenters agree that proposed Rule 1101(a)(1)(ii) is consistent with prior 

Commission statements, including those described in section II.B above?  Why or why 

not?  If not, should the Commission revise any of its statements in light of the proposal?  

Please explain.  

40. Do commenters believe that proposed Rule 1101(a)(1)(iii) appropriately requires a 

broker-dealer’s policies and procedures to reflect how it will incorporate material 

potential liquidity sources into its order handling practices?  Why or why not? 

41. Do commenters believe that proposed Rule 1101(a)(1)(iii) appropriately requires a 

broker-dealer’s policies and procedures to reflect how it will ensure efficient access to 

each material potential liquidity source?  Why or why not? 



   

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42. What factors would a broker-dealer consider to ensure that it can efficiently access a 

material potential liquidity source under the proposed rules?  Please explain.   

43. Do commenters agree that proposed Rule 1101(a)(1)(iii) is consistent with prior 

Commission statements, including those described in section II.B above?  Why or why 

not?  If not, should the Commission revise any of its statements in light of the proposal?  

Please explain. 

44. Do commenters agree with the Commission’s understanding that broker-dealers currently 

have policies and procedures for how they comply with the FINRA and MSRB best 

execution rules, as applicable?  Please describe the types of best execution policies and 

procedures that broker-dealers currently have.  In particular, do broker-dealers’ policies 

and procedures address how they obtain and assess reasonably accessible information, 

including information about price, volume, and execution quality, concerning the markets 

trading the relevant securities?  Do broker-dealers’ policies and procedures address how 

they identify material potential liquidity sources?  Do broker-dealers’ policies and 

procedures address how they incorporate material potential liquidity sources into their 

order handling practices, and how they ensure that they can efficiently access each such 

material potential liquidity source? 

45. Do commenters believe that the Commission should provide staggered compliance dates 

for proposed Rule 1101(a)(1) for broker-dealers of different sizes, if the Commission 

adopts proposed Regulation Best Execution?  For example, should the Commission 

provide longer compliance dates for smaller broker-dealers?  If so, should the 

Commission define a smaller broker-dealer as a broker-dealer that qualifies as a “small 

entity” under the Regulatory Flexibility Act pursuant to 17 CFR 240.0-10(c) for this 



   

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purpose?151  Or should the Commission define a smaller broker-dealer in a different way?  

Please explain. 

2. Proposed Rule 1101(a)(2) – Best Market Determination  

Proposed Rule 1101(a)(2) would require a broker-dealer’s best execution policies and 

procedures to address how it will determine the best market and make routing or execution 

decisions for customer orders that it receives by:  (i) assessing reasonably accessible and timely 

information with respect to the best displayed prices, opportunities for price improvement, 

including midpoint executions, and order exposure opportunities that may result in the most 

favorable price; (ii) assessing the attributes of customer orders and considering the trading 

characteristics of the security, the size of the order, the likelihood of execution, the accessibility 

of the market, and any customer instructions in selecting the market most likely to provide the 

most favorable price; and (iii) in determining the number and sequencing of markets to be 

assessed, reasonably balancing the likelihood of obtaining better prices with the risk that delay 

could result in worse prices. 

In determining the best market for customer orders, the assessment of reasonably 

accessible and timely information152 with respect to the best displayed prices and opportunities 

                                                 

151  17 CFR 240.0-10(c) defines a smaller broker-dealer as one that: (1) had total capital (net 
worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal 
year as of which its audited financial statements were prepared pursuant to Rule 17a-5(d) 
under the Exchange Act, or, if not required to file such statements, had total capital (net 
worth plus subordinated liabilities) of less than $500,000 on the last business day of the 
preceding fiscal year (or in the time that it has been in business, if shorter); and (2) is not 
affiliated with any person (other than a natural person) that is not a small business or 
small organization.   

152  See supra notes 132 and 141 and accompanying text.81 

 

for price improvement would vary depending on the trading characteristics of particular 

securities.  Displayed prices can provide a useful reference price for a broker-dealer to consider 

when assessing the best market in which to execute customer orders, particularly in an asset class 

where there are consolidated displays of the best prices across the market, or for securities that 

are considered liquid and have firm prices that are accessible.  Accordingly, under proposed Rule 

1101(a)(2)(i), a broker-dealer’s policies and procedures would be required to address how it will 

assess reasonably accessible and timely information with respect to the best displayed prices in 

any given market or security.153  In addition, the Commission has previously stated that, when 

reviewing their procedures for seeking to obtain best execution, “broker-dealers must take into 

account price improvement opportunities, and whether different markets may be more suitable 

for different types of orders or particular securities.”154  Accordingly, under proposed Rule 

1101(a)(2)(i), a broker-dealer’s policies and procedures would be required to specifically address 

                                                 

153  For fixed income securities, FINRA has also recognized that while a broker-dealer should 
consider using displayed prices on electronic trading platforms as part of its reasonable 
diligence in determining the best market for a security, executing a customer order at the 
displayed price may not necessarily fulfill the broker-dealer’s best execution obligations.  
See FINRA Regulatory Notice 15-46, at 8 (stating that displayed prices on electronic 
trading platforms may not be the presumptive best prices, especially for securities that are 
illiquid or trade infrequently).  Accordingly, the Commission believes that the concept of 
“best displayed prices” is applicable to the fixed income securities market. 

154  Regulation NMS Adopting Release, supra note 21, 70 FR 37538.  See also Order 
Execution Obligations Adopting Release, supra note 10, 61 FR 48323 n.357 (stating that 
any evaluation of price improvement opportunities would have to consider not only the 
extent to which orders are executed at prices better than the prevailing quotes, but also 
the extent to which orders are executed at inferior prices). 



   

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how it will assess price improvement opportunities,155 including midpoint execution 

opportunities.156     

In addition to displayed prices and opportunities for price improvement, there may be 

other order exposure opportunities for customer orders (e.g., order handling and execution 

protocols that may provide exposure to a competitive process for customer orders).  For example, 

markets that operate limit order books and enable broker-dealers to post customer limit orders 

could represent a best market for customer orders.  These markets may provide an opportunity 

for executions at the prevailing best bid for customer buy orders or at the prevailing best offer for 

customer sell orders, rather than executing customer orders by crossing the prevailing bid-offer 

spread.  As another example, auctions may offer an opportunity to expose marketable customer 

orders to prices that are more favorable than prices that would be achieved by crossing the 

spread.  Accordingly, under proposed Rule 1101(a)(2)(i), a broker-dealer’s policies and 

procedures would be required to address how it will assess order exposure opportunities that may 

result in the most favorable price. 

                                                 

155  Price improvement is the execution of an order at a price that is better than the best 
displayed buy or sell prices in the market, and an execution between the best displayed 
bid and offer is a form of price improvement.  See, e.g., Order Execution Obligations 
Adopting Release, supra note 10, 61 FR 48323 n.357 (stating that price improvement 
means the difference between execution price and the best quotes prevailing in the 
market at the time the order arrived at the market or market maker); FINRA Rule 
5310.09(b)(1) (describing price improvement opportunities to mean the difference 
between the execution price and the best quotes prevailing at the time the order is 
received by the market). 

156  These executions occur at the midpoint of the best displayed buy and sell prices and may 
represent a significant amount of price improvement as compared to executing at the best 
displayed prices for customers seeking to trade immediately. 



   

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FINRA Rule 5310(a)(1) and MSRB Rule G-18(a) also identify price information as 

relevant when ascertaining the best market for a security.157  MSRB Rule G-18(a) also includes 

as an additional factor:  the information reviewed to determine the current market for the subject 

security or similar securities.158  As described in section IV.B.1 above, FINRA and MSRB rules 

reflect requirements for broker-dealers to have policies and procedures for compliance with 

relevant laws and rules.  However, FINRA and MSRB rules do not require a 

broker-dealer’s policies and procedures to specifically address the elements 

that are relevant to its best market determinations.  The Commission 

understands that broker-dealers currently generally have policies and 

procedures to ascertain the best market for a security, although such policies and 

procedures may need to be updated to address the elements specified in 

proposed Rule 1101(a)(2).  

For a retail broker-dealer in NMS stocks, its policies and procedures for the best market 

determination could include assessments of any assurances from a wholesaler that certain orders 

                                                 

157  FINRA has also recognized the importance of considering midpoint liquidity.  See 
FINRA Regulatory Notice 15-46 at 4 n.25 (“For example, if a firm obtains price 
improvement at one venue of $0.0005 per share, and it could obtain mid-point price 
improvement at another venue of $0.025 per share, the firm should consider the 
opportunity of such midpoint price improvement on that other venue as part of its best 
execution analysis.”).  In addition, FINRA Rule 5310.09(b)(1) recognizes the relevance 
of price improvement opportunities.   

158  This factor is consistent with proposed Rule 1101(a)(2) because a broker-dealer’s policies 
and procedures regarding the assessment of reasonably accessible and timely best 
displayed prices in the municipal bond market could include an assessment of 
information to determine the current market for the subject security or similar securities.   



   

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routed by the retail broker-dealer to the wholesaler would be guaranteed midpoint executions by 

the wholesaler or otherwise exposed to opportunities for midpoint executions.159  If midpoint 

executions were not guaranteed by a wholesaler, a retail broker-dealer’s policies and procedures 

could provide for assessments of whether customer orders would best be executed with midpoint 

liquidity that may be available on an exchange, ATS, or other market.  Following an assessment 

of the opportunities for midpoint executions, a broker-dealer’s policies and procedures could 

provide for an assessment of whether other price improvement opportunities might be available, 

such as from wholesalers,160 from resting liquidity between the best bid and offer on exchanges, 

through auctions, or otherwise.      

With respect to listed options, the Commission recognizes that midpoint liquidity is not 

as commonly available on options exchanges as it is in the NMS stock market.161  A broker-

dealer’s policies and procedures nevertheless would be required to address how it will assess 

potential midpoint executions, including to the extent additional midpoint liquidity emerges.  

Following an assessment of potential opportunities for midpoint executions, the Commission 

                                                 

159  If wholesalers do not have a practice of routinely seeking and accessing midpoint 
liquidity as appropriate, the retail broker-dealer’s policies and procedures could address 
how it takes that into account when assessing whether a wholesaler is the best market for 
customer orders. 

160  In considering wholesalers, such policies and procedures could address how the retail 
broker-dealer assesses the price improvement opportunities that may be available from 
different wholesalers, including an assessment of guarantees for price improvement that 
might be provided by wholesalers and the performance of wholesalers, such as the 
execution quality that the retail broker-dealer’s customers received from the wholesalers 
in the past. 

161  Given the lack of order types concerning midpoint liquidity, midpoint liquidity is not 
prevalent in the listed options market. 



   

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preliminarily believes that a broker-dealer’s policies and procedures could provide for an 

assessment of other price improvement opportunities that might be available.  These price 

improvement opportunities could include potential resting liquidity on exchange limit order 

books priced between the best bid and offer.  Price improvement opportunities may also be 

available through exchange price improvement auctions.162  A broker-dealer’s policies and 

procedures could also address how it will assess price improvement opportunities that may be 

available from different wholesalers, including an assessment of guarantees for price 

improvement that might be provided by wholesalers and the performance of the wholesalers, 

including the execution quality that the retail broker-dealer’s customers received from the 

wholesalers in the past.  In doing so, a broker-dealer’s policies and procedures could address 

how it will assess the exchanges and exchange mechanisms that wholesalers use, why they use 

those exchanges and mechanisms, and the relative competitiveness of those exchanges and 

mechanisms in light of fee differentials and functionality that can affect competitive responses 

and facilitate internalization. 

                                                 

162  Price improvement auctions currently available on options exchanges are two-sided and 
thus may not be directly accessible by many retail broker-dealers because they do not 
commit capital to trade with customers.  Specifically, options price improvement auctions 
guarantee that a customer order will be executed by requiring the broker-dealer initiating 
the auction to commit to trade in a principal capacity with the customer order at a certain 
price, with exposure to potential price improvement from competitive responders.  See, 
e.g., Nasdaq ISE, LLC Options 3, Section 13; Nasdaq Phlx LLC Options 3, Section 13; 
Miami International Securities Exchange LLC Rule 515A; BOX Exchange LLC Rule 
7150; NYSE American LLC Rule 971.1NY; Cboe Exchange, Inc. Rule 5.37.  However, 
to the extent one-sided auctions (or other trading protocols providing a competitive 
process for exposing customer orders for the most favorable price) exist or emerge, a 
broker-dealer’s policies and procedures generally should consider addressing whether 
such price improvement opportunities represent the best market for customer orders when 
making a routing or execution decision.   



   

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The policies and procedures requirements under proposed Rule 1101(a)(2)(i) would also 

apply to wholesalers in the NMS stock and options markets.  For customer orders that a 

wholesaler intends to execute at prices worse than the midpoint, its policies and procedures could 

provide for an assessment of whether those orders would best be executed with midpoint 

liquidity that may be available on an exchange, ATS, or other market.  A wholesaler’s policies 

and procedures would also need to address how it will consider other opportunities for price 

improvement, which could include liquidity available on exchanges or other markets priced 

between the best bid and offer.  Finally, these policies and procedures would need to address 

how the wholesaler will assess order exposure opportunities for customer orders that may result 

in the most favorable price for those orders.   

In the corporate and municipal bond markets and government securities markets, some 

broker-dealers display executable prices to customers through proprietary customer-facing 

systems that enable customers to transact at the displayed prices.  Sometimes these prices 

represent securities that are available on other venues such as ATSs, interdealer brokers or 

otherwise, while other times these prices represent securities held in inventory by the broker-

dealer.  The policies and procedures of a broker-dealer in the corporate and municipal bond 

markets and government securities markets would need to address how it will assess reasonably 

accessible and timely information with respect to the best displayed prices.   

Information with respect to the best displayed prices would be different between the 

corporate and municipal bond markets and government securities markets, and the equities and 

options markets.  In particular, timely consolidated best prices are readily accessible in the 

equities and options markets, but there are no similar consolidated best prices in the corporate 

and municipal bond markets and government securities markets.  A broker-dealer’s policies and 



   

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procedures generally should therefore be tailored to reflect best displayed price information that 

is “reasonably accessible and timely” in the corporate and municipal bond markets and 

government securities markets.163   

The proposed rule requires policies and procedures of a broker-dealer in the corporate 

and municipal bond markets and government securities markets to also address how it will assess 

order exposure opportunities that may result in the most favorable price, which could include 

how it will assess RFQ mechanisms.  These mechanisms may represent the best market for 

customer orders in light of the trading characteristics of these securities, where there may be 

limited quotation or transaction pricing information available.  In the absence of reliable pricing 

information, such as bid, offer, or transaction data for a security, a competitive auction 

mechanism may result in the most favorable prices reasonably available.   

The policies and procedures of a broker-dealer in the corporate and municipal bond 

markets and government securities markets could also assess how its use of RFQ systems may 

                                                 

163  FINRA Rule 5310 also states that “when quotations are available, FINRA will consider 
the accessibility of such quotations when examining whether a member has used 
reasonable diligence.”  See FINRA Rule 5310.03.   FINRA has also discussed the 
importance of a broker-dealer evaluating the quality of displayed prices in fixed income 
securities.  See FINRA Regulatory Notice 15-46, at 8 (“FINRA also notes that prices of a 
fixed income security displayed on an electronic trading platform may not be the 
presumptive best price of that security for best execution purposes, especially for 
securities that are illiquid or trade infrequently.  Thus, although a firm should consider 
using this information as part of its reasonable diligence in determining the best market 
for the security, executing a customer order at the displayed price may not fulfill the 
firm’s obligations, particularly if other sources of information indicate the displayed price 
may not be the best price available.  For example, if . . . a firm regularly uses a reliable 
similar security analysis to establish prices, that firm may need to use particular care 
before executing a trade at a price that is displayed by a trading system if its similar 
security analysis suggests that the displayed price is not reflective of the market.”). 



   

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affect the opportunity to expose a customer order to the most favorable price.  For example, 

when a customer wishes to buy or sell a bond, a broker-dealer may use an electronic RFQ system 

to solicit prices from other participants on the system.164  In this scenario, a broker-dealer’s 

policies and procedures could address how it will use “filters” and assess whether the use of 

filters would affect the exposure for customer orders.  Specifically, a broker-dealer that submits 

an RFQ on behalf of a customer typically has the option of deciding which participants it wants 

to request prices from.  While a broker-dealer may use filters in a way that is consistent with its 

duty of best execution, a broker-dealer could also potentially use filters to prevent certain market 

participants from receiving and participating in the RFQ in a way that prevents a customer order 

from being exposed to opportunities to receive the most favorable price (e.g., the participants 

that might have been willing to provide that price may have been precluded from the RFQ by the 

broker-dealer).165     

                                                 

164  It is the Commission’s understanding that a broker-dealer typically uses RFQ systems to 
solicit prices when customers are selling bonds and that RFQ systems are used less for 
customers that are buying bonds. 

165  FINRA and the MSRB have recognized the potential misuse of filters as well.  See 
FINRA Regulatory Notice 15-46, at 5 (“If a firm uses filters on counterparties or filters 
on specific securities intended to limit accessing bids and offers in those securities, they 
may be used only for a legitimate purpose consistent with obtaining the most favorable 
executions for customers, and should be reviewed on a periodic basis and adjusted as 
needed.”).  See MSRB Interpretive Guidance Section III.1 (“Some dealers may employ 
‘filters,’ which generally refer to automated tools that allow the dealer to limit its trading, 
with, for example, specific parties or parties with specified attributes with which it does 
not want to interact.  If a dealer uses filters on counterparties or filters on specific 
securities intended to limit accessing bids or offers in those securities, they may be used 
only for a legitimate purpose consistent with obtaining the most favorable executions for 
non-SMMP customers, and should be reviewed on a periodic basis and adjusted as 
needed.  The dealer, accordingly, should have policies and procedures in place that 
govern when and how to:  reasonably use filters without negatively impacting the quality 



   

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As another example, the policies and procedures of a broker-dealer in the corporate and 

municipal bond markets and government securities markets could address the use of “last look” 

functionalities.  When a broker-dealer uses an RFQ system, it will often receive responses in the 

form of bids (most common) or offers, and it typically has a certain amount of time to decide 

whether or not it chooses to execute the transaction with the best price or to match or improve 

that price in a principal trade with the customer.  One effect of this “last look” practice may be to 

deter market participants that might otherwise vigorously compete to trade with the customer’s 

order from submitting their most favorable prices, in light of the possibility that the broker-dealer 

is simply using the RFQ system for price discovery and ultimately intends to trade with its 

customer in a principal capacity.166  A broker-dealer’s policies and procedures could address 

how the broker-dealer uses “last look” in connection with its RFQs and whether this practice 

                                                 

of execution of non-SMMP customer transactions; periodically reevaluate their use; and 
determine whether to lift them upon request.”). 

166  See Recommendation Regarding the Practice of Pennying in the Corporate and 
Municipal Bond Markets, SEC Fixed Income Market Structure Advisory Committee 
(June 11, 2019), available at https://www.sec.gov/spotlight/fixed-income-advisory-
committee/fimsac-pennying-recommendations.pdf (describing that the abusive use of the 
last look practice “harms competitiveness” and “deters aggressive pricing or participation 
in the auction process by other dealers who fear that the submitting dealer is going to 
‘step in front of’ their winning prices or is otherwise using the auction process solely for 
price discovery purposes”).  See also FINRA Regulatory Notice 20-29 (Aug. 17, 2020) 
(requesting comment on the impact of the broker-dealer practice of trading with a 
customer as principal by matching or slightly improving on the best auction responses 
without participating in the auction); MSRB Notice 2018-22 (Sept. 7, 2018) (requesting 
comment on the abusive practice of last look known as pennying and stating “[i]n recent 
outreach to a broad range of market participants, it has been suggested that pennying is 
prevalent in the municipal market and that widespread pennying does indeed 
disincentivize participation in the bid-wanted process, discourages bidders from giving 
their best price in a bid-wanted and may impact the efficiency of the market”).  

https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-pennying-recommendations.pdf
https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-pennying-recommendations.pdf


   

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affects the extent to which customer orders are exposed to opportunities to receive the most 

favorable price.167   

As a third example, the policies and procedures of a broker-dealer in the corporate and 

municipal bond markets and government securities markets could address the response times that 

a broker-dealer may require for responses to an RFQ.  Broker-dealers frequently request quotes 

and include a time limit by which all quotes must be received.  This practice permits market 

participants time to consider the request and provide a price for the security, while establishing a 

time limit so that the broker-dealer can execute its customer order in a timely manner.  The 

appropriate amount of time for responses can be influenced by important and variable 

considerations for different customer orders.  Response times that are too short, however, can 

prevent market participants that may otherwise be interested in competing for the customer order 

from being able to submit prices in response to the request.  A broker-dealer’s policies and 

procedures could address how the broker-dealer uses response times in connection with its RFQs 

and how its use might impact the exposure of a customer order to opportunities to receive the 

most favorable price.  

In addition to assessing reasonably accessible and timely information regarding displayed 

prices and price improvement and order exposure opportunities, proposed Rule 1101(a)(2)(ii) 

                                                 

167  Last look practices can also be beneficial to customers.  For example, there could be 
situations where the responses received by the broker-dealer all reflect prices that the 
broker-dealer has reason to believe are not reflective of the most favorable price.  In these 
cases, last look enables the broker-dealer to evaluate those prices, determine not to 
execute the customer order at those prices, and either internalize the order at a price the 
broker-dealer believes is the most favorable price or seek additional liquidity for the 
customer order.   



   

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would require a broker-dealer’s policies and procedures to address how it will assess the 

attributes of its customers’ orders and consider the trading characteristics of the security, the size 

of the orders, the likelihood of execution, the accessibility of the market, and any customer 

instructions in selecting the market most likely to provide the most favorable price for the order.   

Not all customer orders have the same attributes or size and a broker-dealer’s best market 

determination is affected by the attributes of customer orders and the size of customer orders.168  

For example, when a broker-dealer is handling and executing large orders, it may likely be more 

sensitive to the possibility of information leakage and price impact that could harm the execution 

quality of such orders.  Therefore, the broker-dealer may make a best market determination 

designed to minimize the risk of information leakage and price impact concerns.169  In contrast, a 

broker-dealer handling and executing small orders may not be as concerned with information 

                                                 

168  FINRA Rule 5310(a)(1) also recognizes the “size and type” of transactions as factors 
relevant to a broker-dealer’s exercise of reasonable diligence to ascertain the best market, 
although FINRA rules do not require a broker-dealer’s policies and procedures to 
explicitly address how it would assess these factors. 

169  It is the Commission’s understanding that when an institutional customer gives a large 
order to be executed on behalf of one account (e.g., a single mutual fund or pension 
fund), it expects the broker-dealer that handles and executes such large order to do so in a 
manner that ensures best execution is provided to the “parent” order.  In other words, to 
the extent that a parent order is split into smaller “child” orders, the institutional customer 
expects the best execution analysis to evaluate whether the parent order was executed at 
the most favorable price possible under prevailing market conditions according to 
customer instructions.  See, e.g., Concept Release on Equity Market Structure, supra note 
49, 75 FR at 3604-3605 (measuring the transaction costs of institutional investors “can be 
extremely complex” because their “large orders often are broken up into smaller child 
orders and executed in a series of transactions” and “[m]etrics that apply to small order 
executions may miss how well or poorly the large order traded overall.”). 



   

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leakage, resulting in a different best market determination for execution of such orders.170  Other 

relevant customer order attributes could include whether or not the order is a market order or 

limit order.  A broker-dealer’s assessment of the best market to execute customer orders is 

different for customers interested in trading immediately171 and customers willing to execute 

orders over a longer period of time.  Moreover, the likelihood of execution is a relevant 

consideration for a broker-dealer, as the failure to receive an execution for orders from a 

particular market may negatively impact the ultimate execution quality received by customers.     

                                                 

170  While the Commission has long-acknowledged a range of factors relevant for a best 
execution analysis, it has recognized price as a critical concern.  See supra note 22 and 
accompanying text.  The Commission has stated, for example, that it “strongly believes, 
however, that most investors care a great deal about the quality of prices at which their 
orders are executed….”  See Order Execution and Routing Practice Release supra note 
22, 65 FR at 75418.  Additionally, the Commission has stated that broker-dealers 
handling small orders in listed and OTC equities should look for price improvement 
opportunities when executing these orders.  See Order Execution Obligations Adopting 
Release, supra note 10, 61 FR 48323.  

171  FINRA Rule 5310.01 requires a broker-dealer to make every effort to execute marketable 
customer orders fully and promptly.  Similarly, MSRB Rule G-18.03 requires a broker-
dealer to make every effort to execute a customer transaction promptly, taking into 
account prevailing market conditions, and recognizes that in certain market conditions a 
broker-dealer may need more time to use reasonable diligence to ascertain the best 
market for the subject security.  The MSRB has stated that while a broker-dealer must 
make every effort to execute a customer transaction promptly, the determination as to 
whether a firm exercised reasonable diligence necessarily involves a “facts and 
circumstances” analysis, and actions that in one instance may meet a broker-dealer’s 
best-execution obligation may not satisfy that obligation under another set of 
circumstances.  MSRB Interpretative Guidance, V1.1: Execution timing (Nov. 20, 2015).  
Similarly, when assessing the attributes of a customer order under proposed Rule 
1101(a)(2), a broker-dealer would be required to assess how it will execute marketable 
customer orders fully and promptly, taking into account prevailing conditions, given that 
the customer expectation when submitting a market order is to have the order executed 
immediately at the prevailing market price or better.   



   

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A broker-dealer’s best market determination is also affected by the trading characteristics 

of a security and the accessibility of a market.  For example, some securities may not have 

readily available or accessible quotation data or may trade in OTC markets.172  These 

characteristics affect how a broker-dealer would identify the best market for customer orders, 

and a broker-dealer may need to seek out pricing information that may not otherwise be available 

or accessible at the time it receives a customer order, such as by soliciting buy or sell interest 

from market participants through auction mechanisms, interdealer brokers, or otherwise.173  

                                                 

172  See also FINRA Rule 5310(a)(1) (recognizing the relevance of the pressure on available 
communications as relevant for a broker-dealer’s best market determination).  A broker-
dealer’s assessment of the accessibility of a market could vary depending on the cost of 
maintaining connectivity, receiving market data, and transacting on the market.  

173  These considerations are consistent with FINRA and MSRB rules concerning orders 
involving securities with limited quotations or pricing information.  See FINRA Rule 
5310.06 (providing that a broker-dealer must be especially diligent in ensuring that it has 
met its best execution obligations with respect to customer orders involving securities for 
which there is limited pricing information or quotations available; requiring each member 
to have written policies and procedures that address how it will determine the best inter-
dealer market for such a security in the absence of pricing information or multiple 
quotations and document its compliance with those policies and procedures; providing as 
an example that a broker-dealer should analyze pricing information based on other data, 
such as previous trades in the security, to determine whether the resultant price to the 
customer is as favorable as possible under prevailing market conditions; and providing 
that a broker-dealer should generally seek out other sources of pricing information or 
potential liquidity, which may include obtaining quotations from other sources (e.g., 
other firms with which the member previously has traded in the security)); MSRB Rule 
G-18.06 (providing that a broker-dealer must be especially diligent in ensuring that it has 
met its best-execution obligations with respect to customer transactions involving 
securities for which there is limited pricing information or quotations available; requiring 
each broker-dealer to have written policies and procedures in place to address how it will 
make its best execution determinations with respect to such a security in the absence of 
pricing information or multiple quotations and document its compliance with those 
policies and procedures; and providing as an example that a broker-dealer generally 
should seek out other sources of pricing information and potential liquidity for such a 
security, including other broker-dealers with which the broker-dealer previously has 



   

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Furthermore, extreme market conditions that result in heightened volatility or impact the 

liquidity for a security may affect a broker-dealer’s best market determination for customer 

orders as trading in those conditions may merit different order handling than in more normal 

market conditions.174   

Moreover, customer instructions are relevant for a broker-dealer’s best market 

determination.  Customers may provide a broker-dealer with specific instructions regarding how 

the broker-dealer should handle and execute their orders, including institutional customers that 

also owe their clients a duty to seek best execution.  A broker-dealer’s policies and procedures 

generally should address how the broker-dealer will assess the factors in proposed Rule 

1101(a)(2) within the context of and consistent with customer instructions.175  For example, 

some institutional customers may instruct their broker-dealer to handle and execute their orders 

with regard being given to the fees and rebates that may be charged or paid by a particular 

                                                 

traded in the security; and providing that a broker-dealer generally should, in determining 
whether the resultant price to the customer is as favorable as possible under prevailing 
market conditions, analyze other data to which it reasonably has access). 

174  See also FINRA Regulatory Notice 21-12 (discussing the best execution obligations of 
broker-dealers handling and executing customer orders during extreme market 
conditions); FINRA Rule 5310(a)(1) (discussing the relevance of volatility and liquidity 
to a broker-dealer’s best market determination). 

175  A broker-dealer that receives an unsolicited instruction from a customer to route that 
customer’s order to a particular market for execution and otherwise qualifies for the 
exemption from the proposed best execution standard in Rule 1100(c) would not be 
subject to the requirements of proposed Rule 1101, including the requirement to have 
policies and procedures that address how the broker-dealer would consider customer 
instructions in selecting the market most likely to provide the most favorable price. 



   

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market,176 and a broker-dealer’s policies and procedures generally should address how it would 

assess the relevant factors in proposed Rule 1101(a)(2) while taking into account the customer 

instructions in determining the best market for the customers’ orders.177     

Proposed Rule 1101(a)(2)(iii) would require a broker-dealer’s policies and procedures to 

address how it will reasonably balance the likelihood of obtaining better prices with the risk that 

delay could result in worse prices in determining the number and sequencing of markets to be 

assessed for its customers’ orders.178  An undue delay in execution of customer orders may 

detrimentally impact the execution of those orders, if there was a change in the price or liquidity 

available at the time of execution that was not favorable to the customer.  For example, in a 

volatile market, executing customer orders quickly may be necessary for the customer to receive 

the most favorable prices or to receive an execution at all.  Doing so may require the broker-

dealer to execute customer orders using fewer or different execution methods than it might 

otherwise use in a less volatile market.  Similarly, a broker-dealer that is handling large customer 

orders may determine that preventing information leakage is necessary in order for the large 

orders to be executed at the most favorable prices, which may affect the number and sequencing 

of the markets that it assesses.  Accordingly, the broker-dealer’s best execution policies and 

                                                 

176  The Commission understands that these customers often pay the broker-dealer a lower 
commission or service fee for handling their orders, and the fees and rebates that are 
charged or paid by a market are often passed through to the customers.   

177  To the extent rebates cause certain transactions to be “conflicted transactions” as defined 
in proposed Rule 1101(b), a broker-dealer’s policies and procedures must also address 
how it would assess the relevant factors in proposed Rule 1101(b) while taking into 
account the customer instructions. 

178  For example, a broker-dealer could develop an automated process for determining the 
specific markets to which it routes orders and the sequence in which the orders are 
routed. 



   

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procedures generally should be tailored for the different circumstances in order to reflect a 

reasonable balance between the likelihood of obtaining better prices with the risk that delay 

could result in worse prices. 

FINRA Rule 5310(a)(1) and MSRB Rule G-18(a) set forth similar factors that are 

relevant to ascertaining the best market for customer orders, including the character of the 

market for the security (e.g., price, volatility, relative liquidity, and pressure on available 

communications), the size and type of transaction, the number of markets checked, the 

accessibility of the quotation,179 and the terms and conditions of the order that result in the 

transaction as communicated to the broker-dealer.  As described in section IV.B.1 above, FINRA 

and MSRB rules require broker-dealers to have policies and procedures for compliance with 

relevant laws and rules.  In addition, the FINRA and MSRB rules specifically require a broker-

dealer to establish written policies and procedures that address how it will determine the best 

market for a security in the absence of pricing information or multiple quotations and document 

its compliance with those policies and procedures.180  However, FINRA and MSRB rules do not 

require a broker-dealer’s policies and procedures to specifically address the elements that are 

relevant to its best market determinations.  The Commission understands that broker-dealers 

                                                 

179  FINRA Rule 5310.03 provides that, for purposes of debt securities, the term “quotation” 
refers to either dollar (or other currency) pricing or yield pricing.  It also states that 
accessibility is only one of the non-exhaustive reasonable diligence factors, and in the 
absence of accessibility, members are not relieved from taking reasonable steps and 
employing their market expertise in achieving the best execution of customer orders.  
Proposed Rule 1101(a) similarly provides a list of non-exhaustive reasonable diligence 
factors that would be addressed in a broker-dealer’s best execution policies and 
procedures. 

180  See supra note 173. 



   

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generally have policies and procedures to ascertain the best market for a security, although such 

policies and procedures may need to be updated to address the elements specified in proposed 

Rule 1101(a)(2).  

Request for Comment 

The Commission requests comment on all aspects of proposed Rule 1101(a)(2), and in 

particular:   

46. Has the Commission appropriately identified the considerations for determining the best 

market for customer orders?  Why or why not?   

47. Do commenters believe that proposed Rule 1101(a)(2)(i) appropriately requires a broker-

dealer’s policies and procedures to reflect how it will assess reasonably accessible and 

timely information with respect to the best displayed prices, opportunities for price 

improvement, including midpoint executions, and order exposure opportunities that may 

result in the most favorable price?  Why or why not? 

48. Do commenters believe that proposed Rule 1101(a)(2)(ii) appropriately requires a broker-

dealer’s policies and procedures to reflect how it will assess the attributes of customer 

orders and consider the trading characteristics of the security, the size of the order, the 

likelihood of execution, the accessibility of the market, and any customer instructions in 

selecting the market most likely to provide the most favorable price?  Why or why not? 

49. Do commenters believe that proposed Rule 1101(a)(2)(iii) appropriately requires a 

broker-dealer’s policies and procedures to reflect how it will reasonably balance the 

likelihood of obtaining better prices with the risk that delay could result in a worse price, 

in determining the number and sequencing of markets to be assessed?  Why or why not? 



   

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50. Do commenters agree that proposed Rule 1101(a)(2) is consistent with prior Commission 

statements, including those described in section II.B above?  Why or why not?  If not, 

should the Commission revise any of its statements in light of the proposal?  Please 

explain. 

51. While the considerations for determining the best market included in proposed Rule 

1101(a)(2) are non-exhaustive, should the Commission explicitly include other 

considerations in the rule?  If so, please explain.  

52. Is the list of considerations for determining the best market included in proposed Rule 

1101(a)(2) consistent with the considerations included in FINRA Rule 5310 and MSRB 

Rule G-18?  If not, please explain any differences and whether the considerations should 

be consistent. 

53. Do commenters agree with the Commission’s understanding that midpoint liquidity is not 

as commonly available in the options market as it is in the NMS stock market?  Why or 

why not? 

54. Should the Commission specify transaction fees in the rule text as considerations for 

determining the best market?  If so, please explain how fees may be relevant to the best 

execution standard and a broker-dealer’s best market determination.  Do broker-dealers 

route and execute customer orders based on a favorable transaction fee and does that 

impact the execution quality of customer orders?  Please explain. 

55. What factors should a broker-dealer consider in determining the number and sequencing 

of markets to be assessed, in addition to the likelihood of obtaining better prices and the 

risk that a delay could result in a worse price?  Please explain. 



   

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56. Do commenters agree with the Commission’s understanding that institutional customers 

expect broker-dealers that handle and execute their large orders for a single account to do 

so in a manner that ensures best execution is provided to the “parent” order?  

57. Do commenters agree with the Commission’s understanding that broker-dealers 

currently generally have policies and procedures to ascertain the best 

market for a security?  Please describe the types of best market policies and procedures 

that broker-dealers currently have.  In particular, do broker-dealers’ policies and 

procedures address how they assess reasonably accessible and timely information with 

respect to the best displayed prices, opportunities for price improvement, including 

midpoint executions, and order exposure opportunities that may result in the most 

favorable price?  Do broker-dealers’ policies and procedures address how they assess the 

attributes of customer orders and consider the trading characteristics of the security, the 

size of the order, the likelihood of execution, the accessibility of the market, and any 

customer instructions in selecting the market most likely to provide the most favorable 

price?  Do broker-dealers’ policies and procedures address how they reasonably balance 

the likelihood of obtaining better prices with the risk that delay could result in a worse 

price, in determining the number and sequencing of markets to be assessed? 

58. Do commenters believe that the Commission should provide staggered compliance dates 

for proposed Rule 1101(a)(2) for broker-dealers of different sizes, if the Commission 

adopts proposed Regulation Best Execution?  For example, should the Commission 

provide longer compliance dates for smaller broker-dealers?  If so, should the 

Commission define a smaller broker-dealer as a broker-dealer that qualifies as a “small 

entity” under the Regulatory Flexibility Act pursuant to 17 CFR 240.0-10(c) for this 



   

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purpose?181  Or should the Commission define a smaller broker-dealer in a different way?  

Please explain.  

C. Proposed Rule 1101(b) – Policies and Procedures and Documentation for 
Conflicted Transactions 

Proposed Rule 1101(b) would require a broker-dealer’s best execution policies and 

procedures to address additional considerations with respect to “conflicted transactions.”  It 

would also require a broker-dealer to document its compliance with the proposed best execution 

standard for conflicted transactions and document any arrangement concerning payment for 

order flow. 

Proposed Rule 1101(b) would define a “conflicted transaction” for purposes of proposed 

Regulation Best Execution as any “transaction for or with a retail customer” where a broker-

dealer:  (i) executes an order as principal, including riskless principal;182 (ii) routes an order to, 

                                                 

181  See supra note 151 and accompanying text (describing the broker-dealers that qualify as 
small entities under the Regulatory Flexibility Act). 

182  For purposes of proposed Rule 1101(b), a broker-dealer would be executing an order as 
“riskless principal” if, after having received an order to buy from a customer, the broker-
dealer purchases the security from another person to offset a contemporaneous sale to the 
customer or, after having received an order to sell, the broker-dealer sells the security to 
another person to offset a contemporaneous purchase from the customer.  See also, 
Exchange Act Rule 3a5-1; U.S. Securities and Exchange Commission, Report on the 
Municipal Securities Market (July 31, 2012) available at 
https://www.sec.gov/news/studies/2012/munireport073112.pdf.  The Commission 
preliminarily believes that it is appropriate to include riskless principal transactions as a 
type of conflicted transactions because of the variability of markups and markdowns 
associated with riskless principal transactions, which impacts the ultimate price paid by 
the customer (i.e., the ultimate execution received by the customer) and often is not 
known to the customer prior to transacting.  See, e.g., John M. Griffin, et al., supra note 
66. 

https://www.sec.gov/news/studies/2012/munireport073112.pdf101 

 

or receives an order from, an affiliate for execution; or (iii) provides or receives payment for 

order flow as defined in Rule 10b-10(d)(8) under the Exchange Act.183  For purposes of 

paragraph (b), “affiliate” would be defined by proposed Rule 1101(b)(4)(iii) as, with respect to a 

specified person, any person that, directly or indirectly, controls, is under common control with, 

or is controlled by, the specified person.  “Control” would be defined for purposes of the 

proposed definition of “affiliate” by proposed Rule 1101(b)(4)(iii) as the power, directly or 

indirectly, to direct the management or policies of the broker-dealer whether through ownership 

of securities, by contract, or otherwise.  A person is presumed to control a broker-dealer if that 

person is a director, general partner, or officer exercising executive responsibility (or having 

similar status or performing similar functions); directly or indirectly has the right to vote 25 

percent or more of a class of voting securities or has the power to sell or direct the sale of 25 

percent or more of a class of voting securities of the broker-dealer; or in the case of a 

partnership, has contributed, or has the right to receive upon dissolution, 25 percent or more of 

                                                 

183  See supra note 43 (setting forth the definition of “payment for order flow” under Rule 
10b-10(d)(8)).  Given the widespread use of the Rule 10b-10(d)(8) definition of 
“payment for order flow” and the collective understanding of the term by market 
participants, the Commission proposes to use the existing Rule 10b-10(d)(8) definition in 
proposed Regulation Best Execution.  As reflected in this definition, payment for order 
flow would include any payments from a wholesaler to a retail broker-dealer in return for 
order flow.  It would also include any exchange rebates paid to a broker-dealer in return 
for sending orders to the exchange.  When all payment for order flow for a customer 
order from a particular market is passed through to the customer and the broker-dealer 
retains no part of the payment for order flow associated with that customer order, the 
broker-dealer would not be engaging in a conflicted transaction under proposed Rule 
1101(b) with respect to that customer order. 



   

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the capital of the broker-dealer.184   In each of these types of conflicted transactions, the broker-

dealer has a financial interest that could disincentivize the broker-dealer from achieving best 

execution for its customer’s orders.185  Accordingly, the Commission proposes to require more 

robust policies and procedures, as well as documentation, for conflicted transactions with retail 

customers to better address these disincentives.     

Proposed Rule 1101(b) would apply to conflicted transactions for or with a retail 

customer, and proposed Rule 1101(b)(4)(i) would define a “transaction for or with a retail 

                                                 

184  These definitions are substantially the same as the definitions of “affiliate” and “control” 
prescribed for purposes of the disclosures required of an ATS that trades NMS stocks 
(“NMS Stock ATS”) about its operations on Form ATS-N with the following 
modifications: the Form ATS-N definition of “affiliate” uses a separately-defined term 
“Person” instead of the statutory definition of “person,” and Form ATS-N defines 
“control” as applicable to the “broker-dealer of the alternative trading system” instead of 
as applicable to a “broker or dealer.” The Commission believes that it would be 
appropriate to use substantially similar definitions of “affiliate” and “control” in the 
context of proposed Rule 1101(b) because, for purposes of Form ATS-N, the 
Commission defined such terms for use with respect to disclosures designed to enable 
market participants to better evaluate how relationships between certain persons could 
affect the handling of orders on a particular NMS Stock ATS.  See Securities Exchange 
Act Release No. 83663 (July 18, 2018), 83 FR 38768 (Aug. 7, 2018).  The substantially 
similar proposed definitions, as used in the context of proposed Rule 1101(b), are 
similarly designed to recognize that relationships among certain persons may impact the 
handling of orders, and are designed to help ensure that broker-dealers that have conflicts 
of interest in their order handing are subject to additional obligations under proposed 
Rule 1101(b). 

185  See generally section III.A.2 (discussing in more detail these conflicts of interest); see 
also 2022 Report on FINRA’s Examination and Risk Monitoring Program 45 (Feb. 
2022), available at https://www.finra.org/sites/default/files/2022-02/2022-report-finras-
examination-risk-monitoring-program.pdf (describing FINRA exam findings, including 
firms not considering and addressing potential conflicts of interest relating to routing 
orders to affiliated broker-dealers, affiliated ATSs, or market centers that provide routing 
inducements, such as payment for order flow from wholesale market makers and 
exchange liquidity rebates). 

https://www.finra.org/sites/default/files/2022-02/2022-report-finras-examination-risk-monitoring-program.pdf
https://www.finra.org/sites/default/files/2022-02/2022-report-finras-examination-risk-monitoring-program.pdf


   

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customer” as any transaction for or with the account of a natural person or held in legal form on 

behalf of a natural person or group of related family members.  The proposed definition’s 

limitation to accounts of natural persons is consistent with existing rules that are designed to 

identify the orders of individual investors.  For example, the definition of “retail customer” in the 

Commission’s Regulation Best Interest rule is limited to a “natural person.”186  Moreover, 

several national securities exchanges operate programs for trading “retail” orders that are limited 

to accounts of natural persons or certain accounts on behalf of natural persons.187  The proposed 

definition of retail customer is also consistent with FINRA’s rule for certain trade reporting.188  

                                                 

186  17 CFR 240.15l-1(b)(1) (defining “retail customer” to mean, among other things, a 
natural person who receives a recommendation of any securities transaction from a 
broker or dealer and uses the recommendation primarily for personal, family, or 
household purposes).  Proposed Rule 1101(b) does not incorporate all of the definition of 
“retail customer” in Regulation Best Interest because that definition is limited to 
scenarios where a person receives and uses a recommendation.  In contrast, proposed 
Rule 1101(b) and the proposed standard of best execution are not limited to scenarios 
where a person receives and uses a recommendation.   

187  See, e.g., Investors Exchange LLC Rule 11.190(b)(15) (providing, among other things, 
that “[a] Retail order must reflect trading interest of a natural person” and that “[a]n order 
from a retail customer can include orders submitted on behalf of accounts that are held in 
a corporate legal form—such as an Individual Retirement Account, Corporation, or a 
Limited Liability Company—that have been established for the benefit of an individual 
or group of related family members, provided that the order is submitted by an 
individual”); The Nasdaq Stock Market LLC, Equity 7, Section 118 (defining a 
“Designated Retail Order” as originating from a “natural person” and explaining that 
“[a]n order from a ‘natural person’ can include orders on behalf of accounts that are held 
in a corporate legal form—such as an Individual Retirement Account, Corporation, or a 
Limited Liability Company—that has been established for the benefit of an individual or 
group of related family members, provided that the order is submitted by an individual”). 

188  FINRA Rule 7620A.01 (defining a “retail order” as originating from a “natural person” 
and explaining that “[a]n order from a ‘natural person’ can include orders on behalf of 
accounts that are held in a corporate legal form, such as an Individual Retirement 
Account, Corporation, or a Limited Liability Corporation that has been established for the 
benefit of an individual or group of related family members, provided that the order is 
submitted by an individual”). 



   

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Proposing a definition of retail customer that is similar to existing Commission and SRO rules 

would facilitate compliance with proposed Rule 1101(b) and help mitigate the costs of 

compliance because broker-dealers would already be familiar with identifying orders for the 

accounts of natural persons, or for related accounts, in these other contexts.  

In addition to the accounts of natural persons, the proposed definition of “transaction for 

or with a retail customer” would cover accounts held in legal form on behalf of a natural person 

or a group of related family members.  A “group of related family members” would be defined 

broadly in proposed Rule 1101(b)(4)(i) to include a group of natural persons with any of the 

following relationships:  child, stepchild, grandchild, great grandchild, parent, stepparent, 

grandparent, great grandparent, spouse, domestic partner, sibling, stepbrother, stepsister, niece, 

nephew, aunt, uncle, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, 

or sister-in-law, including adoptive and foster relationships; and any other natural person (other 

than a tenant or employee) sharing a household with any of the foregoing natural persons.  This 

proposed definition is broad so as not to restrict the types of arrangements that may be set up to 

benefit family groups, including individual retirement accounts, corporations, and limited 

liability companies for the benefit of related family members.   

Proposed Rule 1101(b) would create new requirements for broker-dealers’ conflicted 

transactions that are not currently required by FINRA or the MSRB.  Because a broker-dealer 

engaging in conflicted transactions for or with retail customers has an incentive to handle those 

orders in a manner that prioritizes its own interests over its customers’ interests, the Commission 

preliminarily believes that, correspondingly, additional policies and procedures elements and 

documentation requirements should apply to such transactions in order to help mitigate the 

potential for these incentives to negatively affect the broker-dealer’s best execution 



   

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determinations.  The Commission preliminarily believes that proposed Rule 1101(b) would help 

broker-dealers to comply with the proposed best execution standard with respect to conflicted 

transactions, because it would require heightened attention by broker-dealers for conflicted 

transactions and would require broker-dealers to document the basis for their determinations that, 

despite the conflicts of interest, they have complied with the best execution standard for their 

conflicted transactions. 

The Commission also preliminarily believes that retail customers generally would benefit 

more than non-retail customers from the more robust conflicted transactions requirements 

because retail customers are likely to have fewer resources for evaluating the best execution 

practices of their broker-dealers than non-retail customers.  For example, institutional customers 

likely have additional knowledge, experience, and analytical resources as compared to retail 

customers and, thus, are more readily able to evaluate the impact of their broker-dealers’ 

conflicted transactions.  In contrast, retail customers are less likely to have the same level of 

knowledge, experience, and resources to make such evaluations.     

Request for Comment 

The Commission requests comment on the types of conflicted transactions under 

proposed Rule 1101(b), and in particular: 

59. Is it appropriate for proposed Rule 1101(b) to incorporate the definition of “payment for 

order flow” from Exchange Act Rule 10b-10(d)(8)?  Why or why not?  If not, how 

should “payment for order flow” be defined for purposes of proposed Regulation Best 

Execution?  Please describe any alternative definition and explain why such definition 

would be appropriate.  



   

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60. Does proposed Rule 1101(b) appropriately identify the conflicts of interest of broker-

dealers that are most relevant to the handling of retail customer orders?  If not, why not? 

Are there other conflicted transactions that should be included in proposed Rule 1101(b) 

or are there transactions that are included that should be omitted?  If so, please explain. 

61. Should the principal trading conflict identified in proposed Rule 1101(b) include riskless 

principal trades with customers, as proposed?  Why or why not?  If riskless principal 

trades should be included, should they be defined as proposed – after having received an 

order to buy from a customer, the broker-dealer purchases the security from another 

person to offset a contemporaneous sale to the customer or, after having received an 

order to sell, the broker-dealer sells the security to another person to offset a 

contemporaneous purchase from the customer – similar to the definition of riskless 

principal in Exchange Act Rule 3a5-1?  Why or why not? 

62. Should the Commission provide an exemption from the definition of conflicted 

transactions for certain types of riskless principal trades?  For example, should the 

Commission exempt from the definition of “riskless principal” in proposed Rule 1101 

(b)(4)(ii) trades where the broker-dealer discloses to its customer the markup or 

markdown that it charges on these trades on a pre-trade basis?  Please explain.  If this 

type of exemption should be provided, what would be an appropriate method of pre-trade 

markup or markdown disclosure by the broker-dealer?  For example, would it be 

appropriate for the broker-dealer to disclose a markup or markdown schedule in a readily 

accessible place such as its website?  Please explain.   

63. Alternatively, should the Commission exempt from the definition of “riskless principal” 

in proposed Rule 1101(b)(4)(ii) trades where the contemporaneous purchases and sales 



   

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are executed at the same price resulting in a transaction with the customer that does not 

include any markup or markdown?  Please explain.  In these types of transactions, how 

would the broker-dealer be compensated by the customer?  Would it charge a 

commission that is separately disclosed to the customer on the confirmation?  Would the 

customer know the commission that it would pay the broker-dealer prior to engaging in 

the transaction?   

64. Is the proposed definition of a “transaction for or with a retail customer” in Rule 

1101(b)(4)(i), which would include accounts held in legal form on behalf of a natural 

person or a group of related family members, appropriate?  Why or why not?  Should the 

proposed definition be broadened or narrowed?  If so, please explain how the definition 

should be broadened or narrowed and why.  

65. Is the proposed definition of “group of related family members” in proposed Rule 

1101(b)(4)(i) appropriate?  Why or why not?  Should it be more or less inclusive, and if 

so, in what regard?  Please explain.  For example, instead of capturing a group of natural 

persons with “any” of the relationships in the proposed definition (child, stepchild, 

grandchild, great grandchild, parent, stepparent, grandparent, great grandparent, spouse, 

domestic partner, sibling, stepbrother, stepsister, niece, nephew, aunt, uncle, mother-in-

law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister in law, including 

adoptive and foster relationships; and any other natural person (other than a tenant or 

employee) sharing a household with any of the foregoing natural persons), should the 

proposed definition be limited to a group of natural persons consisting “only” of those 

relationships?   



   

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66. Should the definition of a “transaction for or with a retail customer” exclude a transaction 

with a “family office,” which is defined in Rule 202(a)(11)(G)-1(b) under the Investment 

Advisers Act of 1940 as a company (including its directors, partners, members, 

managers, trustees, and employees acting within the scope of their position or 

employment) that: (1) has no clients other than family clients (as defined in the rule) 

(provided that if a person that is not a family client becomes a client of the family office 

as a result of the death of a family member or key employee (as defined in the rule) or 

other involuntary transfer from a family member or key employee, that person shall be 

deemed to be a family client for purposes of the rule for one year following the 

completion of the transfer of legal title to the assets resulting from the involuntary event); 

(2) is wholly owned by family clients and is exclusively controlled (directly or indirectly) 

by one or more family members and/or family entities; and (3) does not hold itself out to 

the public as an investment adviser?  Why or why not? 

67. Alternatively, should the definition of a “transaction for or with a retail customer” only 

exclude a subset of “family offices”?  For example, should it exclude a family office (as 

defined above) that (1) has one or more experienced securities or financial services 

professionals, (2) manages a threshold level of total assets (e.g., $50 million or more) that 

are indicative of an institutional account, (3) has the capacity to evaluate independently 

the execution quality received from the broker-dealer, and (4) has professionals who are 

independent representatives of their family clients?  Please explain.   

68. Is the proposed definition of an “affiliate” in proposed Rule 1101(b)(4)(iii) appropriate?  

Why or why not?  Should the proposed definition be broadened or narrowed?  If so, 

please explain how the definition should be broadened or narrowed and why.   



   

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69. Is the proposed definition of “control” for purposes of the proposed definition of 

“affiliate” in proposed Rule 1101(b)(4)(iii) appropriate?  Why or why not?  Should the 

proposed definition be broadened or narrowed?  If so, please explain how the definition 

should be broadened or narrowed and why.      

70. Should some or all institutional customers’ orders also have the protections afforded by 

proposed Rule 1101(b)?  Please explain.  If only certain categories of institutional 

customers’ orders should also have the protections afforded by proposed Rule 1101(b), 

how should the Commission identify and define the institutional customers’ orders that 

should benefit?   

71. Should the size of institutional customers be considered when determining whether or not 

they should be afforded the protections of proposed Rule 1101(b)?  If so, what would be 

the appropriate metric to identify such institutional customers?  For example, should the 

Commission consider the amount of assets under management when determining which 

institutional customers should be afforded the protections of proposed Rule 1101(b)?   

72. If the Commission were to apply the protections of proposed Rule 1101(b) to 

conflicted transactions for or with institutional customers, should it define “institutional 

customer” as any person that does not qualify as a QIB?189  Should it define 

“institutional customer” to include any person that qualifies as a QIB?  Or 

should it define “institutional customer” to include a broader set of 

                                                 

189  See supra note 124 (providing the definition of QIB under Rule 144A under the Securities 
Act of 1933). 



   

110 

 

institutional customers than the QIB definition, such as those entities 

that are included in the FINRA definition of “institutional account” 

under FINRA Rule 4512(c)?190     

73. Do commenters believe there is another definition of “institutional customer” that would 

be more appropriate if the Commission were to apply the protections of proposed Rule 

1101(b) to conflicted transactions for or with institutional customers?  Please explain.  

74. If institutional customers’ orders should be afforded the additional protections, are some 

or all of the conflicts of interest identified in proposed Rule 1101(b) also relevant for 

institutional customers?  Are there other conflicts of interest relevant for institutional 

customers that should be included in proposed Rule 1101(b)?  Please explain. 

75. If institutional customers’ orders should be afforded the additional protections, should all 

the requirements under proposed Rule 1101(b) be extended to institutional customers’ 

orders, or should only certain of the requirements be extended to institutional customers’ 

orders?  Should the Commission include other requirements for the protection of 

institutional customers’ orders?  Please explain. 

1. Proposed Rules 1101(b)(1) and (2) – Policies and Procedures for 
Conflicted Transactions 

Proposed Rules 1101(b)(1) and (2) would require a broker-dealer’s best execution 

policies and procedures to address the following with respect to conflicted transactions:  (1) how 

the broker-dealer will obtain and assess information beyond that required by proposed Rule 

                                                 

190  See supra note 125 and accompanying text (describing the definition of institutional 
account in FINRA Rule 4512(c)). 



   

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1101(a)(1)(i), including additional information about price, volume, and execution quality, in 

identifying a broader range of markets beyond those identified as material potential liquidity 

sources; and (2) how the broker-dealer will evaluate a broader range of markets, beyond those 

identified as material potential liquidity sources, that might provide the most favorable price for 

customer orders, including a broader range of order exposure opportunities and markets that may 

be smaller or less accessible.   

Proposed Rule 1101(b) is not designed to eliminate order handling conflicts of interest, 

and does not ban conflicted transactions.  However, because a broker-dealer engaging in 

conflicted transactions for or with retail customers has an incentive to handle those orders in a 

manner that prioritizes its own interests over its customers’ interests, the Commission 

preliminarily believes that, correspondingly, such transactions should be subject to more robust 

policies and procedures in order to help mitigate the potential for these incentives to negatively 

affect the broker-dealer’s best execution determinations.  Specifically, to help ensure that a 

broker-dealer exercises the reasonable diligence required by proposed Rule 1100 despite its 

incentives not to, a broker-dealer would be required to have policies and procedures that are 

specific to conflicted transactions to address how it will assess information beyond what is 

required for non-conflicted transactions and how it will identify and evaluate of a broader set of 

liquidity sources than for non-conflicted transactions.  These policies and procedures are 

designed to help ensure that a broker-dealer exercises additional diligence in considering relevant 

information and identifying the best market for customer orders, despite their conflicts of 

interest.    

Specifically, proposed Rule 1101(b)(1) would require a broker-dealer’s policies and 

procedures for conflicted transactions to address how it will obtain and assess information 



   

112 

 

beyond what it would obtain and assess for non-conflicted transactions, including additional 

information about price, volume, and execution quality, in identifying a broader range of markets 

beyond those identified as material potential liquidity sources.  While a broker-dealer would use 

reasonably accessible information in identifying material potential liquidity sources for non-

conflicted transactions, a broker-dealer would additionally be required to consider how it would 

use information beyond what it used for non-conflicted transactions in identifying a broader 

range of markets beyond material potential liquidity sources for conflicted transactions.191   

Proposed Rule 1101(b)(2) would require a broker-dealer’s policies and procedures for 

conflicted transactions to address how it will evaluate a broader range of markets, beyond those 

identified as material potential liquidity sources, that might provide the most favorable price for 

retail customer orders, including a broader range of order exposure opportunities and markets 

that may be smaller or less accessible than those identified as material potential liquidity sources.  

Because a broker-dealer may have a financial incentive to engage in conflicted transactions, it 

may have an incentive to more quickly conclude that the conflicted transactions represent the 

                                                 

191  Proposed Rule 1101(b) would require a broker-dealer to consider a broader range of 
markets for conflicted transactions than non-conflicted transactions.  In doing so, the 
broker-dealer may need to obtain and assess information beyond what it obtains and 
assesses for non-conflicted transactions.  It is possible, however, that a broker-dealer 
obtains and assesses information beyond what is needed to identify material potential 
liquidity sources for non-conflicted transactions, including information concerning 
markets that it did not identify as material potential liquidity sources.  Under these 
circumstances, the information the broker-dealer obtained and assessed for non-conflicted 
transactions may include information beyond what is required by proposed Rule 
1101(a)(1), and this information may be sufficient for it to identify a broader set of 
markets beyond those identified as material potential liquidity sources.  See also supra 
note 132 and accompanying text.   



   

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best market and thus execute the trade in a conflicted transaction.  Accordingly, the proposed 

rule would require a broker-dealer to have policies and procedures that reflect additional efforts 

to identify a broader range of markets, including a broader range of order exposure opportunities, 

that may provide retail customers with the most favorable price and the establishment of order 

handling, routing, and execution arrangements with this broader range of potential liquidity 

sources.192  

Request for Comment  

The Commission requests comment on all aspects of proposed Rules 1101(b)(1) and (2), 

and in particular: 

76. Do proposed Rules 1101(b)(1) and (2) represent an appropriate approach to addressing 

conflicted transactions?  Why or why not? 

                                                 

192  For example, a retail broker-dealer, in accordance with its policies and procedures related 
to the identification of material potential liquidity sources as required by proposed Rule 
1101(a), may have evaluated a certain number of markets and identified a subset of those 
markets as material potential liquidity sources for non-conflicted transactions.  For 
conflicted transactions, the broker-dealer, in accordance with its policies and procedures 
for conflicted transactions, would additionally evaluate some of the markets that it did not 
identify as material potential liquidity sources for non-conflicted transactions.  Conflicted 
transactions, such as routing orders to an affiliated ATS for execution, may involve 
financial incentives for the broker-dealer and could result in the broker-dealer prioritizing 
its own interests over its customers’ interests.  The additional requirements of proposed 
Rule 1101(b) are designed to help ensure that the broker-dealer exercises reasonable 
diligence for conflicted transactions in light of these incentives.  As stated above, 
proposed Rule 1101(a)(1)(ii) would not prescribe the minimum number of markets that a 
broker-dealer would need to identify as material potential liquidity sources.  See supra 
section IV.B.1.  Rather, as stated above, the Commission believes that the identification 
of these markets could be influenced by the nature of the broker-dealer’s business 
operation and customer order flow, such as whether it handles institutional or retail 
orders.  See id.    



   

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77. Should a broker-dealer be required to establish, maintain, and enforce best execution 

policies and procedures for conflicted transactions that address the additional 

requirements under proposed Rules 1101(b)(1) and (2)?  Why or why not? 

78. Should a broker-dealer’s policies and procedures for conflicted transactions be required 

to address how it will obtain and assess information beyond what it would obtain and 

assess for non-conflicted transactions, including additional information about price, 

volume, and execution quality, in identifying a broader range of markets beyond the 

material potential liquidity sources?  Why or why not? 

79. Should a broker-dealer’s policies and procedures for conflicted transactions be required 

to address how it will evaluate a broader range of markets beyond material potential 

liquidity sources, including a broader range of order exposure opportunities and markets 

that may be smaller or less accessible?  Why or why not? 

80. Would retail customers benefit from potentially having their orders exposed by a broker-

dealer to a broader array of liquidity sources where the broker-dealer would have a 

conflict of interest?  Why or why not?   

81. Should proposed Rules 1101(b)(1) and (2) include different or additional requirements 

for conflicted transactions in different asset classes?  Please explain. 

82. What challenges, if any, would broker-dealers encounter in implementing proposed Rules 

1101(b)(1) and (2)?  Please explain. 

83. Do commenters believe that the Commission should provide staggered compliance dates 

for proposed Rules 1101(b)(1) and (2) for broker-dealers of different sizes, if the 

Commission adopts proposed Regulation Best Execution?  For example, should the 

Commission provide longer compliance dates for smaller broker-dealers?  If so, should 



   

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the Commission define a smaller broker-dealer as a broker-dealer that qualifies as a 

“small entity” under the Regulatory Flexibility Act pursuant to 17 CFR 240.0-10(c) for 

this purpose?193  Or should the Commission define a smaller broker-dealer in a different 

way?  Please explain. 

2. Proposed Rule 1101(b)(3) – Documentation for Conflicted Transactions  

Proposed Rule 1101(b)(3) would require a broker-dealer to document its compliance with 

the best execution standard for conflicted transactions, including all efforts taken to enforce its 

policies and procedures for conflicted transactions and the basis and information relied on for its 

determination that such conflicted transactions would comply with the best execution standard.  

Proposed Rule 1101(b)(3) would require that such documentation be done in accordance with 

written procedures.   

The Commission understands that broker-dealers currently differ in documentation 

practices relating to their compliance with their duty of best execution, and some broker-dealers 

currently retain information that allows them to recreate the prices that were available at the time 

of an execution.  While proposed Rule 1101(b)(3) would not require a broker-dealer to document 

its compliance with the best execution standard with respect to its conflicted transactions in any 

specific way, the broker-dealer would need to document all efforts taken to enforce its policies 

                                                 

193  See supra note 151 and accompanying text (describing the broker-dealers that qualify as 
small entities under the Regulatory Flexibility Act). 



   

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and procedures for its conflicted transactions194 and to demonstrate the basis and information 

relied on for its determination that its conflicted transactions would comply with the best 

execution standard.195  Proposed Rule 1101(b)(3) also would not prescribe the manner in which a 

broker-dealer would need to document its compliance with the proposed best execution standard, 

and the Commission preliminarily believes that the manner of documentation may vary 

depending on various considerations specific to the broker-dealer, such as the nature of its 

customers and the characteristics of the securities traded.  The Commission preliminarily 

believes that, in connection with documenting its compliance with the proposed best execution 

standard and its best execution determinations for conflicted transactions, the broker-dealer could 

document the prices received from those markets that it checked pursuant to its policies and 

procedures.  The Commission preliminarily believes that such information could serve as a basis 

for demonstrating a broker-dealer’s best execution efforts and determinations, and broker-dealers 

already maintain much of this information pursuant to existing regulatory or operational 

requirements.196   

                                                 

194  A failure to have the policies and procedures required by proposed Rule 1101(b) that are 
applicable to all conflicted transactions, or a failure to enforce such policies and 
procedures, would be a violation of proposed Regulation Best Execution.   

195  This proposed documentation requirement would differ from proposed Rule 1101(a), 
which would more generally require the broker-dealer’s policies and procedures to be 
reasonably designed to comply with the best execution standard and to address a number 
of specified elements. 

196  The Commission preliminarily believes that this documentation would be similar to many 
of the records that broker-dealers currently maintain pursuant to regulatory requirements, 
such as trade-through prohibitions and the National Market System Plan Governing the 
Consolidated Audit Trail (“CAT Plan”) reporting.  For example, the CAT Plan requires a 
broker-dealer to report the entire lifecycle of an order.  See CAT Plan, Appendix C, 



   

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The proposed documentation requirement, including the obligation to document pursuant to 

written procedures, would assist broker-dealers in complying with proposed Regulation Best 

Execution and regulators in overseeing broker-dealers’ compliance.  As stated above in this 

section, while the Commission understands that some broker-dealers retain information that 

allows them to recreate the prices that were available at the time of an execution (for example, in 

response to a regulatory inquiry), the Commission understands that broker-dealers have varying 

degrees of documentation with respect to their best execution practices.  By specifically 

requiring all broker-dealers that engage in conflicted transactions to document their compliance 

with the proposed best execution standard, including all efforts to enforce their policies and 

procedures, and the basis and information relied on for their determinations that the conflicted 

transactions would comply with the best execution standard, such broker-dealers would be 

required to collect important information concerning the application of their best execution 

process.  This information may help broker-dealers better evaluate the effectiveness of their best 

execution policies and procedures, including their order handling practices.  Moreover, by 

requiring that the documentation be conducted pursuant to written procedures, the proposed rule 

                                                 

Section A. 2 (3); See also Rule 613(c)(1) of Regulation NMS, 17 CFR 242.613(c)(1) 
(stating that the CAT plan must provide for an accurate, time-sequenced record of orders 
beginning with the receipt or origination of an order by a member of a national securities 
exchange or national securities association, and document the life of the order through the 
process of routing, modification, cancellation, and execution (in whole or in part) of the 
order).  This order lifecycle information that today is reported to the CAT Plan could 
include information that is relevant for the documentation provision of proposed Rule 
1101(b).  For example, in documenting the markets checked, a broker-dealer that routes 
customer orders to markets in an attempt to access midpoint liquidity could retain records 
concerning the markets it pinged for potential midpoint executions.   



   

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would help ensure that all broker-dealers that engage in conflicted transactions (and any 

applicable associated persons of such broker-dealers) document their compliance with the best 

execution standard in a consistently robust manner.197  Similarly, the proposed documentation 

requirement would help ensure that regulators have access to a consistent and minimum level of 

information in overseeing broker-dealers’ efforts to satisfy the best execution standard in 

proposed Rule 1100 with respect to conflicted transactions with retail customers.  

Proposed Rule 1101(b)(3) would also require a broker-dealer to document any 

arrangement, whether written or oral, concerning payment for order flow, including but not 

limited to the parties to the arrangement, all qualitative and quantitative terms concerning the 

arrangement,198 and the date and terms of any changes199 to the arrangement.200  This proposed 

                                                 

197  For example, the written procedures concerning documentation could describe the 
obligations of various personnel within the broker-dealer with respect to this 
documentation requirement.   

198  Qualitative and quantitative terms would include any terms that impact the variability or 
establish a condition concerning payment for order flow.  These could include, for 
example, any terms based on the characteristics of an order (e.g., size, marketability, held 
or not held, special order handling instructions, whether the order is a complex options 
order) and the type of security involved (e.g., whether the security is in the S&P 500 
Index, ETF) or the price of a security.   

199  The proposed rule would require a broker-dealer to document the date and terms of any 
changes to an existing payment for order flow arrangement.   

200  This proposed requirement would apply whether or not there is any contractual obligation 
associated with the payment for order flow arrangement, and is intended to capture 
payment for order flow arrangements between broker-dealers and between broker-dealers 
and other markets, such as exchanges.  Such documentation would be required in any 
scenario where payment for order flow is actually made or received by a broker-dealer.  
This proposed documentation requirement would also apply to rebates paid by an 
exchange to a broker-dealer in return for routing orders to the exchange.  For example, a 
broker-dealer must document the specific rebate tiers that it qualifies for with respect to 
each exchange from which it receives payment for order flow.  Furthermore, should a 



   

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documentation requirement would complement the other requirements of proposed Rule 

1101(b), and could facilitate a broker-dealer’s understanding of the effect of such arrangements 

on its order handling and execution practices, and more broadly, on its compliance with the best 

execution standard and proposed Rules 1100-1102.  This proposed requirement would also help 

ensure that regulators have fuller and more efficient access to details regarding broker-dealers’ 

payment for order flow arrangements,201 which in turn should facilitate regulators’ oversight of 

broker-dealers’ compliance with the proposed rules by providing more context with respect to 

broker-dealers’ operations, business model, and order handling and execution practices.   

Request for Comment  

The Commission requests comment on all aspects of the proposed documentation 

requirement under proposed Rule 1101(b)(3), and in particular: 

84. Are the proposed documentation requirements appropriate?  Why or why not? 

85. Should such documentation requirements apply only to broker-dealers’ conflicted 

transactions?  Alternatively, should they apply to all transactions, including non-

conflicted transactions?  Or should they apply to all conflicted transactions and to a 

subset of non-conflicted transactions?  Please explain.   

                                                 

broker-dealer have an arrangement with an exchange for the establishment of a tier aimed 
at earning that broker-dealer’s order flow, the broker-dealer must document that 
arrangement.  

201  Existing Commission rules, such as Rule 10b-10(d)(8), 17 CFR 240.10b-10(d)(8), and 
Rule 606 under Regulation NMS, 17 CFR 242.606, do not require the same level of detail 
with respect to the payment for order flow practices of broker-dealers that would be 
required under proposed Rule 1101(b)(3).  



   

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86. Should such documentation be required to be done pursuant to written procedures?  

Please explain.  

87. As proposed, a broker-dealer would need to document, for its conflicted transactions, its 

compliance with the best execution standard, including all efforts taken to enforce its best 

execution policies and procedures for conflicted transactions and the basis and 

information relied on for its determinations that the conflicted transactions would comply 

with the best execution standard.  What challenges, if any, would a broker-dealer 

encounter in complying with the proposed documentation requirements?  Would such 

challenges differ based on the type of security being traded or the type of broker-dealer 

engaging in the conflicted transactions?  Please explain. 

88. Do commenters agree with the Commission’s understanding that broker-dealers have 

varying degrees of documentation with respect to their best execution practices?  Why or 

why not? 

89. Should the proposed documentation requirements apply only to certain types of 

conflicted transactions or for all types of conflicted transactions?  Please explain.   

90. Should broker-dealers in the NMS stock and listed options markets be subject to the 

documentation requirements for the orders they execute on a principal basis, or for which 

they have paid or received payment for order flow, or routed to an affiliate, as proposed?  

Why or why not? 

91. Should broker-dealers in the corporate and municipal bond markets and government 

securities markets be subject to the documentation requirements for the orders they 

execute on a principal basis, as proposed?  Why or why not?121 

 

92. Are there other aspects of the proposed additional requirements for a broker-dealer’s 

policies and procedures for conflicted transactions that should also be required to be 

documented?  Please explain.   

93. Are there practices other than the proposed additional requirements for conflicted 

transactions that should be required to be documented?  Please explain. 

94. Should a broker-dealer be required to document any payment for order flow arrangement, 

whether written or oral, as proposed?  Why or why not?  If so, should such 

documentation requirements include the parties to the arrangement, all qualitative and 

quantitative terms concerning the arrangement, and the date and terms of any changes to 

the arrangement?  Why or why not?  Are there other aspects of the arrangements that 

should also be included in the documentation requirement?  If so, please describe.  

95. Are there other types of arrangements involving conflicted transactions that should also 

be subject to a documentation requirement?  Please explain. 

96. Do commenters believe that the Commission should provide staggered compliance dates 

for proposed Rule 1101(b)(3) for broker-dealers of different sizes, if the Commission 

adopts proposed Regulation Best Execution?  For example, should the Commission 

provide longer compliance dates for smaller broker-dealers?  If so, should the 

Commission define a smaller broker-dealer as a broker-dealer that qualifies as a “small 

entity” under the Regulatory Flexibility Act pursuant to 17 CFR 240.0-10(c) for this 



   

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purpose?202  Or should the Commission define a smaller broker-dealer in a different way?  

Please explain.   

3. Application of Proposed Rule 1101(b) to NMS Stock Market Conflicts of 
Interest 

Broker-dealers that engage in conflicted transactions for or with retail customers in NMS 

stocks would be required to comply with the additional policies and procedures requirements 

under proposed Rule 1101(b).  For example, a retail broker-dealer that receives payment for 

order flow from a wholesaler would need to establish, maintain, and enforce policies and 

procedures to address how it will evaluate additional liquidity sources that the broker-dealer 

would not need to evaluate if it did not receive payment for order flow.  Therefore, in connection 

with a determination of whether to route customer orders to the wholesaler that pays for order 

flow, the retail broker-dealer could evaluate other exchanges, ATSs, or order exposure 

opportunities that may not have been determined by the retail broker-dealer to be material 

potential liquidity sources for non-conflicted transactions under proposed Rule 1101(a)(1).   

Retail broker-dealers that receive payment for order flow for retail customer orders must 

also comply with the documentation requirement under proposed Rule 1101(b)(3).  For example, 

to the extent a retail broker-dealer attempts to execute customer orders prior to sending them to a 

wholesaler in return for payment, it could document such efforts by, for example, retaining a 

record of the markets at which it attempted to execute customer orders at prices better than the 

                                                 

202  See supra note 151 and accompanying text (describing the broker-dealers that qualify as 
small entities under the Regulatory Flexibility Act). 



   

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NBBO (e.g., markets pinged for midpoint liquidity),203 or documenting how it otherwise used 

reasonable diligence in assessing whether those markets may be the best market for customer 

orders.  For retail nonmarketable orders routed to markets (e.g., exchanges) that pay rebates for 

those orders, a retail broker-dealer would need to document its basis for determining that routing 

orders to such markets would comply with the best execution standard, as well as the information 

relied on for such determination.  It could do so by, for example, documenting its assessment of 

fill rates and the likelihood of execution for nonmarketable orders at such markets as compared 

to other markets that do not provide such rebates.   

Furthermore, in documenting its determination that transactions that are conflicted due to 

payment for order flow from a wholesaler would comply with the best execution standard, a 

retail broker-dealer could document its process for evaluating and routing to wholesalers that pay 

it for order flow, including its assessment of wholesaler performance and any price improvement 

commitments.  Additionally, a retail broker-dealer would be required to document its 

determination that customer transactions for which it receives payment for order flow would 

comply with the best execution standard.204  A retail broker-dealer could do this by, for example, 

                                                 

203  See supra note 196 (describing records and documentations under the CAT Plan).  As 
discussed above in section IV.C.2, proposed Rule 1101(b)(3) would not require a broker-
dealer to document its efforts to comply with the best execution standard with respect to 
its conflicted transactions in any specific way.  However, the broker-dealer would need to 
document in accordance with its written procedures the basis and information relied on 
for its determination that its conflicted transactions would comply with the best execution 
standard. 

204  Similarly, FINRA has stated that broker-dealers may not negotiate the terms of order 
routing arrangements for customer orders in a manner that reduces the price improvement 
opportunities that, absent payment for order flow, otherwise would be available to those 
customer orders.  See FINRA Regulatory Notice 21-23. 



   

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soliciting price improvement commitments from wholesalers for customer orders in the absence 

of payment for order flow and comparing those commitments to the price improvement 

commitments that the wholesaler would make if it were to pay the retail broker-dealer for order 

flow, and documenting these efforts.  Finally, as described above in section IV.C.2, a retail 

broker-dealer would be required to document any arrangement concerning payment for order 

flow. 

A wholesaler that executes customer orders in a principal capacity or pays a retail broker-

dealer for order flow would also be required to document its compliance with the best execution 

standard for conflicted transactions.205  For example, a wholesaler could document the prices 

received from those markets that it checked pursuant to its policies and procedures, such as by 

retaining a record of the markets at which it attempted to execute customer orders at prices better 

than the NBBO (e.g., markets pinged for midpoint liquidity)206 and by retaining records of 

market data feeds that the wholesaler uses when handling retail customer orders.  A wholesaler 

could also document how it otherwise used reasonable diligence in its best execution 

determinations.  For retail nonmarketable orders routed to markets that pay rebates for those 

orders, a wholesaler could document its basis for determining that routing to such markets would 

comply with the best execution standard and the information relied on for such determination by, 

for example, documenting its assessment of fill rates and the likelihood of execution for 

nonmarketable orders at such markets as compared to other markets that do not provide such 

rebates.   

                                                 

205  See supra note 200. 
206  See supra note 203. 



   

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The wholesaler would also be required to document any arrangement concerning 

payment for order flow as described above in section IV.C.2.  Furthermore, the wholesaler would 

be required to document its determination that its transactions with customer orders that were 

sent to it in return for payment would comply with the best execution standard.  For example, a 

wholesaler could document that it provides the same price improvement to the customers of 

retail broker-dealers to which it does not pay for order flow that it provides to the customers of 

broker-dealers to which it pays for order flow.   

4. Application of Proposed Rule 1101(b) to the Options Market 

As discussed above, payment for order flow, principal trading, and affiliated routing 

conflicts of interest in the execution of retail customer orders also exist in the options market.207   

Under proposed Rule 1101(b), a wholesaler that pays for order flow or transacts with retail 

customers in a principal capacity would need to establish, maintain, and enforce policies and 

procedures for conflicted transactions that address how it will obtain and assess information 

beyond that required by proposed Rule 1101(a)(1)(i) and evaluate a broader range of liquidity 

sources, including a broader range of order exposure opportunities, which could include an 

evaluation of whether any price improvement auctions may provide an opportunity to execute a 

customer order at a price that is better than the displayed best bid and offer. 208    

                                                 

207  See supra section III.A.2 (discussing the payment for order flow, affiliated routing and 
principal trading conflicts of interest in the options market). 

208  As discussed above, the wholesaler’s policies and procedures that would be required by 
proposed Rule 1101(a)(1) could address how the wholesaler assesses price improvement 
auctions, including  their relative competitiveness, when identifying material potential 
liquidity sources.  A similar assessment would be required under proposed Rule 
1101(b)(2) for a broader range of order exposure opportunities that may result in the most 



   

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Under proposed Rule 1101(b)(3), a wholesaler that engages in conflicted transactions 

would also be required to document, in accordance with written procedures, its compliance with 

the best execution standard for such conflicted transactions, including all efforts to enforce its 

policies and procedures for conflicted transactions and the basis and information relied on for its 

determinations that such conflicted transactions would comply with the best execution standard.  

For example, as with conflicted transactions in NMS stocks, a wholesaler could document the 

prices received from those markets that it checked pursuant to its policies and procedures, such 

as by retaining records of market data feeds that the wholesaler uses when handling retail 

customer orders.  The wholesaler’s documentation could also include a description of its decision 

making process for routing retail customer orders to execute against the wholesaler’s or its 

affiliates’ displayed prices on exchanges and when it chooses to execute through a price 

improvement auction that may provide an opportunity for price improvement.  For retail 

nonmarketable orders routed to markets that pay rebates for those orders, a wholesaler would 

need to document its basis for determining that routing to such markets would comply with the 

best execution standard and the information relied on for such determination.  It could do so by, 

for example, documenting its assessment of fill rates and the likelihood of execution for 

nonmarketable orders at such markets as compared to other markets that do not provide such 

rebates.   

                                                 

favorable price for customer orders.  A wholesaler’s best execution policies and 
procedures that favor one price improvement auction when other, more competitive, price 
improvement auctions exist may be relevant to an assessment of whether such policies 
and procedures are reasonably designed to identify material potential liquidity sources or 
to evaluate a broader range of order exposure opportunities that may result in the most 
favorable price for the customer order, as required by proposed Rules 1101(a) and 
1101(b).   



   

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The wholesaler would also be required to document any arrangement concerning 

payment for order flow as described above in section IV.C.2.  Furthermore, the wholesaler would 

be required to document its determination that its transactions with the customer orders that were 

sent to it in return for payment would comply with the best execution standard.  For example, a 

wholesaler could document that it provides the same execution quality to the customers of retail 

broker-dealers to which it does not pay for order flow that it provides to the customers of broker-

dealers to which it pays for order flow.   

A retail broker-dealer in the listed options market would be engaged in a conflicted 

transaction under proposed Rule 1101(b) if it receives payment for order flow and its policies 

and procedures would have to address how it evaluates a broader range of markets, including 

opportunities to expose customer orders for the most favorable price.  A retail broker-dealer’s 

policies and procedures could evaluate wholesaler practices concerning the use of price 

improvement auctions and whether such wholesalers are appropriately considering a broader 

range of opportunities to expose customer orders and identifying exposure opportunities that are 

designed to enhance competition for customer orders.   

Retail broker-dealers that accept payment for order flow for retail customer orders would 

also be required to comply with the documentation requirement under proposed Rule 1101(b)(3).  

To the extent a retail broker-dealer routes retail customer nonmarketable orders to markets that 

pay rebates for those orders, a retail broker-dealer would need to document its basis for 

determining that routing to such markets would comply with the best execution standard and the 

information relied on for such determination.  It could do so by, for example, documenting its 

assessment of fill rates and the likelihood of execution for nonmarketable orders at such markets 

as compared to other markets that do not provide such rebates.   



   

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Furthermore, in documenting its determination that transactions conflicted due to 

payment for order flow from a wholesaler would comply with the best execution standard, a 

retail broker-dealer could document its process for evaluating and routing to wholesalers that pay 

it for order flow, including its assessment of wholesaler performance and any price improvement 

commitments.  Additionally, under proposed Rule 1101(b)(3), a retail broker-dealer would need 

to document its determination that customer transactions for which it receives payment for order 

flow would comply with the best execution standard and the information relied on for such 

determination.  A retail broker-dealer could do this by, for example, soliciting price improvement 

commitments from wholesalers for customer orders in the absence of payment for order flow and 

comparing those commitments to the price improvement commitments that the wholesaler would 

make if it were to pay the retail broker-dealer for order flow.  Finally, a retail broker-dealer 

would be required to document any arrangement concerning payment for order flow, as 

described above in section IV.C.2. 

5. Application of Proposed Rule 1101(b) to the Corporate and Municipal 
Bond Markets and Government Securities Markets 

Many broker-dealers in the corporate and municipal bond markets and government 

securities markets trade with retail customers in a principal capacity and therefore engage in 

conflicted transactions.  Such broker-dealers would also be subject to proposed Rule 1101(b) 

with respect to their conflicted transactions.  A broker-dealer’s policies and procedures for 

conflicted transactions would be required to address how it will evaluate a broader range of 

markets, including a broader range of order exposure opportunities.  This could include 

evaluation of a broader range of ATSs, broker’s brokers, RFQ systems, and other broker-dealers 



   

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that trade corporate and municipal bonds and government securities, than the markets that the 

broker-dealer identifies as material potential liquidity sources under proposed Rule 1101(a)(1).   

Under proposed Rule 1101(b)(3), a retail broker-dealer that trades in a principal capacity 

with retail customers would be required to document, in accordance with written procedures, its 

compliance with the best execution standard for conflicted transactions, including all efforts 

taken to enforce its policies and procedures for conflicted transactions and the basis and 

information relied on for its determinations that such conflicted transactions would comply with 

the best execution standard.  In doing so, a retail broker-dealer could retain records of any data 

feeds or other pricing information that the retail broker-dealer uses when handling retail 

customer orders, including ATS data feeds, responses to RFQs, transaction prices, and evaluated 

pricing information.209  In documenting its efforts to comply with the best execution standard, a 

retail broker-dealer could also document its order handling practices that can impact whether 

customer orders are executed in compliance with the best execution standard.  This could 

include, for example, its practices concerning the use of RFQ systems, including its filtering, 

response time, and last look practices and how those practices promote the execution of retail 

                                                 

209  As discussed above in section IV.C.2, proposed Rule 1101(b)(3) would not require a 
broker-dealer to document its efforts to comply with the best execution standard with 
respect to its conflicted transactions in any specific way.  However, the broker-dealer 
would need to document the basis and information relied on for its determination that its 
conflicted transactions would comply with the best execution standard, and the 
Commission preliminarily believes that the manner of documentation may vary 
depending on asset class.  For example, a broker-dealer’s best execution policies and 
procedures may provide for more individualized handling of customer orders in corporate 
and municipal bonds and government securities than in equities securities.  Accordingly, 
the broker-dealer’s documentation for conflicted retail transactions in corporate and 
municipal bonds and government securities would need to reflect the more individualized 
best execution process.  



   

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customer orders in a manner that complies with the best execution standard.  Finally, broker-

dealers could document their markup policies for principal trades, including documenting how 

the broker-dealer assesses markups for trades with customers and any variation in its markups 

depending on the nature of the transaction (e.g., riskless principal trades versus trades with the 

broker-dealer’s inventory).   

Request for Comment 

The Commission requests comment on the application of proposed Rule 1101(b) to the 

NMS stock, options, corporate and municipal bond markets, and government securities markets, 

and in particular:  

97. Has the Commission appropriately described the various practices in sections IV.C.3-5 

that should be addressed in a broker-dealer’s policies and procedures for conflicted 

transactions?  Please explain. 

98. Are there other practices not described in sections IV.C.3-5 that should be addressed in a 

broker-dealer’s policies and procedures for conflicted transactions, or any that are 

described that should be not be addressed?  Please explain. 

D. Proposed Rule 1101(c) – Regular Review of Execution Quality 

Proposed Rule 1101(c) would require a broker-dealer, no less frequently than quarterly, 

to review the execution quality of its transactions for or with its customers or customers of 

another broker-dealer, and how such execution quality compares with the execution quality the 

broker-dealer might have obtained from other markets, and to revise its best execution policies 

and procedures, including its order handling and routing practices, accordingly.  Proposed Rule 

1101(c) would also require a broker-dealer to document the results of this review. 



   

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While the Commission understands that broker-dealers generally currently conduct 

certain execution quality reviews,210 including pursuant to FINRA’s best execution rule, the 

scope of proposed Rule 1101(c) differs from FINRA’s best execution rule in that it would apply 

to a broader range of broker-dealers.211  Specifically, while FINRA’s execution quality review 

requirement applies only to a broker-dealer that routes customer orders to other broker-dealers 

for execution on an automated, nondiscretionary basis or that internalizes customer order flow,212 

proposed Rule 1101(c) would apply to all broker-dealers that are not introducing brokers 

(discussed in section IV.E below) that transact for or with customers.  The Commission 

preliminarily believes that it would be beneficial to customers for a broader range of broker-

dealers to regularly review the execution quality that their customer orders receive.  Aside from 

                                                 

210  FINRA describes the findings from its best execution exams in an annual report.  See, 
e.g., 2022 Report on FINRA’s Examination and Risk Monitoring Program, supra note 
185, at 44-45 (describing FINRA exam findings, including:  not comparing the quality of 
the execution obtained via firms’ existing order-routing and execution arrangements 
against the quality of execution they could have obtained from competing markets; not 
conducting adequate reviews on a type-of-order basis, including, for example, on market, 
marketable limit, or non-marketable limit orders; not considering certain factors set forth 
in FINRA Rule 5310 when conducting a “regular and rigorous review,” including, among 
other things, speed of execution, price improvement and the likelihood of execution of 
limit orders; and using routing logic that was not necessarily based on quality of 
execution). 

211  The MSRB rule does not require broker-dealers to conduct quarterly (or more frequent) 
comparative analysis of execution quality.  Rather, MSRB Rule G-18 requires an annual 
review of the broker-dealer’s policies and procedures that takes “into account the quality 
of the executions the [broker-dealer] is obtaining under its current policies and 
procedures, changes in market structure, new entrants, the availability of additional pre-
trade and post-trade data, and the availability of new technologies” and requires the 
broker-dealer “to make promptly any necessary modifications to such policies and 
procedures as may be appropriate in light of such reviews.”  See MSRB Rule G-18.08(a).   

212  See FINRA Rule 5310.09. 



   

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this distinction in scope, proposed Rule 1101(c) is designed to be consistent with FINRA Rule 

5310.09.   

The requirements of proposed Rule 1101(c) would complement a broker-dealer’s policies 

and procedures concerning how it will comply with the proposed best execution standard and the 

determination of the best market for customer orders, as well as the additional policies and 

procedures for conflicted transactions.  As proposed, a broker-dealer must compare the execution 

quality it obtains via its current order routing and execution arrangements (including through the 

internalization of its order flow or executing its order flow through another broker-dealer in a 

wholesaler or other arrangement) to the execution quality it might have obtained from other 

markets.  A broker-dealer would not meet the requirements of proposed Rule 1101(c) if it solely 

conducted its review based on the markets to which it currently routes customer orders without 

considering other markets or trading venues.213  Rather, a broker-dealer would be required to 

consider the potential execution quality at trading venues that it does not currently use to execute 

customer orders, including new markets to the extent they become available, and consider 

whether it needs to access such markets in order to attain best execution for its customer 

orders.214 

                                                 

213  This is consistent with FINRA’s rule concerning the review of execution quality.  See 
FINRA Rule 5310.09(b) (“To assure that order flow is directed to markets providing the 
most beneficial terms for their customers’ orders, the member must compare, among 
other things, the quality of the executions the member is obtaining via current order 
routing and execution arrangements (including the internalization of order flow) to the 
quality of the executions that the member could obtain from competing markets.”).   

214  FINRA has pursued enforcement against broker-dealers relating to compliance with 
FINRA Rule 5310.09 concerning the regular and rigorous review of execution quality.  
See, e.g., TradeStation Securities, Inc., Letter of Acceptance, Waiver and Consent 



   

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In reviewing and comparing the execution quality of its customer transactions to the 

execution quality that might have been obtained from other markets, a broker-dealer could 

consider various factors, including price improvement opportunities, differences in price 

disimprovement,215 likelihood of execution of limit orders, speed of execution, size of execution, 

transaction costs, customer needs and expectations, and the existence of internalization or 

payment for order flow arrangements.216  Furthermore, a broker-dealer that routinely routes 

                                                 

(FINRA Case No. 2014041812501) (Mar. 2021) (describing violations of FINRA’s best 
execution rule where the firm “did not exercise reasonable diligence to ascertain whether 
the venues where it routed certain equity and option customer orders provided the best 
market for the subject securities as compared to the execution quality that was being 
provided at competing markets”); Robinhood FINRA, supra note 69 (describing 
violations of FINRA’s best execution rule where the firm routed its customers’ orders to 
four broker-dealers that all paid for order flow and “did not exercise reasonable diligence 
to ascertain whether these four broker-dealers provided the best market for the subject 
securities to ensure its customers received the best execution quality from these as 
compared to other execution venues”); E*Trade Securities LLC, Letter of Acceptance, 
Waiver, and Consent (FINRA Case No. 20130368815-01) (June 2016) (describing 
violations of FINRA’s best execution rule where the firm lacked sufficient information to 
reasonably assess the execution quality it provided to its customer because, among other 
things, the firm “did not take into account the internalization model employed by the 
firm” and “was overly reliant on comparisons of the firm’s overall execution quality with 
industry and custom averages, rather than focusing on comparisons to the actual 
execution quality provided by the market centers to which the firm routed orders”). 

215  Price disimprovement occurs when a customer receives a worse price than the best quotes 
prevailing at the time the order is received by the market.  See, e.g., FINRA Rule 
5310.09(b)(2).   

216  These considerations are consistent with FINRA’s rule regarding the review of execution 
quality.  See FINRA Rule 5310.09(b) (providing that, in reviewing and comparing the 
execution quality of its current order routing and execution arrangements to the execution 
quality of other markets, a member should consider:  (1) price improvement 
opportunities; (2) differences in price disimprovement; (3) the likelihood of execution of 
limit orders; (4) the speed of execution; (5) the size of execution; (6) transaction costs; 
(7) customer needs and expectations; and (8) the existence of internalization or payment 
for order flow arrangements).  



   

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customer orders to multiple trading centers, whether internal or external, could evaluate the 

latency impacts, fill rates, information leakage, and resulting execution quality harms.217  And 

when conducting these reviews, a broker-dealer could consider the procedures it uses or would 

use for executing the same or similar transactions for its own accounts.218  The Commission 

believes that, when compared to the execution quality that the broker-dealer might have obtained 

from other markets, the review could help the broker-dealer evaluate the effectiveness of its 

current best execution policies and procedures, including its order handling practices, and enable 

the broker-dealer to make informed judgments regarding whether these policies and procedures 

and practices need to be modified.   

As described in this section IV.D above, proposed Rule 1101(c) would apply to a broader 

range of broker-dealers than FINRA Rule 5310.09.  However, the substantive review 

requirements of proposed Rule 1101(c) are similar to FINRA Rule 5310.09, which requires a 

broker-dealer to compare, among other things, the quality of the executions it is obtaining via 

current order routing and execution arrangements to the quality of the executions that the broker-

dealer could obtain from competing markets.   

While the review under FINRA Rule 5310.09 must be conducted on a security-by-

security, type-of-order basis (e.g., limit order, market order, and market on open order), proposed 

Rule 1101(c) does not provide this level of specificity concerning the manner of execution 

                                                 

217  This is also consistent with existing FINRA guidance concerning these types of reviews.  
See FINRA Regulatory Notice 15-46, at 4-5. 

218  This is consistent with existing FINRA guidance.  See FINRA Regulatory Notice 15-46, 
at 4-5.  FINRA states that “firms should consider the risk of information leakage by 
routing orders to a particular venue in light of the fill rates achieved at that venue and 
carefully assess whether the risks outweigh the potential for an execution.”  Id. at 5. 



   

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quality reviews.  The Commission believes that execution quality reviews would differ based on 

the characteristics of a market or of a broker-dealer’s business, and the methods for conducting 

execution quality reviews would evolve over time based on the availability of data and 

advancements in technology.  A broker-dealer generally should conduct such reviews in a 

manner that will provide it with robust information concerning its customer orders’ execution 

quality so that it can assess whether it needs to revise its best execution policies and procedures.  

In doing so, a broker-dealer should exercise its expertise and judgment in this regard and the 

manner of its execution quality reviews may be tailored to reflect various factors (e.g., whether 

the broker-dealer engages in conflicted transactions, the sizes of customer orders).219   

                                                 

219  Under FINRA Rule 5310.09, a broker-dealer must have procedures in place to ensure it 
periodically conducts regular and rigorous reviews of the quality of the executions of its 
customers’ orders if it does not conduct an order-by-order review.  FINRA has stated in a 
regulatory notice that broker-dealers must conduct order-by-order best execution reviews 
rather than relying on regular and rigorous reviews in certain circumstances.  In 
particular, FINRA has stated that a “regular and rigorous review alone (as opposed to an 
order-by-order review) may not satisfy best execution requirements, given that the 
execution of larger-size orders ‘often requires more judgment in terms of market timing 
and capital commitment.’”  FINRA has also stated that “[o]rders that a firm determines to 
execute internally are subject to an order-by-order best execution analysis.”  Finally, 
FINRA has recognized that advances in order routing technology make order-by-order 
reviews of execution quality for a range of orders in all equity and standardized options 
increasingly possible.  See FINRA Regulatory Notice 15-46, at 3-4.  As stated above, 
proposed Regulation Best Execution would not affect a broker-dealer’s obligation to 
comply with the FINRA or MSRB best execution rule.  Accordingly, a broker-dealer 
would be required to comply with proposed Regulation Best Execution, in addition to the 
FINRA and MSRB best execution rules, as applicable.  See supra note 109 and 
accompanying text.  To the extent FINRA or the MSRB impose more specific 
requirements than proposed Regulation Best Execution, broker-dealers must continue to 
comply with those requirements, as applicable. 



   

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FINRA Rule 5310.09 also requires a broker-dealer to determine whether any material 

differences in execution quality exist among the markets trading the security and, if so, modify 

its routing arrangements or justify why it is not modifying its routing arrangements.  While 

proposed Rule 1101(c) does not include “materiality” language or require a broker-dealer to 

justify why it is not modifying its routing arrangements, these concepts are consistent with the 

language of proposed Rule 1101(c).  Proposed Rule 1101(c) states that a broker-dealer would be 

obligated to “revise its best execution policies and procedures, including its order handling 

practices, accordingly” after it has conducted its comparative execution quality analysis.  The 

Commission preliminarily believes that revisions to the broker-dealer’s policies and procedures, 

including its order handling practices, would be appropriate if there were material differences in 

execution quality that were not otherwise justifiable.  Moreover, proposed amendments to Rule 

17a-4 would require a broker-dealer to retain documentation of the results of its execution 

quality review, which could include any justifications for not modifying its policies and 

procedures if a comparative analysis revealed material differences in execution quality.220   

MSRB rules do not require broker-dealers to conduct comparative analysis of execution 

quality.221  Rather, MSRB Rule G-18.08 states that, when conducting its periodic reviews, a 

broker-dealer must assess whether its policies and procedures are reasonably designed to achieve 

best execution, taking into account the quality of the executions the broker-dealer is obtaining 

under its current policies and procedures, changes in market structure, new entrants, the 

                                                 

220  For a discussion of recordkeeping requirements of the proposed rules, see infra section 
IV.G.  

221  See supra note 211. 



   

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availability of additional pre-trade and post-trade data, and the availability of new technologies, 

and make promptly any necessary modifications to such policies and procedures as may be 

appropriate in light of such reviews.  While MSRB Rule G-18.08 reflects an execution quality 

review by broker-dealers, proposed Rule 1101(c) would impose a specific requirement for 

review of execution quality on at least a quarterly basis, including a comparative analysis 

requirement, for all broker-dealers regardless of whether they are currently subject to MSRB or 

FINRA rules.   

Proposed Rule 1101(c) would require a broker-dealer to review the execution quality of 

customer orders no less frequently than quarterly.222  In complying with the proposed rule, a 

broker-dealer should determine the appropriate frequency of review by considering, for example: 

the nature of its business; the asset class transacted; new pools of liquidity, trading protocols, or 

sources of data that have emerged; the availability of technology needed to conduct execution 

quality reviews; and the level of transparency in a particular market.  In doing so, the 

Commission believes that, in many cases, broker-dealers may determine that a more frequent 

review of execution quality than quarterly is appropriate.  For example, market participants 

subject to Rule 605 of Regulation NMS are required to disclose on a monthly basis certain 

                                                 

222  FINRA also requires a broker-dealer to conduct regular and rigorous reviews of its 
customer execution quality at least quarterly, but has specified that a broker-dealer should 
consider, based on its business, whether more frequent reviews are needed.  See FINRA 
Rule 5310.09; FINRA Regulatory Notice 15-46, at 4.  MSRB Rule G-18 requires a 
broker-dealer to, at a minimum, conduct annual reviews of its policies and procedures for 
determining the best available market for the executions of its customers’ transactions, 
but the broker-dealer should consider a frequency reasonably related to the nature of its 
municipal securities business, including but not limited to its level of sales and trading 
activity.  See MSRB Rule G-18.08(a). 



   

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execution quality statistics in NMS stocks.  These Rule 605 reports provide a broker-dealer with 

information that it could use to evaluate the execution quality of customer transactions in NMS 

stocks more frequently than quarterly.223  In contrast, a broker-dealer may determine that it is 

appropriate to review the execution quality of customer transactions in non-NMS stocks less 

frequently due to the characteristics of those other markets.224   

Finally, proposed Rule 1101(c) would require a broker-dealer to document the results of 

its execution quality reviews.225  By documenting its execution quality reviews, a broker-dealer 

would maintain and preserve a robust record of its order execution quality over time that could 

assist the broker-dealer to better evaluate the effectiveness of its best execution policies and 

procedures, including its order handling practices, on an ongoing basis.  Similarly, such 

documentation would allow regulators to more effectively oversee the broker-dealer’s efforts to 

meet the best execution standard of proposed Rule 1100 and the requirements of proposed Rules 

1101 and 1102. 

Request for Comment  

                                                 

223  FINRA has stated that some broker-dealers conduct monthly reviews of execution 
quality, recognizing that market participants are required to publish Rule 605 execution 
quality statistics on a monthly basis.  See FINRA Regulatory Notice 15-46, at 4, 15 n.21.   

224  FINRA has also stated that orders in the fixed income market may be handled and 
executed differently than in equity and options markets.  Because of these differences, 
FINRA stated that broker-dealers may determine to conduct execution quality reviews of 
such securities under FINRA’s rule less frequently than for equities and options.  See 
FINRA Regulatory Notice 15-46, at 8. 

225  See proposed amendments to Rule 17a-4; infra section IV.G (describing the 
recordkeeping obligations applicable to any documentation made pursuant to proposed 
Regulation Best Execution). 



   

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The Commission requests comment on all aspects of proposed Rule 1101(c), and in 

particular: 

99. Should broker-dealers be required to conduct reviews of execution quality of their 

transactions for or with customers at least quarterly, including how such execution 

quality compares with the execution quality that might have been obtained from other 

markets, as required by proposed Rule 1101(c)?  Why or why not?  Should broker-

dealers document the results of their execution quality reviews, as required by proposed 

Rule 1101(c)?  Why or why not? 

100. Should a review of execution quality include factors similar to those identified in 

FINRA rules and guidance, such as price improvement opportunities, differences in price 

disimprovement, likelihood of execution of customer limit orders, speed of execution, 

size of execution, transaction costs, customer needs and expectations, and the existence 

of internalization or payment for order flow arrangements?  Why or why not?  Are there 

other factors that should also be included in a review of execution quality?  If so, please 

explain.  Should these factors be specified in proposed Rule 1101(c)?  Please explain. 

101. Would the proposed documentation requirement improve the utility of the reviews 

of execution quality by a broker-dealer?  Please explain.  Should the proposed rule 

include other specific documentation requirements to supplement the documentation of 

the execution quality reviews?  If so, please explain.   

102. Should proposed Rule 1101(c) apply to broker-dealers that currently rely on their 

executing brokers to conduct such reviews, if they otherwise would not qualify as 

introducing brokers as defined in proposed Rule 1101(d) and discussed in section IV.E 

below?  Please explain.  Would broker-dealers that currently rely on the execution quality 



   

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reviews of their executing brokers (and do not qualify as introducing brokers as defined 

in proposed Rule 1101(d) and discussed in section IV.E below) have the resources and 

expertise to conduct the reviews required by proposed Rule 1101(c)?  Would such 

broker-dealers have the information necessary to compare the executions received for 

their customers and the customers of other broker-dealers with the execution quality that 

could have been obtained on other markets to which they did not route customer orders?  

Please explain. 

103. Should the Commission require a different frequency for the reviews of execution 

quality?  If so, how frequently should such reviews be required and should the frequency 

be different for different asset classes?  Should the frequency be monthly, semi-annually, 

annually, or another time period?  Please explain. 

104. Should the frequency of such reviews be dependent on any unique characteristics 

of the broker-dealer, its customers, its order flow, or the securities traded?  For example, 

should the frequency standard be at least monthly for reviews of execution quality for 

NMS stocks because broker-dealers and market centers are required to disclose execution 

quality on a monthly basis under Rules 605 of Regulation NMS?  Or does the availability 

of Rule 605 reports suggest that reviews of execution quality in NMS stocks should be 

less frequent?  Please explain.  

105. Should broker-dealers that handle and execute customer municipal bond orders be 

required to conduct reviews of execution quality at least quarterly as required by 

proposed Rule 1101(c)?  Please explain.  Is there a different frequency for these reviews 

that would be more appropriate for the municipal bond market?  If so, please explain.  Is 

there a frequency standard that would be more appropriate for other fixed income141 

 

markets, such as the corporate bond and government securities markets?  Is it appropriate 

to require that a broker-dealer’s best execution policies and procedures, including its 

order handling practices, be revised based on the outcome of the proposed execution 

quality reviews?  Please explain.  Should there be more specificity concerning when a 

broker-dealer would be required to revise its best execution policies and procedures, 

including its order handling practices?  For example, should the rule specify that best 

execution policies and procedures, including order handling practices, must be revised if 

the broker-dealer identifies material differences in execution quality among the various 

markets and trading venues that trade the applicable security?  Please explain. 

106. Should the proposed requirement that a broker-dealer revise its best execution 

policies and procedures, including its order handling practices, based on its review of 

execution quality apply differently depending on the type of asset class or any unique 

characteristics of the broker-dealer, its customers, its order flow, or the securities traded?  

Please explain.   

107. Do commenters agree with the Commission’s understanding that broker-dealers 

currently conduct certain execution quality reviews and those reviews vary in rigor?  

Please describe the frequency and rigor of any such reviews and whether broker-dealers 

document the results of such reviews. 

108. Do commenters believe that the Commission should provide staggered 

compliance dates for proposed Rule 1101(c) for broker-dealers of different sizes, if the 

Commission adopts proposed Regulation Best Execution?  For example, should the 

Commission provide longer compliance dates for smaller broker-dealers?  If so, should 

the Commission define a smaller broker-dealer as a broker-dealer that qualifies as a 



   

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“small entity” under the Regulatory Flexibility Act pursuant to 17 CFR 240.0-10(c) for 

this purpose?226  Or should the Commission define a smaller broker-dealer in a different 

way?  Please explain. 

E. Proposed Rule 1101(d) – Introducing Brokers 

Proposed Rule 1101(d) would permit a broker-dealer that qualifies as an introducing 

broker to rely on its executing broker to comply with proposed Rules 1101(a), (b), and (c), 

subject to certain review requirements.   

Broker-dealers have different business models, including whether they accept, and the 

extent to which they handle and execute, customer orders.  Certain broker-dealers commit their 

own capital by executing customer transactions on a principal basis, while some broker-dealers 

employ an agency model that requires them to find another buyer or seller in order to execute a 

customer order.  The sizes and resources of broker-dealers also vary, with some broker-dealers 

carrying the accounts of millions of customers, while others carry few customer accounts and 

employ significantly fewer in-house personnel.     

Many broker-dealers do not provide the service of holding customer funds and securities 

and instead enter into agreements with other broker-dealers to provide such services and handle 

and execute their customers’ orders.  Such agreements generally allocate various functions 

among the broker-dealers, including the opening and approval of accounts, acceptance 

of orders, transmission of orders for execution, execution of orders, 

                                                 

226  See supra note 151 and accompanying text (describing the broker-dealers that qualify as 
small entities under the Regulatory Flexibility Act). 



   

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extension of credit, receipt and delivery of funds and securities, preparation 

and transmission of confirmations, maintenance of books and records, and 

monitoring of accounts.227  Typically, a broker-dealer that does not carry 

customer accounts enters into an agreement with another broker-dealer that 

would require the initial broker-dealer to transmit all of its customer orders 

to the other broker-dealer for order handling and execution.  In this 

circumstance, the second broker-dealer, which accepts the responsibility to 

handle and execute the customer orders, would be subject to the full 

obligations of proposed Regulation Best Execution.  On the other hand, the 

first broker-dealer is not making any decisions or exercising discretion 

regarding the manner in which its customer orders will be handled and 

executed, beyond its determination to engage the services of the second 

broker-dealer, and it would not be subject to the full obligations of proposed 

Regulation Best Execution.   

FINRA Rule 5310.09(c) provides that a broker-dealer that routes its order flow to another 

broker-dealer that has agreed to handle that order flow as agent for the customer can rely on that 

broker-dealer’s regular and rigorous review, as long as the statistical results and rationale of the 

review are fully disclosed to the first broker-dealer and the first broker-dealer periodically 

reviews how the review is conducted, as well as the results of the review.228  MSRB Rule G-

                                                 

227  See FINRA Rule 4311 (establishing standards for carrying agreements between executing 
firms and introducing firms). 

228  See FINRA Rule 5310.09(c). 



   

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18.08(b) provides that a broker-dealer that routes its customers’ transactions to another broker-

dealer that has agreed to handle those transactions as agent or riskless principal for the customer 

may rely on that other broker-dealer’s periodic reviews as long as the results and rationale of the 

review are fully disclosed to the first broker-dealer and the first broker-dealer periodically 

reviews how the other broker-dealer’s review is conducted and the results of the review.229  As 

discussed in section IV.E.1 below, the exemption under proposed Rule 1101(d) would be 

provided to a narrower group of broker-dealers than contemplated by FINRA and MSRB rules, 

because it would apply only to broker-dealers that meet the proposed definition of “introducing 

broker.”  Accordingly, certain broker-dealers that qualify under the current FINRA and MSRB 

exemptions may not similarly qualify for the exemption under proposed Rule 1101(d), absent a 

change in business practices that would allow them to meet the additional criteria described 

below in section IV.E.1.  Moreover, as discussed in section IV.E.2 below, the exemption under 

proposed Rule 1101(d) would require the introducing broker’s policies and procedures to provide 

for comparisons between the execution quality obtained from its executing broker and the 

execution quality it might have obtained from other executing brokers, which would be a more 

specific policies and procedures obligation for introducing brokers than required under the 

                                                 

229  See MSRB Rule G-18.08(b).  The MSRB has further interpreted the obligations of 
introducing brokers under this provision.  See MSRB Implementation Guidance on 
MSRB Rule G-18, on Best Execution, at Section II.1 (last updated Feb. 7, 2019) (“Under 
this provision, introducing dealers may rely on the best-execution policies and procedures 
of their clearing firms or other executing dealers, all of which are subject to their own 
best-execution obligations under the rule.  An introducing dealer, however, is not relieved 
of its obligations to establish written policies and procedures of its own.  For example, 
such an introducing dealer’s policies and procedures could provide for the reliance on 
another dealer’s policies and procedures and periodic reviews by the introducing dealer 
of the other dealer’s reviews of its policies and procedures.”). 



   

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current FINRA and MSRB rules.  Finally, a broker-dealer that qualifies as an introducing broker 

under proposed Rule 1101(d) would be exempt from the requirement to separately comply with 

proposed Rules 1101(a), (b), and (c), while the FINRA and MSRB rules only provide certain 

broker-dealers with exemptions from conducting either the regular and rigorous execution 

quality review under the FINRA rule or the periodic review under the MSRB rule.  

1. Definition of Introducing Broker and Executing Broker  

For purpose of proposed Rule 1101(d), the Commission would define an “introducing 

broker” as a broker-dealer that:  (1) does not carry customer accounts and does not hold customer 

funds or securities; (2) has entered into an arrangement with an unaffiliated broker-dealer that 

has agreed to handle and execute on an agency basis all of the introducing broker’s customer 

orders (“executing broker”); and (3) has not accepted any monetary payment, service, property, 

or other benefit that results in remuneration, compensation, or consideration from the executing 

broker in return for the routing of the introducing broker’s customer orders to the executing 

broker.230   Broadly, these proposed conditions are designed to identify those entities that, due to 

                                                 

230  This proposed definition of “introducing broker” would be used only for purposes of 
proposed Rule 1101(d), and would not affect the use of this term under existing 
Exchange Act rules.  See, e.g., 17 CFR 240.15c3-3 (defining introducing broker as a 
broker-dealer that “clears all transactions with and for customers on a fully disclosed 
basis with a clearing broker or dealer, and who promptly transmits all customer funds and 
securities to the clearing broker or dealer which carries all of the accounts of such 
customers and maintains and preserves such books and records pertaining thereto . . . as 
are customarily made and kept by a clearing broker or dealer”).  While the term 
“introducing broker” is defined differently for purposes of other Commission rules, the 
Commission preliminarily believes the definition in proposed Rule 1101(d) is 
appropriately tailored for application in the best execution context.  As discussed in this 
section, the proposed definition is designed to identify introducing brokers that rely on 
their executing brokers and to ensure that they do not have order handling conflicts of 



   

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their business models, expertise, and resources, need to be able to rely on their executing 

brokers, and to ensure that these entities do not have order handling conflicts of interest such that 

their reliance on their executing brokers would be appropriate.   

The first proposed condition of this definition (in proposed paragraph (d)(1)) would 

require that an introducing broker not carry customer accounts or hold customer funds or 

securities.  This proposed condition is designed to identify those broker-dealers that do not 

handle or execute customer orders and therefore need to enter into arrangements with other 

broker-dealers to provide those services.  The Commission preliminarily believes that this 

proposed condition would identify broker-dealers that do not exercise any discretion with respect 

to how their customer orders are handled and executed, beyond the selection of the executing 

broker.  Because these introducing brokers do not handle or execute customer orders in a manner 

that would warrant the application of the proposed best execution rules, the Commission 

proposes to permit these broker-dealers to rely on their executing brokers for purposes of 

complying with proposed Rules 1101(a), (b), and (c).  In addition, these introducing brokers may 

not be in a position to implement certain of the proposed best execution rules because they have 

chosen to outsource order handling and execution functions to another broker-dealer.   

The second proposed condition in the definition (in proposed paragraph (d)(2)) would 

require an introducing broker to enter into an arrangement with an unaffiliated broker-dealer that 

has agreed to handle and execute on an agency basis all of the introducing broker’s customer 

orders.  This proposed condition contains several elements.  First, the proposed requirement that 

                                                 

interest in their reliance on their executing brokers.  See also section IV.E.1 (describing 
FINRA Rule 5310.09(c), MSRB Rule G-18.08(b), and the definition of introducing 
broker in proposed Rule 1101(d)). 



   

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an arrangement be in place for the handling and execution of all customer orders by another 

broker-dealer would help ensure that the introducing broker does not exercise discretion 

concerning the routing and execution of customer orders in a manner that would otherwise 

necessitate the application of all of the provisions of proposed Regulation Best Execution.231  

Second, the introducing broker would be required to have an order handling and execution 

arrangement with an unaffiliated broker-dealer.  Because the introducing broker would be 

permitted to rely on the executing broker rather than having policies and procedures that address 

independently many of the operative provisions of proposed Regulation Best Execution 

(including the additional obligations for conflicts of interest with retail customers), the 

introducing broker should not be permitted to be subject to a conflict of interest by selecting an 

affiliated executing broker.  Such conflict of interest could impede the introducing broker’s 

efforts to achieve best execution by providing the introducing broker an incentive to act in 

manner that benefits its own or its affiliate’s interests.  Third, the executing broker that has been 

selected by the introducing broker would be required to agree to handle all of the introducing 

broker’s customer orders on an agency basis.  If an executing broker could trade with the 

introducing broker’s customers in a principal capacity, the introducing broker would effectively 

be making a determination concerning how its customer order should be executed, and the 

introducing broker should be subject to the full requirements of proposed Regulation Best 

Execution.  

                                                 

231  The broker-dealer that has agreed to handle all of the introducing broker’s customer 
orders on an agency basis would be subject to proposed Regulation Best Execution, 
including proposed Rules 1101(a)-(c). 



   

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There are two principal trading scenarios that, under proposed Rule 1101(d)(2), would be 

considered to be orders handled on an agency basis solely for the purposes of proposed Rule 

1101(d)(2):  fractional share trading in NMS stocks and riskless principal trading in corporate 

and municipal bonds and government securities.  The Commission understands that many 

broker-dealers permit their customers to submit orders for fractional shares of a stock.  These 

orders are often the result of a retail customer submitting an order for a security for a certain 

dollar amount, rather than for a specific number of shares.  In order for an executing broker to fill 

the fractional share orders of an introducing broker’s customer buy orders, for example, the 

executing broker may buy a whole share into its inventory and allocate a portion of that share to 

fill the customer’s fractional share order.  This scenario involves a principal trade between the 

executing broker and the customer that is necessary to fill the customer’s fractional share order.  

The Commission preliminarily believes that an executing broker filling the fractional share 

components of an introducing broker’s customer orders in this manner should not disqualify the 

initial broker-dealer from meeting prong (2) of the definition of an introducing broker, because 

the executing broker is filling the fractional share components on a principal basis solely for the 

purpose of completing transactions that otherwise would be executed on an agency basis.  

Therefore, in this context, the executing broker filling a customer’s fractional share order would 

be considered to be acting on an agency basis.   

In the corporate and municipal bond markets and government securities markets, the 

Commission understands that executing brokers most often execute an introducing broker’s 



   

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customer orders on a riskless principal basis.232  In these transactions, the executing broker does 

not fill a customer order out of its own inventory, but rather finds a counterparty for the customer 

order prior to executing the customer order.233  The bond simply flows through the executing 

broker’s account for transaction processing before ultimately being transferred to the appropriate 

customer.  For purposes of proposed Rule 1101(d)(2), riskless principal would be defined as 

proposed under Rule 1101(b)(4)(ii).  In particular, a transaction would be riskless principal if, 

after having received an order to buy from the introducing broker on behalf of its customer, the 

executing broker purchased the security from another person to offset a contemporaneous sale to 

such introducing broker on behalf of a customer or, after having received an order to sell, the 

executing broker sold the security to another person to offset a contemporaneous purchase from 

                                                 

232  The MSRB best execution rule recognizes that introducing brokers may have a 
relationship with clearing firms that handle and execute customer orders on a riskless 
principal basis.  See, e.g., MSRB Rule G-18.08(b) (“A dealer that routes its customers’ 
transactions to another dealer that has agreed to handle those transactions as agent or 
riskless principal for the customer (e.g., a clearing firm or other executing dealer) may 
rely on that other dealer’s periodic reviews as long as the results and rationale of the 
review are fully disclosed to the dealer and the dealer periodically reviews how the other 
dealer’s review is conducted and the results of the review.”). 

233  As the Commission has stated, “[t]rading on a riskless principal basis is similar, 
conceptually, to a municipal bond dealer trading on an agency basis.  In these 
transactions, the municipal bond dealer is not putting its capital at risk.  For example, 
when it receives a customer order to buy, the [dealer] will offset the sale to the customer 
by contemporaneously purchasing the security sold to the customer.”  See U.S. Securities 
and Exchange Commission, Report on the Municipal Securities Market (2012), available 
at https://www.sec.gov/news/studies/2012/munireport073112.pdf.  See also 17 CFR 
240.3a5-1(b) (defining the term “riskless principal transaction” for purposes of a bank’s 
exemption from the definition of dealer). 

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such introducing broker on behalf of its customer.234  The Commission preliminarily believes 

that this riskless principal transaction scenario in the corporate and municipal bond markets and 

government securities markets should not disqualify the initial broker-dealer from meeting the 

definition of an introducing broker in proposed Rule 1101(d), as the riskless principal trading in 

this context is analogous to the executing broker trading on an agency basis.      

The third proposed condition in the definition of introducing broker (in proposed 

paragraph (d)(3)) is that the introducing broker may not accept any monetary payment, service, 

property, or other benefit that results in remuneration, compensation, or consideration from the 

executing broker in return for the routing of the introducing broker’s customer orders to the 

executing broker.235  Similar to the second proposed condition concerning the use of unaffiliated 

                                                 

234  This riskless principal trading scenario would be limited to these types of transactions in 
the corporate and municipal bond markets and government securities markets and is 
consistent with the concept in MSRB Rule G-18.08(b) and with the Commission’s 
defined term of riskless principal in Exchange Act Rule 3a5-1, which exempts banks 
from the definition of “dealer” under the Exchange Act when acting in a riskless principal 
capacity.  See 17 CFR 240.3a5-1 (defining riskless principal as a transaction in which, 
after having received an order to buy from a customer, the bank purchased the security 
from another person to offset a contemporaneous sale to such customer or, after having 
received an order to sell from a customer, the bank sold the security to another person to 
offset a contemporaneous purchase from such customer).  Furthermore, the Commission 
believes that this definition of a riskless principal trade is a commonly used and 
understood definition of the term.  But see 17 CFR 240.10b-18 (defining a riskless 
principal transaction in the context of a safe harbor for issuers from liability under the 
Exchange Act fraud provisions as a transaction in which a broker or dealer after having 
received an order from an issuer to buy its security, buys the security as principal in the 
market at the same price to satisfy the issuer’s buy order, where the issuer’s buy order 
must be effected at the same price per share at which the broker or dealer bought the 
shares to satisfy the issuer’s buy order, exclusive of any explicitly disclosed markup or 
markdown, commission equivalent, or other fee).   

235  This proposed condition is based on the definition of payment for order flow in Exchange 
Act Rule 10b-10(d)(8), 17 CFR 240.10b-10(d)(8).  See supra note 43 (stating the 
definition of payment for order flow under Rule 10b-10(d)(8)). 

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executing brokers, the Commission preliminarily believes that this proposed condition is 

appropriate because the introducing broker, which would be exempt from many of the operative 

provisions of proposed Regulation Best Execution, should not be subject to a conflict of interest 

that could influence its selection of a broker-dealer that will handle and execute its customers’ 

orders. 

2. Review of Executing Broker’s Execution Quality 

Proposed Rule 1101(d) would provide that an introducing broker that routes customer 

orders to an executing broker does not need to separately comply with proposed Rules 1101(a), 

(b), and (c) so long as the introducing broker establishes, maintains, and enforces policies and 

procedures that require the introducing broker to regularly review the execution quality obtained 

from such executing broker, compare it with the execution quality it might have obtained from 

other executing brokers, and revise its order handling practices, accordingly.  The introducing 

broker would also be required to document the results of this review.   

Because proposed Rule 1101(d) would require the introducing broker to establish, 

maintain, and enforce policies and procedures that provide for regular reviews of the execution 

quality obtained from its executing broker, as part of its agreement with the executing broker, an 

introducing broker may wish to consider requiring the executing broker to fully disclose its 

execution quality reviews of the introducing broker’s customer orders to the introducing broker, 

in lieu of conducting its own independent analysis of the execution quality ultimately received 



   

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from the executing broker.236  This aspect of proposed Rule 1101(d) would impose a direct 

obligation on introducing brokers to regularly review the execution quality obtained from their 

executing brokers, in addition to what is required under current FINRA and MSRB rules.237   

In addition, because proposed Rule 1101(d) would require the introducing broker’s 

policies and procedures to provide for comparisons of its executing broker’s execution quality 

with the execution quality it might have obtained from other executing brokers, the introducing 

broker would need to obtain execution quality information concerning other executing brokers 

that could handle and execute the introducing broker’s customer orders.238  While the 

information concerning the execution quality that might be obtained from other executing 

                                                 

236  The executing broker’s review of execution quality that the introducing broker relies on 
would be required to be an execution quality review specific to the introducing broker’s 
customer orders.  The Commission preliminarily believes that it would not be appropriate 
for the introducing broker to rely on the executing broker’s execution quality review if 
that review involved the executing broker’s aggregate executions, including those of 
other introducing brokers’ customers. As a result, proposed Rule 1101(d) would require 
the introducing broker to evaluate the execution quality its customers received from the 
executing broker.   

237 See FINRA Rule 5310.09(c); MSRB Rule G-18.08(b) (providing that an introducing 
broker can “rely on” its executing broker’s execution quality reviews as long as the 
results and rationale of the review are fully disclosed to the introducing broker and the 
introducing broker periodically reviews how the review is conducted and the results of 
the review).  Under these rules, broker-dealers are permitted to rely on the execution 
quality reviews of their executing brokers and are required only to periodically review 
how the review is conducted and the results of the review.  These broker-dealers are not 
required to compare the execution quality they are receiving to the execution quality that 
might have been received from another executing broker.   

238  The Commission preliminarily believes that other executing brokers would have an 
incentive to provide the introducing broker with accurate and comparable execution 
quality information that the introducing broker could use to evaluate its existing 
arrangement due to their financial interest in potentially providing the introducing broker 
with order handling and execution services. 



   

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brokers would not include information concerning the execution of the introducing broker’s 

customer orders, this information would nevertheless better inform the introducing broker’s 

decisions concerning the selection of an executing broker.  This aspect of proposed Rule 1101(d) 

would impose a direct obligation on introducing brokers to conduct comparisons of execution 

quality, in addition to what is required under current FINRA and MSRB rules.239  While the 

broker-dealer would be afforded discretion in how it evaluates the execution quality that could be 

provided by other executing brokers, the Commission believes that introducing brokers could 

consider the execution quality and order routing disclosures of these executing brokers along 

with the information that these executing brokers might provide to the introducing broker 

directly in connection with this obligation.   

Proposed Rule 1101(d) would also require an introducing broker’s policies and 

procedures to address how it would revise its order handling practices, if its execution quality 

comparison shows that a change is warranted.  This aspect of proposed Rule 1101(d) would 

establish an obligation for an introducing broker to revise its policies and procedures following 

an execution quality comparison, which is not explicitly required under the current FINRA and 

MSRB rules.240  An introducing broker may consider it appropriate to change its routing 

                                                 

239 See supra note 236.    
240  See FINRA Rule 5310.09(c) (“A member that routes its order flow to another member 

that has agreed to handle that order flow as agent for the customer (e.g., a clearing firm or 
other executing broker-dealer) can rely on that member’s regular and rigorous review as 
long as the statistical results and rationale of the review are fully disclosed to the member 
and the member periodically reviews how the review is conducted, as well as the results 
of the review.”).  See also MSRB Rule G-18.08(b) (“A dealer that routes its customers’ 
transactions to another dealer that has agreed to handle those transactions as agent or 
riskless principal for the customer (e.g., a clearing firm or other executing dealer) may 



   

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practices to the extent a material difference exists between the execution quality provided by its 

existing executing broker and the execution quality that might have been obtained from other 

executing brokers.  Alternatively, the Commission preliminarily believes that an introducing 

broker could discuss the results of its review with its executing broker and whether it is 

appropriate for the executing broker to modify its order handling and execution practices in order 

to provide better execution quality for the introducing broker’s customers.241  If the executing 

broker were to either provide a reasonable explanation for the execution quality disparity 

identified by the introducing broker or agree to modify its order handling and execution practices 

in order to provide better execution quality, it could be appropriate for the introducing broker to 

continue to retain the services of its executing broker.  Should the introducing broker’s regular 

review demonstrate persistent execution quality issues that are not justifiable by the executing 

broker, the introducing broker should consider retaining the services of another executing broker.  

As a result, the Commission preliminarily believes that this regular review process would 

                                                 

rely on that other dealer’s periodic reviews as long as the results and rationale of the 
review are fully disclosed to the dealer and the dealer periodically reviews how the other 
dealer’s review is conducted and the results of the review.”).  These provisions do not 
obligate the broker-dealers that rely on the regular and rigorous review of other broker-
dealer under FINRA Rule 5310.09(c) and MSRB Rule G-18.08(b) to modify the order 
handling arrangements if execution quality analysis merits modification. 

241  As part of this process, the introducing broker and executing broker could assess why 
execution quality may be different as between the executing broker and other executing 
brokers, and the reason for these differences may inform the introducing broker’s 
decision as to whether to retain the executing broker or change executing brokers.  As 
discussed above with respect to proposed Rule 1101(c), an executing broker would be 
required to revise its best execution policies and procedures, including its order handling 
and routing practices, if warranted by its regular review of the execution quality of the 
introducing broker’s customer orders. 



   

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promote competition among executing brokers and help ensure that customer orders are executed 

consistently with the proposed best execution standard. 

Moreover, proposed Rule 1101(d) would require an introducing broker to document the 

results of its execution quality review,242 which would assist the introducing broker and 

regulators by helping to ensure that the introducing broker maintains and retains a robust record 

of the execution quality its customers receive from its executing broker over time.  This 

documentation should enable the introducing broker to better evaluate the effectiveness of its 

executing broker on an ongoing basis.  This documentation would also help ensure that 

regulators have access to information to effectively oversee the introducing broker’s efforts to 

satisfy its obligations under proposed Rule 1101(d).   

Request for Comment 

The Commission requests comment on proposed Rule 1101(d) relating to the proposed 

definitions of introducing broker and executing broker, and the proposed exemptions for 

introducing brokers, and in particular: 

109. Are the proposed definitions of introducing broker (including the three proposed 

conditions to qualify as an introducing broker) and executing broker appropriate?  If not, 

please explain whether and how the definitions should be more broadly or narrowly 

drawn, including whether certain market participants should be included or excluded 

from the definitions.   

                                                 

242  See proposed amendments to Rule 17a-4; infra section IV.G (describing the 
recordkeeping obligations applicable to any documentation made pursuant to proposed 
Regulation Best Execution). 



   

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110. Do commenters believe the use of the term “introducing broker” in proposed 

Regulation Best Execution is appropriate?  Should the Commission use an alternative 

term to describe the types of entities contemplated by proposed Rule 1101(d)?  If so, 

what alternative term would be appropriate?   

111. Does an introducing broker typically exercise any discretion with respect to how 

its customer orders are handled and executed by its executing broker, beyond the 

selection of the executing broker?  If so, should the definition of introducing broker be 

modified in any manner to account for this discretion by the introducing broker?  Please 

describe. 

112. Does an introducing broker typically have multiple executing brokers or does it 

typically have an arrangement with only one executing broker to handle and execute all 

of its customer orders? 

113. Are the proposed conditions concerning the arrangement between the introducing 

broker and its executing broker appropriate?  Please explain. 

114. Is it appropriate to require the executing broker to handle and execute all of the 

introducing broker’s customer orders on an agency basis in order for the introducing 

broker to meet the definition of introducing broker under proposed Rule 1101(d)?  Please 

explain. 

115. Do executing brokers, which can include many clearing firms that provide these 

types of services to other broker-dealers, typically execute transactions to fill an 

introducing broker’s customer orders in a riskless principal capacity?  Do these executing 

brokers often use inventory to fill the introducing broker’s customer orders? 



   

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116. Would the proposed condition that an executing broker execute customer orders 

on an agency basis harm liquidity for the introducing broker’s customer orders for any 

asset class or classes?  If so, please explain.  For example, is the principal trading desk of 

an executing broker (e.g., clearing firm) in the corporate or municipal bond markets and 

government securities markets an important source of potential liquidity for the 

customers of an introducing broker?   

117. Does the proposed introducing broker definition and the proposed approach 

concerning riskless principal trading appropriately capture the manner in which 

introducing brokers and executing brokers do business in the corporate and municipal 

bond markets and government securities markets?  Please explain. 

118. Should riskless principal transactions by an executing broker disqualify the 

introducing broker from meeting the definition of introducing broker under proposed 

Rule 1101(d)?  Please explain. 

119. Is the description of a riskless principal trade in section IV.E.1 above appropriate?  

Why or why not?   

120. In contrast to the discussion of riskless principal trades in section IV.E.1 above, 

would it be more appropriate to require the two legs of a riskless principal trade to be 

executed at the same price, exclusive of any explicitly disclosed markup or 

markdown, commission equivalent, or other fee?  For example, should a riskless 

principal trade for purposes of proposed Rule 1101(d)(2) be defined to mean:  a 

transaction in which the executing broker, after having received an order from the 

introducing broker on behalf of its customer to buy a security, buys the security from 

another person as principal to offset a contemporaneous sale to such introducing broker 

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on behalf of a customer at the same price, or after having received an order to sell, the 

executing broker sold the security to another person to offset a contemporaneous 

purchase from the introducing broker on behalf of its customer at the same price?  Please 

explain.  Would a potential benefit of this alternative definition of riskless principal 

transaction be that the bond transaction between the introducing broker and its customer 

would reflect the entire markup or markdown on the customer’s trade, which would be 

disclosed to the customer pursuant to existing FINRA and MSRB confirmation disclosure 

rules? 

121. Do commenters agree that principal trades by an executing broker to fill fractional 

share orders in NMS stocks and riskless principal trades by an executing broker in fixed 

income securities should be order handling on an agency basis for purposes of proposed 

Rule 1101(d)(2)?  Why or why not?  Are there additional types of principal transactions 

that should also be considered order handling on an agency basis for purposes of 

proposed Rule 1101(d)(2)?  If so, please describe. 

122. Do commenters agree with the proposed requirement that there be no affiliation 

between an introducing broker and its executing broker in order for the introducing 

broker to meet the definition of introducing broker under proposed Rule 1101(d)?  Why 

or why not? 

123. What is the typical relationship between an introducing broker and its executing 

broker for handling and executing customer orders in different asset classes?  

124. The proposal would prohibit a broker-dealer from receiving any payment for 

order flow from its executing broker in order to qualify as an introducing broker under 

proposed Rule 1101(d).  Currently, to what extent do introducing brokers accept payment 



   

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for order flow for their customer orders from an executing broker?  What are the common 

payment for order flow arrangements between introducing brokers and their executing 

brokers?   

125. Do commenters agree with the proposed requirement that there be no payment for 

order flow between an introducing broker and its executing broker in order for the 

introducing broker to meet the definition of introducing broker under proposed Rule 

1101(d)?  Please explain.  What are the implications for introducing brokers resulting 

from the requirement that they not accept payment for order flow from their executing 

brokers in order to qualify as introducing brokers under proposed Rule 1101(d)?  

126. Should an executing broker be prohibited from accepting payment for order flow 

from other broker-dealers that the executing broker uses to execute the introducing 

broker’s customer orders?  Why or why not? 

127. Do commenters agree that the proposed exemptions for introducing brokers from 

proposed Rule 1101(a), (b), and (c) are appropriate?  Why or why not? 

128. Do commenters believe that the approaches taken by FINRA and the MSRB with 

respect to the definition of introducing broker are preferable to the Commission’s 

proposal?243  Please explain.  Would an approach that is more restrictive than the FINRA 

and MSRB approach but less restrictive than the Commission’s proposal be preferable?  

If so, please explain.  

The Commission also seeks comment on the proposed requirement that, to avail itself of 

the exemptions under proposed Rule 1101(d), an introducing broker must establish, maintain, 

                                                 

243  See supra notes 228-230 and accompanying text.  



   

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and enforce policies and procedures that require it to regularly review the execution quality 

obtained from its executing broker, compare such execution quality with the execution quality it 

might have obtained from other executing brokers, and revise its routing practices accordingly.  

In particular: 

129. How do introducing brokers currently evaluate the execution quality of their 

executing brokers?  How often is this evaluation typically performed?  

130. Would introducing brokers be able to obtain execution quality information 

concerning other executing brokers?  If so, how?  Would executing brokers have an 

incentive to share execution quality information with introducing brokers for which they 

do not handle orders or handle few orders?   

131. Would an introducing broker be able to perform a comparison of execution 

quality received with execution quality that it might have obtained from other executing 

brokers?  Please explain any challenges in making such a comparison and whether any 

challenges depend on the asset class or classes involved.  Please describe any distinctions 

that should be drawn among executing brokers handling and executing orders in various 

asset classes.   

132. Should the Commission require that an introducing broker compare the execution 

quality received with the execution quality it might have obtained from other executing 

brokers only to the extent that such execution quality information is reasonably accessible 

to the introducing broker?  Please explain. 

133. Would introducing brokers have the capacity and resources to independently 

compare the quality of executions received from their executing brokers to the quality of161 

 

executions that they might have received from other executing brokers?  Are introducing 

brokers likely to rely on third parties to facilitate this comparison?  Please explain.   

134. How frequently should an introducing broker be required to perform a 

comparative analysis of execution quality as proposed in Rule 1101(d)?  For example, 

should it be required quarterly, similar to what FINRA requires under FINRA Rule 

5310.09?  Alternatively, should the review be required with a different frequency, such as 

on a monthly, semiannual, or annual basis, instead of quarterly?  Please explain.   

135. Should introducing brokers be required to evaluate the execution quality of a 

minimum number of alternative executing brokers when they compare the execution 

quality received from their own executing brokers?  If so, how many and why? 

136. Would the proposed documentation requirement improve the utility of an 

introducing broker’s execution quality comparison?  Why or why not?  Should the 

Commission require additional documentation to supplement the documentation of the 

introducing broker’s review?  If so, please explain. 

137. Rather than conducting the execution quality review under proposed Rule 

1101(d), should introducing brokers be subject to the regular review of execution quality 

requirement under proposed Rule 1101(c)?  Are there other factors that would make one 

more appropriate for introducing brokers than the other?  Please explain. 

138. Do commenters believe there are any concerns with the proposed requirement that 

an introducing broker’s policies and procedures require it to revise its order handling 

practices to the extent justified by its execution quality reviews?  If so, please explain.  

Should the Commission provide more specificity concerning when order handling 

practices would be required to be revised?  For example, should the Commission specify 



   

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that order handling practices be revised if there are material differences between the 

execution quality received from the executing broker and the execution quality that could 

have been obtained from another executing broker?   

139. How do introducing brokers currently address execution quality concerns relating 

to their executing brokers’ order handling?  Please describe. 

140. Do introducing brokers have a number of executing brokers to choose from when 

determining the firm they will use to handle and execute their customer orders? 

141. Is the approach in FINRA Rule 5310.09(c) and MSRB Rule G-18.08(b) 

preferable to the Commission’s proposal?  Why or why not?  Would some combination 

of the FINRA and MSRB approaches and the Commission’s proposal be preferable to 

either?  Please explain. 

142. Do commenters believe that the Commission should provide staggered 

compliance dates for proposed Rule 1101(d) for broker-dealers of different sizes, if the 

Commission adopts proposed Regulation Best Execution?  For example, should the 

Commission provide longer compliance dates for smaller broker-dealers?  If so, should 

the Commission define a smaller broker-dealer as a broker-dealer that qualifies as a 

“small entity” under the Regulatory Flexibility Act pursuant to 17 CFR 240.0-10(c) for 

this purpose?244  Or should the Commission define a smaller broker-dealer in a different 

way?  Please explain. 

                                                 

244  See supra note 151 and accompanying text (describing the broker-dealers that qualify as 
small entities under the Regulatory Flexibility Act). 



   

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F. Proposed Rule 1102 – Annual Report  

Proposed Rule 1102 would require a broker-dealer that effects any transaction for or with 

a customer or a customer of another broker-dealer to, no less frequently than annually, review 

and assess the design and overall effectiveness of its best execution policies and procedures, 

including its order handling practices.  Such review and assessment would be required to be 

conducted in accordance with written procedures and would be required to be documented.245  

The broker-dealer also would be required to prepare a written report detailing the results of such 

review and assessment, including a description of all deficiencies found and any plan to address 

such deficiencies.  The report would be required to be presented to the board of directors (or 

equivalent governing body) of the broker-dealer.  The proposed annual review requirement is 

designed to require broker-dealers to evaluate whether their best execution policies and 

procedures continue to work as designed and whether changes are needed to ensure their 

continued effectiveness. 

 In assessing the overall effectiveness of its best execution policies and procedures, a 

broker-dealer should consider its policies and procedures holistically, and may utilize its 

execution quality reviews and any documentation with respect to conflicted transactions 

prepared during the course of the review period.246  Although proposed Rule 1101(c), as 

                                                 

245  The Commission believes that broker-dealers currently have written compliance 
procedures reasonably designed to review their business activity, which a broker-dealer 
could update to document the method in which the broker-dealer plans to conduct its 
review pursuant to proposed Rule 1102. 

246  While a broker-dealer that qualifies as an introducing broker under proposed Rule 
1101(d) would need to conduct a review and prepare a written report pursuant to 
proposed Rule 1102, an introducing broker’s review should appropriately reflect its 



   

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discussed in section IV.D above, would require a broker-dealer to implement an at least quarterly 

review of the execution quality of its customer transactions, the annual review requirement in 

proposed Rule 1102 would be a broader, more holistic review of the broker-dealer’s policies and 

procedures not focused solely on execution quality.  As part of its annual review, a broker-dealer 

may review the findings of its execution quality reviews in conjunction with its overall review of 

its policies and procedures, to the extent it would assist the broker-dealer in identifying any 

inadequacies and supporting any revisions to its best execution policies and procedures, 

including its order handling practices, as appropriate.247  Ongoing changes in order handling 

technology and differing broker-dealer trading models and practices may present a need for a 

broker-dealer to reconsider its best execution policies and procedures in a way that is not 

identified during the course of a broker-dealer’s regular execution quality reviews conducted 

pursuant to proposed Rule 1101(c).  For example, the proposed annual review process may 

encourage the broker-dealer to consider investments in new technologies to improve its overall 

best execution process, despite the fact that the broker-dealer has not identified any issues with 

its existing execution quality.  Accordingly, the Commission believes that the proposed annual 

review requirement, including the associated written report that would be presented to the 

broker-dealer’s board of directors or equivalent governing body, would create a robust internal 

                                                 

obligations under proposed Rule 1101(d), rather than the aspects of proposed Rules 
1101(a), (b), and (c) that would be considered as part of the executing broker’s annual 
review. 

247  By utilizing its regular reviews of execution quality as part of its annual review, a broker-
dealer may avoid any duplication of efforts to the extent it needs to conduct any 
execution quality analysis in order to assess the overall effectiveness of its best execution 
policies and procedures as required by proposed Rule 1102. 



   

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compliance process under the oversight of the highest level of a broker-dealer’s internal 

governance to help ensure the broker-dealer maintains robust best execution policies and 

procedures and complies with proposed Regulation Best Execution.  The written report prepared 

pursuant to proposed Rule 1102 would also help regulators better understand the broker-dealer’s 

compliance with proposed Regulation Best Execution.   

FINRA’s best execution rule does not require a periodic review of a broker-dealer’s best 

execution policies and procedures.248  However, FINRA Rule 3130(c) requires a broker-dealer to 

have a report that describes its processes to:  establish, maintain, and review its policies and 

procedures reasonably designed to achieve compliance with applicable FINRA rules, MSRB 

rules, and Federal securities laws and regulations; modify such policies and procedures as 

changes and events dictate; and test the effectiveness of such policies and procedures on a 

periodic basis, the timing and extent of which is reasonably designed to ensure continuing 

compliance with FINRA rules, MSRB rules, and Federal securities laws and regulations.  FINRA 

Rule 3130(c) further requires the broker-dealer’s chief executive officer(s) (or equivalent 

officer(s)) to certify to the existence of such processes, and to certify that the report of such 

processes has been submitted to the broker-dealer’s board of directors and audit committee (or 

equivalent bodies).  The Commission understands that, currently, broker-dealers periodically 

review their policies and procedures (including those related to best execution), although the 

frequency of review may vary.  However, because the Commission is proposing its own best 

execution rule, proposed Rule 1102 would help ensure the effectiveness of the broker-dealer’s 

best execution policies and procedures that it adopts pursuant to the proposed rules. 

                                                 

248  FINRA Rule 5310. 



   

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MSRB Rule G-18.08(a) requires a broker-dealer to, at a minimum, conduct annual 

reviews of its policies and procedures for determining the best available market for the 

executions of its customers’ transactions.  In conducting these reviews, a dealer must assess 

whether its policies and procedures are reasonably designed to achieve best execution, taking 

into account the quality of the executions the dealer is obtaining under its current policies and 

procedures, changes in market structure, new entrants, the availability of additional pre-trade and 

post-trade data, and the availability of new technologies, and to make promptly any necessary 

modifications to such policies and procedures as may be appropriate in light of such reviews.  As 

described above in connection with the FINRA rules, because the Commission is proposing its 

own best execution rule, proposed Rule 1102 would help ensure the effectiveness of the broker-

dealer’s best execution policies and procedures that it adopts pursuant to the proposed rules.  

Moreover, as compared to MSRB Rule G-18.08(a), proposed Rule 1102 would include a specific 

requirement that a broker-dealer review its order handling practices, require that a report be 

maintained of this annual review, and require that the broker-dealer provide the annual report to 

its governing body.   

Request for Comment 

The Commission requests comment on all aspects of proposed Rule 1102, and in 

particular: 

143. Should a broker-dealer be required to have written procedures for annual (or more 

frequent) reviews of the overall effectiveness of its best execution policies and 

procedures, including its order handling practices, and be required to document such 

review, as proposed?  Why or why not? 



   

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144. Would the proposed requirement for written procedures for annual (or more 

frequent) reviews help to ensure the overall effectiveness of a broker-dealer’s best 

execution policies and procedures?  Why or why not? 

145. Should a broker-dealer be required to prepare a written report detailing the results 

of its review, including any plan to address deficiencies, as proposed?  Why or why not?  

Should the Commission require specific information to be included in the written report?  

If so, what specific information should be required? 

146. Should the written report of the review be presented to the broker-dealer’s board 

of directors (or equivalent governing body), as proposed?  Why or why not? 

147. Would the proposed requirement for annual (or more frequent) reviews and for 

presenting written reports of the reviews to the board of directors help to ensure a broker-

dealer’s compliance with proposed Regulation Best Execution?  Why or why not?   

148. Should a broker-dealer’s board of directors (or governing body) also be required 

to approve the best execution policies and procedures that would initially be established 

under proposed Regulation Best Execution?  Please explain. 

149. Do commenters agree with the Commission’s understanding that, currently, 

broker-dealers periodically review their best execution policies and procedures?  Please 

describe the rigor of any such reviews, whether broker-dealers document such reviews, 

and whether broker-dealers present the results of such reviews to their boards of directors 

(or equivalent governing bodies).   

150. Do commenters agree with the Commission’s understanding that such reviews 

vary in frequency among broker-dealers?  Please describe the frequency of such reviews.  



   

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Does the frequency of review vary depending on whether the broker-dealer is subject to 

the FINRA rules or the MSRB rules?  Please explain.  

151. Should management, a committee, or an expert be designated to conduct the 

annual review and prepare the report?  Should specific experience or expertise be 

required to conduct the annual review and prepare the report?  Would additional 

specificity in the rule promote accountability over the annual review and report and 

ensure that adequate resources are devoted to such review and report?  Why or why not?  

152. Does the annual review raise any particular challenges for smaller broker-dealers? 

If so, what could the Commission do to mitigate those challenges?  

153. Are there any conflicts of interest if the same personnel that designs or 

implements the policies and procedures also conduct the annual reviews?  If so, how can 

those conflicts be mitigated or eliminated?  Should broker-dealers be required to have 

their policies and procedures periodically audited by an unaffiliated third party to assess 

their design and effectiveness?  Why or why not?  If so, should the rule define the term 

“affiliate” to specify the entities that would be eligible to perform such an audit and 

should the Commission use the definition of “affiliate” in proposed Rule 1101(b)(4)(iii) 

for this purpose?  Please explain.  What types of unaffiliated third parties might have the 

necessary specific experience and expertise to review a broker-dealer’s best execution 

policies and procedures?  For example, should an unaffiliated consulting firm, accounting 

firm, or law firm be permitted to provide this service, if required?  Should the rule 

prescribe the types of unaffiliated third parties that would have the requisite experience 

and expertise?  Please explain.   



   

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154. Do commenters believe that the Commission should provide staggered 

compliance dates for proposed Rule 1102 for broker-dealers of different sizes, if the 

Commission adopts proposed Regulation Best Execution?  For example, should the 

Commission provide longer compliance dates for smaller broker-dealers?  If so, should 

the Commission define a smaller broker-dealer as a broker-dealer that qualifies as a 

“small entity” under the Regulatory Flexibility Act pursuant to 17 CFR 240.0-10(c) for 

this purpose?249  Or should the Commission define a smaller broker-dealer in a different 

way?  Please explain. 

G. Recordkeeping Requirements under Rule 17a-4 

In connection with proposed Regulation Best Execution, the Commission is proposing 

new recordkeeping requirements for broker-dealers.  Section 17(a)(1) of the Exchange Act 

requires registered broker-dealers to keep for prescribed periods such records as the Commission 

prescribes as necessary or appropriate in the public interest, for the protection of investors, or 

otherwise in furtherance of the purposes of the Exchange Act.250  Rule 17a-4 under the Exchange 

Act specifies how long broker-dealers must preserve required records and other documents.251   

Proposed Regulation Best Execution would require broker-dealers to make the following 

records:  

• Policies and procedures under proposed Rules 1101(a), (b), and (d) and Rule 1102; 

                                                 

249  See supra note 151 and accompanying text (describing the broker-dealers that qualify as 
small entities under the Regulatory Flexibility Act). 

250  15 U.S.C. 78q(a)(1). 
251  17 CFR 240.17a-4.  



   

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• Documentation of compliance with the best execution standard for conflicted transactions 

under proposed Rule 1101(b);  

• Documentation of payment for order flow arrangements under proposed Rule 1101(b); 

• Documentation of the results of the regular review of execution quality under proposed 

Rule 1101(c);  

• Documentation of the results of the regular review of execution quality by introducing 

brokers under proposed Rule 1101(d);  

• Documentation of the annual review under proposed Rule 1102; and  

• Annual report under proposed Rule 1102.   

Current Rule 17a-4(e)(7) under the Exchange Act would apply to the policies and 

procedures required by proposed Regulation Best Execution.252  The Commission proposes to 

amend Rule 17a-4 to add new paragraph (b)(17) to require broker-dealers to preserve all other 

records made pursuant to proposed Rules 1101 and 1102 for a period of not less than three years, 

the first two years in a readily accessible place. 

The Commission preliminarily believes that the preservation of records made pursuant to 

proposed Regulation Best Execution for this time period would assist broker-dealers in ensuring 

that they continue to maintain robust best execution practices for an appropriate amount of time.  

In addition, the preservation and availability of records that support and document broker-

                                                 

252  Rule 17a-4(e)(7) requires broker-dealers to maintain and preserve in an easily accessible 
place compliance, supervisory, and procedures manuals (and any updates, modifications, 
and revisions thereto) describing the policies and practices of the broker-dealer with 
respect to compliance with applicable laws and rules, and supervision of the activities of 
associated persons until three years after the termination of the use of the manual.  17 
CFR 240.17a-4(e)(7).   



   

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dealers’ compliance with proposed Regulation Best Execution would also assist the Commission 

and SROs in assessing the broker-dealer’s efforts to comply with proposed Regulation Best 

Execution.  

Request for Comment 

The Commission requests comment on the proposed record preservation requirements 

related to proposed Regulation Best Execution: 

155. Should all records made pursuant to proposed Regulation Best Execution be 

required to be preserved?  Please explain. 

156. Do commenters agree that the policies and procedures required by proposed 

Regulation Best Execution should be subject to Rule 17a-4(e)(7) and preserved until 

three years after the termination of their use?  Please explain.  

157. Do commenters agree that all other records required by proposed Regulation Best 

Execution should be subject to Rule 17a-4(b) and preserved for a period of not less than 

three years, the first two years in a readily accessible place?  Please explain.   

158. Should the Commission impose additional record preservation requirements 

related to proposed Regulation Best Execution?  Why or why not?  If the Commission 

were to impose additional requirements, what specific records should broker-dealers be 

required to preserve?  Please explain.  

V. Economic Analysis 

A. Introduction 

The Commission is mindful of the economic effects that may result from proposed 

Regulation Best Execution, including the benefits, costs, and the effects on efficiency, 



   

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competition, and capital formation.253  This section analyzes the expected economic effects of 

proposed Regulation Best Execution relative to the current baseline, which consists of the current 

market and regulatory framework in existence today. 

A broker-dealer’s duty of best execution predates the Federal securities laws and, as 

noted previously, has “its roots in the common law agency obligations of undivided loyalty and 

reasonable care that an agent owes to his principal.”254  In general terms, the Commission 

position is, and has been, that “the duty of best execution requires broker-dealers to execute 

customers’ trades at the most favorable terms reasonably available under the circumstances, i.e., 

at the best reasonably available price.”255  FINRA Rule 5310(a) and MSRB Rule G-18(a) codify 

                                                 

253  Exchange Act Section 3(f) requires the Commission, when it is engaged in rulemaking 
pursuant to the Exchange Act, and is required to consider or determine whether an action 
is necessary or appropriate in the public interest, to consider, in addition to the protection 
of investors, whether the action will promote efficiency, competition, and capital 
formation.  See 15 U.S.C. 78c(f).  In addition, Exchange Act Section 23(a)(2) requires the 
Commission, when making rules pursuant to the Exchange Act, to consider among other 
matters, the impact that any such rule would have on competition, and not to adopt any 
rule that would impose a burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.  See 15 U.S.C. 78w(a)(2). 

254  Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 270, n. 30 (3rd 
Cir. 1998).  As the Commission explained when adopting rules governing payment for 
order flow almost three decades ago, “[a] broker-dealer's duty to seek to 
obtain best execution of customer orders derives, in part, from the common law agency 
duty of loyalty, which obligates an agent to act exclusively in the principal's best 
interest. Restatement (Second) of Agency section 387 (1958). Thus, when an agent acts 
on behalf of a customer in a transaction, the agent is under a duty to exercise reasonable 
care to obtain the most advantageous terms for the customer. Id. at section 424.” Payment 
For Order Flow Release, supra note 33, at n. 15.   

255  Regulation NMS Adopting Release, supra note 21, at 37538 (citations omitted). See also, 
Special Study, supra note 10, at 623 (“A broker-dealer acting as an agent for a customer 
in the execution of a transaction assumes the obligations of a fiduciary. . . . A corollary of 
the fiduciary’s duty of loyalty to his principal is his duty to obtain or dispose of property 



   

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essentially the same requirement that members must “use reasonable diligence to ascertain the 

best market for the subject security and buy or sell [there] so that the resultant price to the 

customer is as favorable as possible under prevailing market conditions.”  

The duty of best execution is a foundational component of the current best execution 

regulatory framework that helps protect investors in a setting of imperfect markets.  The duty 

serves to counteract market failures that arise, for example, when an agent (in this case, a broker 

or broker-dealer) has different incentives than a principal (investor), and the principal, 

particularly the retail investor, is not in a position to monitor the agent.  This is known in 

economics as a principal-agent problem.256  A principal-agent problem arises when a broker-

dealer undertakes costly actions to achieve best execution and the principal (investor) cannot 

observe the broker-dealer’s actions.  The broker-dealer in this situation has financial incentives 

to take (or not take) certain actions to reduce its costs or increase its profits.  

The principal-agent problem can be exacerbated by a specific conflict of interest that 

arises when the broker-dealer executes a customer order in a principal capacity.257  In these 

instances, the broker-dealer acting as principal on the trade has a financial incentive to maximize 

its gains from the trade, which would be at the expense of the counterparty, here the broker-

                                                 

for his principal at the best price discoverable in the exercise of reasonable diligence.”) 
(citations omitted), available at 
https://www.sechistorical.org/collection/papers/1960/1963_SSMkt_Chapter_07_2.pdf 

256  See Joseph E. Stiglitz, Principal and Agent, in Allocation, Information and Markets 241 
(John Eatwell et al. eds., 1989).  

257  For instance, a broker-dealer may decide to act in a principal capacity in a situation where 
there is a  liquidity externality in that the investor’s order lacks a counterparty, though the 
presence of such an externality is not necessary to the broker-dealer’s decision. 

https://www.sechistorical.org/collection/papers/1960/1963_SSMkt_Chapter_07_2.pdf


   

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dealer’s customer, in a zero-sum game.258  This conflict of interest should be mitigated because 

the broker-dealer as agent for its customer also has a duty to ensure that the order was executed 

at the most favorable terms reasonably available to the customer under the circumstances.  

However, retail customers typically lack access to the information that would allow them to 

determine independently whether an order received best execution from a broker-dealer.  

Further, obtaining and analyzing such information could be costly for retail customers. 

The Commission has long taken the position that the “scope of [the] duty of best 

execution must evolve as changes occur in the market that give rise to improved executions for 

customer orders . . . [and that] broker-dealers' procedures for seeking to obtain best execution for 

customer orders also must be modified to consider price [improvement] opportunities that 

become ‘reasonably available.’”259  Current SRO rules that specifically address broker-dealer 

best execution policies and procedures requirements focus on a retrospective “regular and 

rigorous” review of execution quality.  With limited exceptions, such as those for orders 

involving foreign securities, and securities for which there is limited pricing information or 

quotations available, existing SRO rules do not establish specific standards concerning a broker-

                                                 

258  “Trading is a zero-sum game in an important accounting sense. In a zero-sum game, the 
total gains of the winners are exactly equal to the total losses of the losers. Trading is a 
zero-sum game, because the combined gains and losses of buyers and sellers always sum 
to zero.”  Larry Harris, Trading and Exchanges: Market Microstructure for Practitioners 
(2002). 

259  See, e.g., Marc N. Geman, Securities Exchange Act Release No. 43963 (Feb. 14, 2001) 
(Commission opinion) (citing Order Execution Obligations Adopting Release, supra note 
10, 61 FR 48322 - 48323).  



   

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dealer’s policies and procedures for complying with the best execution obligations in FINRA 

Rule 5310(a) and MSRB Rule G-18(a).260    

 The proposal would build on the existing regulatory framework, codify in a Commission 

rule a best execution standard that is consistent with how the Commission and the courts have 

described the duty of best execution, enhance the Commission’s ability to enforce best 

execution, and impose detailed policies and procedures obligations on broker-dealers’ handling 

and execution of customer orders, including documented incremental efforts required for a 

broker-dealer to obtain the most favorable price in conflicted transactions for or with retail 

customers.261  These requirements could further help enhance broker-dealers’ ability to maintain 

robust best execution practices, including in situations where broker-dealers have order handling 

conflicts of interest with retail customers.  

The Commission estimates aggregate compliance costs of $165.4 million in one-time 

costs and $128.9 million in annual costs on broker-dealers as they update, or establish, their 

policies and procedures for the handling, execution, and review of customer orders.  To the 

extent that broker-dealers already have policies and procedures that are consistent with the 

                                                 

260  As discussed supra in note 129 and the accompanying text, FINRA Rule 3110(b)(1) 

requires broker-dealers to have policies and procedures for compliance with FINRA rules 
and Federal securities laws and regulations.  MSRB Rule G-18.08 requires broker-dealers 
to have policies and procedures for determining the best available market for the 
executions of their customers’ transactions.  MSRB Rule G-28 requires broker-dealers to 
have procedures for compliance with MSRB rules and the Exchange Act and rules 
thereunder.  Unlike these FINRA and MSRB rules, proposed Regulation Best Execution 
would establish specific standards concerning the policies and procedures for complying 
with the proposed best execution standard, as discussed in sections IV.B.1 and 2 supra. 

261  See supra section IV. 



   

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proposed rules, aggregate implementation costs would be less than this estimate, and based on 

the Commission’s experience, the Commission preliminarily believes these estimates overstate 

costs broker-dealers would bear in implementing the proposal.262  Broker-dealers may also incur 

indirect costs.263  Some of these costs could be passed through to customers in the form of higher 

commissions or reduced services.    

The Commission has considered the economic effects of proposed Regulation Best 

Execution and, wherever possible, the Commission has quantified the likely economic effects of 

proposed Regulation Best Execution.  The Commission is providing both a qualitative 

assessment and quantified estimates of the potential economic effects of the proposal where 

feasible.  The Commission has incorporated data and other information to assist it in the analysis 

of the economic effects of proposed Regulation Best Execution.  However, as explained in more 

detail below, because the Commission does not have, and in certain cases does not believe it can 

reasonably obtain, data that may inform the Commission on certain economic effects, the 

Commission is unable to quantify certain economic effects.  Further, even in cases where the 

Commission has some data, quantification is not practicable due to the number and type of 

assumptions necessary to quantify certain economic effects, which render any such 

quantification unreliable.  Our inability to quantify certain costs, benefits, and effects does not 

imply that the Commission believes such costs, benefits, or effects are less significant.  The 

Commission requests that commenters provide relevant data and information to assist the 

Commission in quantifying the economic consequences of proposed Regulation Best Execution. 

                                                 

262  See infra section V.C.2. 
263  See infra section V.C.2.b).  



   

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B. Baseline 

Commission statements and SRO rules, including FINRA Rule 5310 and MSRB Rule G-

18, and related SRO interpretive notices and guidance address broker-dealer best execution 

duties primarily through a broad, principles-based approach.  Differences in security 

characteristics and market structure can cause broker-dealer order handling and execution 

practices to vary significantly across different asset classes, including the role that conflicts of 

interests play in the handling and execution of a broker-dealer’s retail customer orders.  In 

addition, policies related to the handling of customer orders can impact competition among 

broker-dealers, trading venues, and broker-dealers that offer order routing and execution 

services.  The baseline against which the costs, benefits, and the effects on efficiency, 

competition, and capital formation of proposed Regulation Best Execution is measured consists 

of the current regulatory requirements and SRO guidance for broker-dealers concerning 

customer best execution, current broker-dealer best execution review processes, the current 

market structure and broker-dealer practices concerning handling and executing customer orders 

that may be impacted by proposed Regulation Best Execution,264 and the structure of the market 

for broker-dealer services. 

                                                 

264  While proposed Regulation Best Execution would apply to all securities, the Commission 
preliminarily believes that the proposal would not have economic effects on the market 
structure or order handling practices in the markets for securities based swaps, asset-
backed securities, and repurchase and reverse repurchase agreements because these 
markets are mostly dominated by institutional investors that do their own order handling.  
Therefore, the market structure and order handling practices in these markets are not 
discussed in the economic baseline of this release.  



   

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1. Current Legal and Regulatory Framework 

 Although FINRA and the MSRB have established rules and issued guidance directly 

addressing the duty of best execution that are applicable to their respective members, the 

Commission has never established its own rule governing a broker-dealer’s legal duty of best 

execution.  As described above in section II.A, the duty of best execution that a broker-dealer has 

today was originally derived from an implied representation that a broker-dealer makes to its 

customers when it agrees to engage in certain transactions on their behalf.   The common law 

agency obligations of “undivided loyalty and reasonable care” that an agent owes to its principal 

require that a “broker-dealer seek to obtain for its customer orders the most favorable terms 

reasonably available under the circumstances.” 265  Expressed in economic terms, because a 

“client-principal seeks his own economic gain and the purpose of the agency is to help the client-

principal achieve that objective, the broker-dealer[’s best execution obligation], absent 

instructions to the contrary, [means that a broker-dealer] is expected to use reasonable efforts to 

maximize the economic benefit to the client in each transaction.”266    

In addition to the duty itself, the current framework consists of examination and 

monitoring programs conducted by the Commission and FINRA267 of Commission registrants 

                                                 

265  Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d at 270.  
266  See id.     
267  The MSRB does not conduct its own enforcement or compliance examinations.  MSRB, 

The Role and Jurisdiction of the MSRB, at 2 (2021) (“the SEC and federal bank 
regulators [] share responsibility for enforcement and compliance examinations”), 
available at https://www.msrb.org/sites/default/files/2022-09/Role-and-Jurisdiction-of-
MSRB.pdf. 

https://www.msrb.org/sites/default/files/2022-09/Role-and-Jurisdiction-of-MSRB.pdf
https://www.msrb.org/sites/default/files/2022-09/Role-and-Jurisdiction-of-MSRB.pdf


   

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and FINRA and MSRB members. Best execution is and has been a priority item in these 

examinations.268  In addition, FINRA produces monthly status reports for members, known as 

the best execution Outside-of-the-Inside report card, “detailing the number of transactions 

reported to a FINRA [trade reporting] Facility, in which [a] firm participated that were executed 

Outside-of-the-Inside market in apparent violation of the Best Execution Rule.”269 

a) Commission and Court Statements, Agency Guidance, and 
Enforcement Activities 

  In the context of agency rulemaking, adjudication, and Federal court litigation, the 

Commission and various Federal courts of appeal have articulated what the duty of best 

execution means and interpreted how the duty applies in various circumstances.  For example, 

the duty of best execution requires a broker-dealer to “execute customers’ trades at the most 

favorable terms reasonably available under the circumstances, i.e., at the best reasonably 

                                                 

268  The Division of Exams 2022 priorities note that best execution in fixed-income 
securities, best execution obligations in a zero commission environment, and possible 
effects of conflicts of interest on best execution are focus points of its broker-dealer exam 
program.  Division of Examinations, 2022 Examination Priorities, at 19 and 20, available 
at https://www.sec.gov/files/2022-exam-priorities.pdf.  According to FINRA, 
“[a]ssessing firms’ compliance with their best execution obligations under FINRA Rule 
5310 (Best Execution and Interpositioning) is one of the cornerstones of FINRA’s 
oversight activities.” FINRA, 2022 Report on FINRA’s Examination and Risk 
Monitoring Program, at 2 (Feb. 2022), available at 
https://www.finra.org/sites/default/files/2022-02/2022-report-finras-examination-risk-
monitoring-program.pdf.  

269  FINRA, Best Execution Outside-of-the-Inside Report Card, available at 
https://www.finra.org/compliance-tools/report-center/equity/best-execution-outside-
inside-report-card. Member firms are told that they should “make no inference . . . that 
FINRA staff has or has not determined that the information contained on the Best 
Execution Outside-of-the-Inside report cards does or does not constitute rule violations.”  
Id.   

https://www.sec.gov/files/2022-exam-priorities.pdf
https://www.finra.org/sites/default/files/2022-02/2022-report-finras-examination-risk-monitoring-program.pdf
https://www.finra.org/sites/default/files/2022-02/2022-report-finras-examination-risk-monitoring-program.pdf
https://www.finra.org/compliance-tools/report-center/equity/best-execution-outside-inside-report-card
https://www.finra.org/compliance-tools/report-center/equity/best-execution-outside-inside-report-card


   

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available price.”270  When considering what the best reasonably available price means in the 

context of a broker-dealers’ best execution analysis, the Commission has articulated a non-

exhaustive list of factors that may be relevant to broker-dealers’ best execution analysis.  These 

factors include the size of the order, speed of execution, clearing costs, the trading characteristics 

of the security involved, the availability of accurate information affecting choices as to the most 

favorable market center for execution and the availability of technological aids to process such 

information, and the cost and difficulty associated with achieving an execution in a particular 

market center.271   

 Other Commission statements address what best execution means in the context of 

various market practices and circumstances.  Interpositioning, which occurs when a broker-

dealer places a third party between itself and the best market for executing a customer trade in a 

manner that results in a customer not receiving the best available market price or paying 

unnecessary expenses, violates the broker-dealer’s duty of best execution.272  When a broker-

                                                 

270  Regulation NMS Adopting Release, supra note 21, at 37538.  See also Order Execution 
and Routing Practice Release, supra note 22, at 75418 (price is a critical concern for 
investors); Geman v. SEC, 334 F.3d 1183, 1186 (10th Cir. 2003) (“[T]he duty of best 
execution requires that a broker-dealer seek to obtain for its customer orders the most 
favorable terms reasonably available under the circumstances.”) (quoting Newton v. 
Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 270 (3d Cir. 1998)); Kurz v. 
Fidelity Management & Research Co., 556 F.3d 639, 640 (7th Cir. 2009) (describing the 
“duty of best execution” as “getting the optimal combination of price, speed, and 
liquidity for a securities trade”). 

271  See Order Execution and Routing Practice Release, supra note 22, at 75422; Regulation 
NMS Adopting Release, supra note 21, at 37538. 

272  See supra notes 29-30 listing Commission opinions.  See also SEC v. Ridenour, 913 F.2d 
515 (8th Cir. 1990) (bond salesman’s interpositioning of personal trading between his 
customers’ securities transactions and the market violated the antifraud provisions).181 

 

dealer receives a limit order, the duty of best execution requires the broker-dealer to account for 

potential material differences in execution quality, such as the likelihood of execution among the 

various securities markets or market centers to which limit orders may be routed.273 The 

Commission has also recognized that it may be impractical for a broker-dealer that handles a 

heavy volume of orders to make individual determinations regarding where to route each 

order274 and that the duty of best execution requires a broker-dealer to assess periodically the 

quality of competing markets to ensure that its customers’ order flow is directed to the markets 

providing the most beneficial terms.275   

 Although the Commission has not established a set of specific minimum data elements 

that a broker-dealer would need to acquire to achieve best execution276 and has acknowledged 

that it cannot specify the data elements that may be relevant to every specific situation,277 it has 

identified the various types of data needed by broker-dealers to fulfill their duty of best 

execution.  For example, information contained in the public quotation system must be 

considered in seeking best execution of customer orders.278  In adopting Rules 605 and 606,279 

the Commission recognized that the reports required of market centers would provide statistical 

                                                 

273  See Order Execution Obligations Adopting Release, supra note 10, at 48323. 
274  See Payment for Order Flow Release, supra note 33, at 55009. 
275  See Regulation NMS Adopting Release, supra note 21, at 37516; Payment for Order 

Flow Release, supra note 33, at 55009. 
276  See MDI Adopting Release, supra note 38, at 18606. 
277  Id. 
278  See Order Execution and Routing Practice Release, supra note 22, at 75418. 
279  17 CFR 242.605, 242.606. 



   

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disclosures regarding certain factors, such as execution price and speed of execution, relevant to 

a broker-dealer’s order routing decisions and that these public disclosures of execution quality 

should help broker-dealers fulfill their duty of best execution.280  More recently, the Commission 

emphasized that broker-dealers should consider the availability of consolidated market data, 

including the various elements of data content and the timeliness, accuracy, and reliability of the 

data in developing and maintaining best execution policies and procedures.281  

The Commission has also emphasized the importance of price improvement in 

considering whether a customer order received best execution stating that “notwithstanding any 

ambiguity that may have once existed [], it should now be clear that a firm must consider the 

potential for price improvement in carrying out its best execution obligations.”282  Relatedly, the 

Commission has taken the position that simply routing customer order flow for automated 

executions or internalizing customer orders on an automated basis at the best bid or offer does 

not necessarily satisfy a broker-dealer’s duty of best execution for small orders in non-NMS 

stock equity securities (and NMS stocks).283  Rather, broker-dealers handling small orders should 

                                                 

280  See Order Execution and Routing Practice Release, supra note 22, at 75418.  See also, id. 
at 75420 (information provided by these reports is not, by itself, sufficient to support 
conclusions regarding the provision of best execution, and any such conclusions would 
require a more in-depth analysis of the broker-dealer's order routing practices than will be 
available from the disclosures required by the rules).  

281  See MDI Adopting Release, supra note 38, at 18605-06.  
282  Marc N. Geman, Exchange Act Release No. 43963 (Feb. 14, 2001) (C’n opinion) (record 

did not support a finding that firm fraudulently violated its duty of best execution), 
affirmed on other grounds, 334 F.3d 1183, 1186 (10th Cir. 2003).  See Order Execution 
Obligations Adopting Release, supra note 10, at 48323.  See also, id. at 48323 n. 357   

283  See id. at 48323. 



   

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look for price improvement opportunities when executing these orders.284  And the expectation 

of price improvement for customer orders is particularly important when broker-dealers receive 

payment for order flow.285  According to the Commission, a broker-dealer’s receipt of payment 

for order flow is not a violation of its duty of best execution as long as it periodically assesses the 

quality of the markets to which it routes packaged order flow.286 

An additional component of the best execution baseline for the Commission is 

enforcement mechanisms.  The Commission has broad statutory authority under the Exchange 

Act to bring an injunctive action in Federal district court under Exchange Act Section 21(d)(1) 

whenever any person is engaged or is about to engage in acts or practices constituting a violation 

of the Federal securities laws and rules and regulations thereunder and, among other things, 

FINRA and MSRB rules, including best execution rules.  Exchange Act Section 21(f) directs the 

Commission not to bring an injunctive action against any person for a SRO rule violation “unless 

. . . such self-regulatory organization . . . is unable or unwilling to take appropriate action . . ., or 

(2) such action is otherwise necessary or appropriate in the public interest or for the protection of 

investors.”287  The Commission’s authority to obtain monetary sanctions in Federal district court 

                                                 

284  See id. 
285  See Payment for Order Flow Release, supra note 33, at 55008.  See Exchange Act Rule 

10b-10, 17 CFR 240.10b-10.  See also supra note 43 (reviewing the definition of payment 
for order flow).   

286  See Payment for Order Flow Release, supra note 33, at 55009.   
287  Under Exchange Act Section 21(f), the Commission “shall not bring any action pursuant 

to subsection (d) or (e) of this section against any person for violation of, or to command 
compliance with, the rules of a self-regulatory organization . . . unless it appears to the 
Commission that (1) such self-regulatory organization . . . is unable or unwilling to take 
appropriate action against such person in the public interest and for the protection of 



   

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actions for FINRA and MSRB rule violations is also not co-extensive with its authority to obtain 

injunctive relief for violations of the Federal securities laws.  For example, while the 

Commission can seek disgorgement and any equitable relief for Federal securities law violations 

and SRO rule violations, the Commission’s authority to obtain civil penalties in a Federal district 

court action under Section 21(d) extends to violations of “any provision of th[e Exchange Act], 

the rules or regulations thereunder, or a cease-and-desist order entered by the Commission . . . 

other than [] a violation subject to a penalty pursuant to [the Exchange Act provision penalizing 

insider trading violations].”288  Section 21(d)(3) does not include the language in Section 

21(d)(1) regarding the “rules of a registered securities association” or the “rules of the Municipal 

Securities Rulemaking Board.”   

The Commission’s authority to obtain relief in administrative and cease-and-desist 

proceedings is more limited. The Commission can institute administrative proceedings pursuant 

to Exchange Act Sections 15(b)(4) and 15(b)(6), against broker dealers and their associated 

persons respectively, and pursuant to Exchange Act Sections 15B(c)(2) and 15B(c)(4) against 

municipal securities dealers and their associated persons respectively, for willful violations, and 

willful aiding and abetting violations of, among other things, the federal securities statutes, the 

rules and regulations thereunder, “or the rules of the Municipal Securities Rulemaking Board.”289   

                                                 

investors, or (2) such action is otherwise necessary or appropriate in the public interest or 
for the protection of investors.”   

288  Exchange Act Section 21(d)(3)(A).  
289  Exchange Act Section 15(b)(4)(D) and (E) and 15(b)(6)(A)(i). Where broker-dealer’s 

best execution-related misconduct has also involved fraud, the Commission may exercise 
its discretion to bring best execution-based fraud charges pursuant to the Exchange Act’s 



   

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There is no parallel provision for the rules of an SRO or a registered securities association such 

as FINRA.  A cease-and-desist proceeding can be brought only if “any person is violating, has 

violated, or is about to violate any provision of [the Exchange Act], or any rule or regulation 

thereunder.”290  There is no parallel provision for the rules of the MSRB291 or the rules of a 

federal securities association.292 

b) FINRA Rule 5310 Best Execution Rule and Related Information 

As discussed in greater detail in Sections II.C and IV., FINRA has a rule for its members 

that details their best execution obligations.293  Specifically, Rule 5310(a)(1) states that “[i]n any 

                                                 

and the Securities Act’s antifraud provisions. See, e.g., Linkbrokers Derivatives LLC, 
Exchange Act Rel. No. 72,846 (Aug. 14, 2014) (settled Section 15(b) and cease-and-
desist proceeding alleging antifraud violations of Exchange Act Section 15(c)(1)), 
available at https://www.sec.gov/litigation/admin/2014/34-72846.pdf.    

290  Exchange Act Section 21C(a).  
291  Where the Commission can institute an administrative proceeding under both Sections 

15B(c) and 21C, the Commission can order remedies, including a cease-and-desist order, 
and other sanctions against a municipal securities dealer.  See, e.g., RBC Capital 
Markets, LLC, Exchange Act Rel. No. 93,042 (Sept. 17, 2021) (settled action) available 
at https://www.sec.gov/litigation/admin/2021/34-93042.pdf.  

  
292  In situations where broker-dealer best execution-related misconduct has involved fraud, 

the Commission can exercise its discretion to bring best execution-based fraud charges 
pursuant to the Exchange Act’s or the Securities Act’s antifraud provisions. See, e.g., 
Robinhood SEC, supra note 69 (settled cease-and-desist proceeding alleging antifraud 
violations of Securities Act Sections 17(a)(2) and 17(a)(3)) 
https://www.sec.gov/litigation/admin/2020/33-10906.pdf; Patrick R. Burke, Exchange 
Act Rel. No. 76,285 (Oct. 28, 2015) (settled cease-and-desist and Section 15(b) 
proceeding alleging antifraud violations of Exchange Act Section 10(b) and Rule 10b-5 
and Securities Act Section 17(a)), available at  
https://www.sec.gov/litigation/admin/2015/33-9968.pdf.  

293  Rule 5310, which first became effective in May 2012, consolidated FINRA members' 
best execution requirements that were based largely on NASD Rule 2320 and NASD 
Interpretive Guidance with Respect to Best Execution Requirements, NASD IM-2320, as 

https://www.sec.gov/litigation/admin/2014/34-72846.pdf
https://www.sec.gov/litigation/admin/2021/34-93042.pdf
https://www.sec.gov/litigation/admin/2020/33-10906.pdf
https://www.sec.gov/litigation/admin/2015/33-9968.pdf


   

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transaction for or with a customer or customer of another broker-dealer, a member and persons 

associated with a member shall use reasonable diligence to ascertain the best market for the 

subject security and buy or sell in such market so that the resultant price to the customer is as 

favorable as possible under prevailing market conditions.”294  FINRA’s rule applies “not only 

where the member acts as agent for the account of its customer but also where transactions are 

                                                 

well as new provisions.  FINRA, Regulatory Notice 12-13, SEC Approves Consolidated 
FINRA Best Execution Rule, available at https://www.finra.org/rules-
guidance/notices/12-13.  As previously noted supra in note 129, in addition to FINRA’s 
best execution rule, FINRA Rule 3110(b)(1)  requires broker-dealers to have procedures 
for compliance with FINRA rules (including its best execution rule) and Federal 
securities laws and regulations.  Separately, FINRA Rules 3130(b) and (c) require the 
chief executive officer (or equivalent officer) of a FINRA member to certify annually that 
the member has in place processes to establish, maintain, review, test and modify written 
compliance policies and written supervisory procedures reasonably designed to achieve 
compliance with applicable FINRA rules, MSRB rules, and Federal securities laws and 
regulations.  See also, FINRA Regulatory Notice 21-12, supra note 174, at 9 (“FINRA 
has also advised Member firms should have effective procedures in place to ensure they 
are fulfilling their best execution obligations during extreme market conditions”).  

294  FINRA Rule 5310(a)(1), available at https://www.finra.org/rules-
guidance/rulebooks/finra-rules/5310.  FINRA rule 5310 recodified FINRA’s predecessor, 
the NASD, rule and interpretative material (IM) governing best execution and 
interpositioning, NASD Rule 2320 and IM-2320.  FINRA’s most recent regulatory 
guidance on Rule 5310 is contained in Regulatory Notice 15-46, Best Execution: 
Guidance on Best Execution Obligations in Equity, Options and Fixed Income Markets 
(Nov. 2015) (“FINRA Regulatory Notice 15-46”), available at 
https://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_15-
46.pdf; and Regulatory Notice 21-23, Best Execution and Payment for Order Flow (June 
23, 2021) (“FINRA Regulatory Notice 21-23”) available at 
https://www.finra.org/sites/default/files/2021-06/Regulatory-Notice-21-23.pdf.   

https://www.finra.org/rules-guidance/notices/12-13
https://www.finra.org/rules-guidance/notices/12-13
https://www.finra.org/rules-guidance/rulebooks/finra-rules/5310
https://www.finra.org/rules-guidance/rulebooks/finra-rules/5310
https://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_15-46.pdf
https://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_15-46.pdf
https://www.finra.org/sites/default/files/2021-06/Regulatory-Notice-21-23.pdf


   

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executed as principal”295 and cannot be transferred to others.296  Interpositioning is expressly 

prohibited.297  Like the position taken by the Commission,298 FINRA’s rule lists a set of non-

exclusive “factors that will be considered in determining whether a member has used ‘reasonable 

diligence.”  The five factors listed are:  

i. the character of the market for the security (e.g., price, volatility, relative 
liquidity, and pressure on available communications); 

ii. the size and type of transaction; 
iii. the number of markets checked; 
iv. accessibility of the quotation; and 
v. the terms and conditions of the order which result in the transaction, as 

communicated to the member and persons associated with the member.299 
 

FINRA’s best execution rule and related guidance300 addresses how its members’ 

obligations and these factors are accounted for and considered. For example, for debt securities, 

                                                 

295  FINRA Rule 5310(e).  This paragraph also states that a broker-dealer’s duty of best 
execution is “distinct from the reasonableness of commission rates, markups, or 
markdowns, which are governed by Rule 2121 and its Supplementary Material.” Id.  

296  FINRA Rule 5310.09(a). 
297  FINRA Rule 5310(a)(2).  This subparagraph is one of a number of the rule’s specific 

provisions addressing interpositioning.  For a discussion of the related burdens and 
prohibitions imposed by FINRA in connection with interpositioning, see the discussion of 
FINRA Rules 5310(b), (c), and (d) in Section IV.A., including the text accompanying 
supra notes 149 and150.   

298  See Order Execution and Routing Practice Release, supra note 22, at 75422, and the 
accompanying discussion.   

299  FINRA Rule 5310(a)(1).   
300  FINRA Rule 5310 includes supplementary material which addresses: i) the execution of 

marketable customer orders; ii) the definition of “market;” iii) debt securities; iv) 
executing brokers; v) the use of another broker, a broker’s broker, to execute a 
customer’s orders; vi) orders involving securities with limited quotation or pricing 



   

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FINRA Rule 5310.03 explains that the term “quotation” in its “accessibility of the quotation” 

factor “refers to either dollar (or other currency) pricing or yield pricing” and that “[i]n the 

absence of accessibility, members are not relieved from taking reasonable steps and employing 

their market expertise in achieving the best execution of customer orders.”301 FINRA Rule 

5310.06 also states that FINRA members “must have written policies and procedures in place 

that address how the member will determine the best inter-dealer market for such a security in 

the absence of pricing information or multiple quotations and must document its compliance 

with those policies and procedures.” 

FINRA Rule 5310.07 also addresses orders involving foreign securities.  “Even though a 

security does not trade in the U.S., members still have an obligation to seek best execution for 

customer orders involving any foreign security.” 302  “[A] member that handles customer orders 

involving foreign securities that do not trade in the U.S. must have specific written policies and 

procedures in place regarding its handling of customer orders for these securities that are 

reasonably designed to obtain the most favorable terms available for the customer, taking into 

account differences that may exist between U.S. markets and foreign markets.”303  Referencing 

                                                 

information; vii) orders involving foreign securities; viii) customer instructions for order 
handling; and ix) the regular and rigorous review of execution quality. The text of 
FINRA Rule 5310 is available at https://www.finra.org/rules-guidance/rulebooks/finra-
rules/5310.  Regulatory Notices 15-46 and 21-23 are FINRA guidance documents for its 
best execution rule.     

301  FINRA Rule 5310.03.   
302  FINRA Rule 5310.07.   
303  Id. 

https://www.finra.org/rules-guidance/rulebooks/finra-rules/5310
https://www.finra.org/rules-guidance/rulebooks/finra-rules/5310


   

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two of its factors to be considered, FINRA Rule 5310.07 states that “the character of the 

particular foreign market and the accessibility of quotations in certain foreign markets may vary 

significantly” and that “the determination as to whether a member has satisfied its best execution 

obligations necessarily involves a ‘facts and circumstances’ analysis.”304  Further, for customer 

orders involving a foreign security FINRA requires its members to “have specific written 

policies and procedures in place regarding its handling of customer orders for these securities 

that are reasonably designed to obtain the most favorable terms available for the customer.”305 

FINRA rules address two situations where a member’s best execution obligation is 

modified or no longer applicable.  If a broker-dealer “receives an unsolicited instruction from a 

customer to route that customer’s order to a particular market for execution, the member is not 

required to make a best execution determination beyond the customer’s specific instruction.”306   

FINRA Rule 5310.04 addresses a specific situation where its best execution rule does not apply.  

The rule “does not apply in instances when another broker-dealer is simply executing a customer 

order against the member's quote.”  The rule explains that “[t]he duty to provide best execution 

                                                 

304  Id.  The rule also states that “best execution obligations also must evolve as changes 
occur in the market that may give rise to improved executions [and] members also must 
regularly review these policies and procedures to assess the quality of executions 
received and update or revise the policies and procedures as necessary.”  

305  Id. 
306  FINRA Rule 5310.08.  FINRA does require, however, that the broker-dealer process the 

“order promptly in accordance with [its] terms … [and] where a customer has directed 
that an order be routed to another specific broker-dealer,” that broker-dealer receiving the 
directed order would be subject to the duty of best execution with respect to the 
customer’s order.  Id.  



   

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to customer orders received from other broker-dealers arises only when an order is routed from 

the broker-dealer to the member for the purpose of order handling and execution.”307 

FINRA Rule 5310 addresses a broker-dealer’s best execution-related obligations to 

determine order execution quality.  FINRA Rule 5310.09(a) requires that “[a] member that 

routes customer orders to other broker-dealers for execution on an automated, non-discretionary 

basis, as well as a member that internalizes customer order flow, must have procedures in place 

to ensure the member periodically conducts regular and rigorous reviews of the quality of the 

executions of its customers' orders if it does not conduct an order-by-order review.”308   This 

“regular and rigorous” review must be conducted at a minimum no less frequently than quarterly 

unless, based on a member’s business, “more frequent reviews are needed.”  Reviews are 

                                                 

307  FINRA Rule 5310.04 (emphasis added). 
308  FINRA Rule 5310.09(a).  FINRA has stated that there are two situations where an order-

by-order review would satisfy best execution requirements when a “regular and rigorous 
review alone . . . may not” do so.  One involves certain larger-sized security orders.  See 
FINRA Regulatory Notice 15-46, supra note 294, at 3 (“when routing or internally 
executing larger-sized orders in any security, regular and rigorous review alone (as 
opposed to an order-by-order review) may not satisfy best execution requirements, given 
that the execution of larger-size orders “often requires more judgment in terms of market 
timing and capital commitment” (quoting NASD Notice to Members 01-22 at n. 13)).  
The other circumstance involves “any orders that a member firm determines to execute 
internally” which, according to FINRA Regulatory Notice 21-23, “are subject to an 
order-by-order best execution analysis.”  Id., supra note 294, at 3.  FINRA guidance 
includes commentary that advances in technology make “order-by-order review of 
execution quality [] increasingly possible for a range of orders in equity securities and 
standardized options. Id.  Although the text of FINRA Rule 5310 and its interpretive 
guidance refer to an “order-by-order review” in contrast to the “regular and rigorous 
review” detailed in Rule 5310.09, it is our understanding that FINRA has not directly 
addressed what an “order-by-order review” entails. 



   

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required to be done on a security-by-security and type-of-order basis.309  Execution quality 

reviews must compare customer execution quality to the execution quality of other markets that 

are not used for customer order execution.310  However, FINRA Rule 5310.09(c) allows a 

broker-dealer to rely on another broker-dealer’s regular and rigorous review if the broker-dealer 

seeking to rely “routes its order flow to another member that has agreed to handle that order flow 

as agent for the customer (e.g., a clearing firm or other executing broker-dealer)” and “as long as 

the statistical results and rationale of the review are fully disclosed to the member and the 

member periodically reviews how the review is conducted, as well as the results of the 

review.”311  Issues associated with payment for order flow are also addressed in FINRA’s best 

execution rule and guidance.  FINRA recently issued best execution guidance that stated that 

“firms that provide payment for order flow for the opportunity to internalize customer orders 

cannot allow such payments to interfere with their best execution obligations.”312  For example, 

                                                 

309  FINRA Rule 5310.09(a). 
310  “[A] member must determine whether any material differences in execution quality exist 

among the markets trading the security and, if so, modify the member's routing 
arrangements or justify why it is not modifying its routing arrangements.”  FINRA Rule 
5310.09(b).  FINRA has identified eight factors for members to consider in order to 
assure that order flow is directed to markets providing the most beneficial terms for a 
member’s customers’ orders.  These factors are discussed in the text accompanying supra 
note 299.   

311  FINRA Rule 5310.09(c).   
312  FINRA Regulatory Notice 21-23, supra note 294, at 4.   



   

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“inducements such as payment for order flow and internalization may not be taken into account 

in analyzing market quality.”313   

 “In other words, … firms may not negotiate the terms of order routing arrangements for 

those customer orders in a manner that reduces the price improvement opportunities that 

otherwise would be available to those customer orders absent payment for order flow.”314 

FINRA publishes reports that include the results of its examination program’s annual 

review of member best execution compliance.  These reports, covering examinations from 2017 

through 2021, include a series of findings and observations on various aspects of Rule 5310.315  

In each year, FINRA observed some noncompliance with Rule 5310.  Among the points made in 

each report, FINRA reported observing some firms that did not: 1) assess execution in competing 

markets; 2)  conduct an adequate review on a type-of-order basis; 3) evaluate certain required 

factors when conducting regular and rigorous review; and, in more recent years, 4) consider and 

address potential conflicts of interest in conflicts of interest relating to routing of orders to 

                                                 

313  Id. FINRA’s guidance stated that “the possibility of obtaining price improvement is a 
heightened consideration when a broker-dealer receives payment for order flow.” Id. 
(citation omitted).  

314  Id. (citing FINRA Regulatory Notice 15-46, supra note 294, at n.25 (“For example, if a 
firm obtains price improvement at one venue of $0.0005 per share, and it could obtain 
mid-point price improvement at another venue of $0.025 per share, the firm should 
consider the opportunity of such midpoint price improvement on that other venue as part 
of its best execution analysis.”)).  

315  Each of these reports is available at https://www.finra.org/media-center/reports-studies. 
For 2017 through 2019, the reports are titled “FINRA Report on Examination Findings.”  
More recent reports are titled “Report on FINRA’s Examination and Risk Monitoring 
Program.”   

https://www.finra.org/media-center/reports-studies.%20For%202017%20through%202019
https://www.finra.org/media-center/reports-studies.%20For%202017%20through%202019


   

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affiliated broker-dealers, ATSs, or market centers that provide payment for order flow or other 

routing inducements. 316   

c) MSRB Rule G-18 Best Execution Rule and Guidance 

The MSRB’s adopted its best execution rule, Rule G-18, in 2015 which became effective 

on March 21, 2016.317  It is generally modeled after and similar to FINRA Rule 5310.318  It 

extends the outline of “reasonable diligence” to include “the information reviewed to determine 

the current market for the subject security or similar securities,” provides more granular detail 

regarding transactions in which the broker-dealer acts in a principal capacity, and directs at least 

                                                 

316  Id.  
317  The full text of the MSRB rule is available at https://www.msrb.org/Rules-and-

Interpretations/MSRB-Rules/General/Rule-G-18.aspx.  The rule applies to brokers, 
dealers, and municipal securities dealers.  In addition, MSRB Rule G-28 requires broker-
dealers to have procedures for compliance with MSRB rules and the Exchange Act and 
rules thereunder.  As previously noted in supra note 48, for ease of discussion and 
consistency, when discussing the MSRB rule, the release refers to these entities 
collectively as “broker-dealers.”  The MSRB issued “Implementation Guidance on 
MSRB Rule G-18, on Best Execution” on November 20, 2015 (“MSRB 2015 
Guidance”), available at https://www.msrb.org/~/media/Files/MISC/Best-Ex-
Implementation-Guidance.ashx.  An updated version of portions of that guidance from 
February 7, 2019 (“MSRB Notice 2019-05”) is available at https://www.msrb.org/-
/media/Files/Regulatory-Notices/Announcements/2019-05.ashx??n=1.  The MSRB and 
FINRA coordinated their issuance of independent guidance in 2015 with each notice 
including a statement that the guidance being issued was “consistent in all material 
respects with guidance on best execution obligations [being published by the other SRO] 
… except where the rule or context otherwise specifically requires.” MSRB 2015 
Guidance, at n. 1; FINRA Regulatory Notice 15-46, supra note 294, at n. 1.  The MSRB 
has also issued information for investors available at 
https://www.msrb.org/msrb1/pdfs/Best-Execution-Investors-Perspective.pdf. 

318  See sections II.C and IV for detailed discussions of Rule G-18.  The discussion in this 
section of the economic analysis is largely limited to identifying the differences between 
Rule G-18 and FINRA Rule 5310.    

https://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G-18.aspx
https://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G-18.aspx
https://www.msrb.org/%7E/media/Files/MISC/Best-Ex-Implementation-Guidance.ashx
https://www.msrb.org/%7E/media/Files/MISC/Best-Ex-Implementation-Guidance.ashx
https://www.msrb.org/-/media/Files/Regulatory-Notices/Announcements/2019-05.ashx??n=1
https://www.msrb.org/-/media/Files/Regulatory-Notices/Announcements/2019-05.ashx??n=1
https://www.msrb.org/msrb1/pdfs/Best-Execution-Investors-Perspective.pdf


   

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annual reviews of best execution (versus at least quarterly reviews required by FINRA).  Unlike 

FINRA Rule 5310, MSRB Rule G-48(e) provides an exception from the requirements of Rule G-

18 for all transactions with sophisticated municipal market professionals, defined in MSRB Rule 

D-15.319  According to FINRA and the MSRB, there are two instances where “material 

differences” exist between the MSRB’s best execution guidance and FINRA’s.320  They involve 

the regular and rigorous review of execution quality required by members,321 and the timeliness 

of executions consistent with reasonable diligence.322  MSRB Rule G-18.08(a) requires a broker-

dealer to, at a minimum, conduct annual reviews of its policies and procedures for determining 

the best available market for the execution of its customers’ transactions.  MSRB Rule G-

18.08(b) provides that where a broker-dealer routes its customers’ transactions to another broker-

                                                 

319  MSRB Rule G-48 and paragraph (e) provide that “a broker, dealer, or municipal 
securities dealer’s obligations to a customer that it reasonably concludes is a 
Sophisticated Municipal Market Professional, or SMMP, as defined in Rule D-15, shall 
be modified” such that “[t]he broker, dealer, or municipal securities dealer shall not have 
any obligation under Rule G-18 to use reasonable diligence to ascertain the best market 
for the subject security and buy or sell in that market so that the resultant price to the 
SMMP is as favorable as possible under prevailing market conditions.”  See supra note 
120. 

320  FINRA Regulatory Notice 15-46, supra note 294, at 12 n. 1; MSRB Notice 2019-05, 
supra note 317, at 4 n.1.  In addition to these “material differences,” the MSRB guidance 
also expressly states that the provisions of Rule G-18 do not apply to transactions in 
municipal fund securities.”  MSRB Rule G-18.09.  The FINRA guidance has no 
comparable position.   

321  The MSRB, “[i]n adopting Rule G-18, and paragraph .08 of the Supplementary Material 
specifically, [] did not include provisions that are contained in FINRA Rule 5310 
pertaining to “regular and rigorous review of execution quality,” to tailor the rule to the 
characteristics of the municipal securities market.”  MSRB Notice 2019-05, supra note 
317, at 7 n.12.    

322  FINRA Regulatory Notice 15-46, supra note 294, at 12 n. 1. 



   

195 

 

dealer, and that broker-dealer has agreed to handle those transactions as agent or riskless 

principal for the customer, the routing broker-dealer may rely on the other broker-dealer’s 

periodic reviews as long as the results and rationale of the reviews are fully disclosed to the 

broker-dealer and the broker-dealer periodically reviews how the other broker-dealer’s reviews 

are conducted and the results of such reviews.323   

The other material difference between FINRA and MSRB best execution rules can be 

found in MSRB Rule G-18.03.  According to this rule, “[a] dealer must make every effort to 

execute a customer transaction promptly, taking into account prevailing market conditions.  In 

certain market conditions a dealer may need more time to use reasonable diligence to ascertain 

the best market for the subject security.”324  FINRA Rule 5310 has no similar provision noting 

the potential need for more time.   

MSRB does not have authority to bring enforcement actions itself.  Rather, FINRA and 

the Commission may enforce MSRB rules.   

2. Best Execution Review Processes 

 Policies and procedures for reviewing the execution quality of customer orders vary 

across broker-dealers.  Under the existing SRO rules and guidance, broker-dealers325 that route 

to clearing or executing brokers on an agency basis may rely on the best execution review of 

                                                 

323  For a discussion of how the MSRB has interpreted the obligations of introducing brokers, 
see supra note 229.   

324  MSRB Rule G-18.03.   
325  These broker-dealers can include introducing brokers as proposed to be defined by this 

rule, but FINRA’s rule applies more generally. 



   

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their clearing firm or executing brokers.  Other broker-dealers may use third-party transactions 

costs analysis (TCA) services and internal review systems, including best execution committees.   

Currently, broker-dealers review best execution to standards set by FINRA Rule 5310 or 

MSRB Rule G-18, as applicable.326  FINRA Rule 5310 requires at least a quarterly review of 

execution quality.  MSRB Rule G-18 requires an annual review of best execution policies and 

procedures that takes into account execution quality obtained under those policies and 

procedures, among other things.  In performing reviews of customers’ order execution quality, 

broker-dealers compare the execution actually achieved to the execution quality in other markets 

that were not used.  Overall, these processes help broker-dealers to evaluate whether or not 

access to a specific market will improve customer execution quality given cost of access.  

FINRA Rule 5310.02 provides a “market” definition and states that broker-dealers must not 

mandate that “certain trading venues have less relevance than others in the course of determining 

a firm’s best execution obligations.”  What constitutes a relevant/material market to access varies 

based on the needs of the individual customer order and estimated changes in their transaction 

costs.  A best execution policy including a documented process of venue selection aids this 

decision. 

Introducing brokers perform best execution reviews by evaluating the execution quality 

achieved by brokers to which they route their customers’ orders.  As discussed above in this 

section , introducing brokers327 may rely on the best execution review processes of their routing 

                                                 

326  See supra Section II.C for a detailed discussion of FINRA and MSRB best execution 
review requirements. 

327  All broker-dealers who route to executing or clearing brokers on an agency basis may use 
this reliance, per FINRA Rule 5310, for the purposes of best execution. 



   

197 

 

or executing brokers and use these to evaluate the execution quality of orders by comparing 

execution statistics of executing brokers, with which the introducing broker has a relationship.  

The Commission believes this is currently done by comparing execution statistics in aggregate, 

rather than on an order-by-order basis, except where an introducing broker is following FINRA’s 

statements in its regulatory notice regarding order-by-order best execution reviews.328   

Introducing brokers typically have pre-arranged agreements with a small number of executing 

brokers, which vary by introducing broker.329  This may lead to introducing brokers principally 

relying on execution statistics from these executing brokers to determine whether customers’ 

orders are receiving best execution.  While the FINRA rule requires introducing brokers to 

review the methodology and results of its executing broker’s regular and rigorous review of its 

execution quality on a quarterly basis, it does not specifically require the introducing broker to 

compare the execution quality of its executing broker(s) to what it would have received from 

other executing brokers.330   

Executing brokers are able to conduct a more thorough review of execution quality of the 

orders they receive.  Executing brokers review execution quality by comparing execution 

statistics of executions received given particular execution methods, e.g., routing to a particular 

market center or internalization.  The Commission preliminarily believes this review is highly 

                                                 

328  See supra note 308 for further discussion on FINRA’s rules and guidance related to 
broker-dealers reviewing the execution quality of customer orders.  

329  See Henry F. Minnerop, The Role and Regulation of Clearing Brokers-Revisited, 75 Bus. 
Lawyer 2201 (Summer 2020), available at 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3663233 (retrieved from Elsevier 
database). 

330  See FINRA Rule 5310.09(c), Regular and Rigorous Review of Execution Quality. 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3663233


   

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heterogeneous among executing brokers (i.e., some use third party transaction cost analysis 

(“TCA”) services exclusively while others supplement and verify their own analysis with third 

party TCA statistics), with some brokers performing very rigorous comparisons of executions 

using various methods, and other brokers performing a more cursory review. 

Some brokers may utilize third-party analysis in their execution quality reviews.  In order 

to evaluate their execution quality, some brokers may send information on their orders to third 

parties TCA services to produce independent order execution quality statistics.  TCA 

components may include, but are not necessarily limited to, fees, taxes, rebates, spreads, delay 

costs, price appreciation, market impact, timing risk, and opportunity costs.  For example, TCA 

service providers in the NMS stock and options markets may produce execution quality reports 

for their clients which contain, in addition to other metrics, information on the percentage of 

trades receiving price improvement, percentage of trades at or within the NBBO, average savings 

per share from price improvement, liquidity multiple (i.e., average size of order execution at or 

better than the NBBO at the time of order routing, divided by average quoted size), execution 

speed, and effective to quoted spread ratios.  In NMS Stocks, broker-dealers may also utilize 

Rule 605 reports to help evaluate execution quality at different market centers, including market 

to which they may not route orders.331 

Some broker-dealers use best execution committees (BECs) to evaluate their execution 

quality and establish their best execution policies and procedures.  Order-by-order reviews are 

typically reserved for large orders, which likely leaves the execution quality review of retail 

                                                 

331 See supra note 223 and accompanying discussion for more information on Rule 605 
reports. 



   

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orders as a task to be done in aggregate.  BECs meet periodically, as often as monthly, to review 

execution quality of all applicable order types, compare order routing practices, policies, and 

procedures to industry standards, and maintain written documentation for order execution and 

evaluation.  BEC members may consist of senior trading representatives along with members of 

the broker-dealer’s compliance, legal, and operational risk departments. 

3. Description of Markets and Broker-Dealer Order Handling and 
Execution Practices 

 Broker-dealers execute orders from their customers in a variety of ways, which may 

depend on the nature of the market, broker-dealer, or customer, or characteristics of the order 

such as size.  Some broker-dealers may act on a purely agency basis by routing orders to the best 

available quotes set by other broker-dealers or third-party market makers on exchanges and 

ATSs or at other OTC market centers, some broker-dealers may choose to execute the orders on 

a principal basis, and some may do both.  

Certain conflicts of interest may arise in the handling and execution of customer orders 

that exacerbate the principal-agent problem between the customer and broker-dealer.  Common 

types of conflicts of interest that may exacerbate the principal-agent problem can involve:  (1) a 

broker-dealer routing a customer order in exchange for a payment or a lower fee; or (2) a broker-

dealer seeking to transact in a principal capacity with a customer order, which involves trading 

off the spread the broker-dealer can earn on the transaction vs the price the customer must pay; 

or (3) a broker-dealer routing a customer order to a trading venue or broker-dealer with which it 

may have a relationship, such as a broker-dealer routing a customer order to an affiliated ATS.332  

                                                 

332  See supra Section III.A. 



   

200 

 

However, SRO rules address the extent to which certain specific situations presenting conflicts 

of interest are prohibited from influencing a broker-dealer’s duty of best execution.  For example 

FINRA rules and guidance (e.g., FINRA Regulatory Notice 21-23) require that “member firms 

may not let payment for order flow interfere with their duty of best execution.”333      

The below sections discuss in more detail the trading environment and broker-dealer 

order handling and execution practices in different asset classes.  They also discuss the role that 

certain conflicts of interest such as PFOF and principal trading play in the handling and 

execution of retail orders in different asset classes. 

a) NMS Securities 

i. NMS Stocks 

a. NMS Stocks Trading Services Overview 

Market centers compete to attract order flow in NMS stocks. At the same time, market 

participants compete to provide liquidity in NMS stocks within market centers. As shown in 

Table 1, in Q1 of 2022, NMS stocks were traded on 16 registered securities exchanges334 and 

                                                 

333  See supra Section III.A.2. 
334  Most of these 16 registered securities exchanges are owned by three exchange families. 

Currently, CBOE Global Markets owns: Cboe BYX Exchange, Inc., Cboe BZX 
Exchange, Inc. (“Cboe BZX”), Cboe EDGA Exchange, Inc., and Cboe EDGX Exchange, 
Inc. (“Cboe EDGX”); the Nasdaq Inc. owns: Nasdaq BX, Inc. (“Nasdaq BX”), Nasdaq 
PHLX LLC (“Nasdaq Phlx”), and The Nasdaq Stock Market LLC (“Nasdaq”); and the 
Intercontinental Exchange Inc. owns: NYSE, NYSE American LLC (“NYSE 
American”), NYSE Arca, Inc. (“NYSE Arca”), NYSE Chicago, Inc., and NYSE 
National, Inc.  Other registered securities exchanges that trade NMS stocks and do not 
belong to one of these exchange groups include: Investors Exchange LLC (“IEX”), Long-
Term Stock Exchange, Inc., MEMX LLC, and MIAX Pearl, LLC (“MIAX PEARL”). 
Among these exchanges, eight trade only equities and eight trade both equities and 
options.  The Commission has approved BOX Exchange LLC (“BOX”) to trade certain201 

 

off-exchange at 32 NMS Stock ATSs and at over 230 other FINRA members, including OTC 

market makers.335  OTC market markers include 6 wholesalers that internalize the majority of 

individual investor marketable orders.336  These numerous market centers match traders with 

counterparties, provide a framework for price negotiation and/or provide liquidity to those 

seeking to trade.  

 Market centers’ primary customers are broker-dealers that route their own orders or their 

customers’ orders for execution.  Market centers may compete with each other for these broker-

dealers’ order flow on a number of dimensions, including execution quality.  They also may 

                                                 

equity securities that would be NMS stocks on a facility, BSTX LLC (“BSTX”), but 
BSTX is not yet operational.  See Securities Exchange Act Release Nos. 94092 (Jan. 27, 
2022), 87 FR 5881 (Feb. 2, 2022) (SR-BOX-2021-06) (approving the trading of equity 
securities on the exchange through a facility of the exchange known as BSTX); 94278 
(Feb. 17, 2022), 87 FR 10401 (Feb. 24, 2022) (SR-BOX-2021-14) (approving the 
establishment of BSTX as a facility of BOX).  BSTX cannot commence operations as a 
facility of BOX until, among other things, the BSTX Third Amended and Restated 
Limited Liability Company Agreement approved by the Commission as rules of BOX is 
adopted. Id. at 10407. 

335  See Concept Release on Equity Market Structure, Exchange Act Release No. 61358 (Jan. 
14, 2010), 75 FR 3593 (Jan. 21, 2010) at 3598-3560 (for a discussion of the types of 
trading centers); see also Form ATS-N Filings and Information, available at 
https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm.  Some academic studies 
attribute the fragmented nature of this market, in part, to certain provisions of Regulation 
NMS. See, e.g., Maureen O’Hara & Mao Ye, Is Market Fragmentation Harming Market 
Quality?, 100 J. FIN. 459 (2011); Amy Kwan, et. al., Is Market Fragmentation Harming 
Market Quality?, 115 J. FIN. 330 (2015).  

336  The six OTC market makers that are classified as wholesalers for purposes of this release 
are the OTC market makers to which the majority of marketable orders originating from 
retail brokers were routed as identified from information from retail broker Rule 
606(a)(1) reports from Q1 2022. Rule 606(a)(1) requires broker-dealers to produce 
quarterly public reports containing information about the venues to which the broker-
dealer regularly routed non-directed orders for execution, including any payment 
relationship between the broker-dealer and the venue, such as any PFOF arrangements. 
See 17 CFR 242.606(a)(1). 

https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm


   

202 

 

innovate to differentiate themselves from other trading centers to attract more order flow.  While 

registered exchanges cater to a broader spectrum of investors, ATSs and OTC market makers, 

including wholesalers, tend to focus more on providing trading services to either institutional or 

individual investor orders. 

Table 1: Q1 2022 NMS Stock Share Volume Percentage by Market Center Type 

Market Center Type Venue Count Percentage of Total Share 
Volume 

Percentage of Off-
Exchange Share Volume 

Exchanges 16 59.7%  

NMS Stock ATSs 32 10.2% 25.2% 

Wholesalers a 6 23.9% 59.4% 

Other FINRA Members 232 6.3% 15.6% 

This table reports for Q1 2022 the percentage of NMS stock share volume executed by market center type and the 
percentage of off-exchange share volume by market centers type. Venue Count lists the number of venues in each 
market center category. Percentage of Total Share Volume is the percentage of all NMS stock share volume (on-
exchange plus off-exchange) executed by the type of market center. Percentage of off-Exchange Share Volume is 
the percentage of off-exchange share volume executed by the type of market center. Exchange share volume and 
total market volume are based on CBOE Market Volume Data on monthly share volume executed on each 
exchange and share volume reported in FINRA Trade Reporting Facilities (TRFs).b NMS Stock ATSs, 
wholesalers and Other FINRA members share volume are based on monthly FINRA OTC Transparency data on 
aggregated NMS stock trading volume executed on individual ATSs and over-the-counter at Non-ATS FINRA 
members.c The Percentage of Off-Exchange Share Volume is calculated by dividing the NMS Stock ATS, 
wholesaler and FINRA member share volume from the FINRA Transparency Data by the total TRF share volume 
reported in CBOE Market Volume Data. Percentages do not add up to 100 percent due to rounding.   
a See supra note 336 for details regarding how FINRA member OTC market makers are classified as wholesalers 
for purposes of this release. 
b Cboe, U.S. Historical Market Volume Data, available at 
https://cboe.com/us/equities/market_statistics/historical_market_volume/. Trade Reporting Facilities (TRFs) are 
facilities through which FINRA members report off-exchange transactions in NMS stocks, as defined in SEC 
Rule 600(b)(47) of Regulation NMS. See generally FINRA, Trade Reporting Facility, available at 
https://www.finra.org/filing-reporting/trade-reporting-facility-trf. 
c FINRA OTC (Non-ATS) Transparency Data, Monthly Statistics, available at 
https://otctransparency.finra.org/otctransparency/OtcData; FINRA OTC (ATS Block)Transparency Data, 
Monthly Statistics, available at https://otctransparency.finra.org/otctransparency/AtsBlocksDownload. The 
FINRA OTC (Non-ATS) Transparency Data may not contain all share volume transacted by a wholesaler or 
FINRA member because FINRA aggregates “[s]ecurity-specific information for firms with ‘de minimis’ volume 
outside of an ATS” and “publishe[s it] on a non-attributed basis.” FINRA, OTC (ATS & Non-ATS) 
Transparency, Overview, available at https://www.finra.org/filing-reporting/otc-transparency 

  



   

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 Table 1 displays NMS stock share volume percentage by market center type for Q1 2022. 

Exchanges execute approximately 60% of total share volume in NMS stocks, while off-exchange 

market centers execute approximately 40%.  The majority of off-exchange share volume is 

executed by wholesalers, who execute almost one quarter of total share volume (23.9%)337 and 

about 60% of off-exchange share volume.338  NMS Stock ATSs execute approximately 10% of 

total NMS stock share volume and 25% of off-exchange share volume.  Other FINRA members, 

besides wholesalers and ATSs, execute approximately 15% of off-exchange share volume. 

Wholesalers and other OTC market makers also operate single dealer platforms (“SDPs”) where 

                                                 

337  Of the six wholesalers identified in Q1 2022, two accounted for approximately 66% of 
wholesalers’ total executed share volume of NMS stocks.  This result suggests that just 
two wholesalers account for a very large percentage of order flow coming from 
individual investors. One study finds that the concentration of wholesaler internalization, 
as measured by the Herfindahl-Hirschman Index (HHI) of share volume executed across 
wholesalers, has increased from 2018 to 2021.  See Edwin Hu & Dermot Murphy, 
Competition for Retail Order Flow and Market Quality (Working paper, June 2022), 
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4070056 (retrieved from 
Elsevier database).  

338  The share volume reported for wholesalers in FINRA OTC Transparency Data includes 
both individual investor orders executed by wholesalers in a principal capacity, as well as 
other orders executed by wholesalers in a principal capacity, such as institutional orders 
executed on their single dealer platforms.  It does not include share volume that they 
executed in a riskless principal capacity or share volume that was routed and executed at 
another market center.  



   

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they operate as dealers to internalize marketable institutional orders.339  One study found that 

SDPs accounted for approximately 10% of off-exchange trading volume in Q1 2022.340  

 Exchanges (via their rules) and ATSs determine how orders compete with each other, 

wherein liquidity suppliers set prices and wait for execution at their prices by liquidity 

demanders.  This interaction between liquidity providers and demanders encompasses order-by-

order competition.  Unlike exchanges, for which each exchange’s rules determine competition in 

a non-discretionary fashion, wholesalers execute or route orders in a discretionary fashion.341   

While some orders may be routed to a central limit order book against which institutional 

investors may execute (on the discretion of the wholesaler), institutional investors generally 

consider order flow routed to a wholesaler to be “inaccessible.”342  

                                                 

339  Wholesalers and OTC market makers can execute orders itself or instead further route the 
order to other venues.  An SDP always acts as the counterparty to any trade that occurs 
on the SDP.  See, e.g., FINRA, Investor Insights, Where Do Stocks Trade? (Dec. 3, 
2021), available at https://www.finra.org/investors/insights/where-do-stocks-trade .  

340  See Rosenblatt Securities, US Equity Trading Venue Guide (May 24, 2022), available at 
https://www.rblt.com/market-reports/rosenblatts-2021-us-equity-trading-venue-guide-2. 
SDP trading volume would be included in the share volume percentage estimates for 
wholesalers and other FINRA members in Table 1. 

341  A study estimates that the volume of individual investor orders executed by wholesalers 
accounted for approximately 16% to 17% of consolidated share volume during Q1 2022.  
See Rosenblatt Securities, An Update on Retail Market Share in US Equities (June 24, 
2022), available at https://www.rblt.com/market-reports/trading-talk-an-update-on-retail-
market-share-in-us-equities.  However, wholesalers are not completely focused on 
individual investor order flow and some do offer services to institutional order flow. 

342  See, e.g., Jennifer Hadiaris, Cowen Market Structure: Retail Trading — What’s going on, 
what may change, and what can you do about it?, Insights (Mar. 23, 2021), available at 
https://www.cowen.com/insights/retail-trading-whats-going-on-what-may-change-and-
what-can-institutional-traders-do-about-it/ (“Market makers print most of these shares 
internally at their firm, so they trade off-exchange.  One way we have for isolating retail 
volume is to look at the share of volume that trades off-exchange, but not in a dark pool.  

https://www.rblt.com/market-reports/rosenblatts-2021-us-equity-trading-venue-guide-2
https://www.rblt.com/market-reports/trading-talk-an-update-on-retail-market-share-in-us-equities
https://www.rblt.com/market-reports/trading-talk-an-update-on-retail-market-share-in-us-equities
https://www.cowen.com/insights/retail-trading-whats-going-on-what-may-change-and-what-can-institutional-traders-do-about-it/
https://www.cowen.com/insights/retail-trading-whats-going-on-what-may-change-and-what-can-institutional-traders-do-about-it/


   

205 

 

 As a proxy for expected execution quality, quoted prices are a dimension on which 

exchanges compete to attract order flow.  Specifically, exchanges are required to post the best 

bid and ask prices available on the exchange at that time343 and broker-dealers can observe those 

prices and choose to route orders to the exchange posting the best prices at a given point in time.   

However, others who provide trading services, such as ATSs and OTC market makers, do not 

compete on this dimension.344  In other words, wholesalers generally do not compete for order 

flow by posting competitive prices the way exchanges do.  They do not display or otherwise 

advertise the prices at which they are willing to internalize individual investor orders at a given 

point in time.  This suggests that wholesalers attract order flow by offering retail brokers more 

than just competitive price improvement.345  In particular, wholesalers bundle their market 

access services with execution services, thereby fully vertically integrating order handling and 

execution services for their retail broker customers.  

                                                 

We refer to this as ‘inaccessible liquidity.’  This is because most institutional orders – 
whether they are executed via algos directly or by high touch desks – primarily go to 
exchanges and dark pools.”). 

343  See Rule 602 of Regulation NMS. 
344  ATSs typically compete for institutional order flow by offering innovative trading 

features such as distinct trading protocols and segmentation options.  They may also 
compete on fees.  In addition, they could include their ATS access in the broader set of 
bundled services that the broker-dealer operator of the ATS offers to its institutional 
investors. 

345  Wholesalers do not compete by quoting price at a given point in time, but instead 
generally attract order flow by offering prices that are on average better than displayed 
prices. 



   

206 

 

b. Rules Addressing Consolidated Market Data 

 In 2020, the Commission adopted a new rule and amended existing rules to establish a 

new infrastructure for consolidated market data (“MDI Rules”),346 and the regulatory baseline 

for NMS stocks includes these changes to the current arrangements for consolidated market data.  

However, as discussed in more detail below, the MDI Rules have not been implemented, and so 

they have not yet affected market practice.  As a result, the data used to measure the baseline 

below reflects the regulatory structure in place for consolidated market data prior to the 

implementation of the MDI Rules.  Accordingly, this section first will briefly summarize the 

regulatory structure for consolidated market data prior to the implementation of the MDI Rules.  

It then will discuss the current status of the implementation of the MDI Rules and provide an 

assessment of the potential effects that the implementation of the MDI Rules could have on the 

baseline estimations. 

Regulatory Structure for Consolidated Market Data Prior to the MDI Rules 

 Consolidated market data are made widely available to investors through the national 

market system, a system set forth by Congress in section 11A of the Exchange Act347 and 

facilitated by the Commission in Regulation NMS.348  Market data are collected by exclusive 

SIPs, who consolidate that information and disseminate an NBBO and last sale information. For 

quotation information, only the 16 exchanges that currently trade NMS stocks provide quotation 

                                                 

346  See supra note 38, discussing MDI Adopting Release. 
347  See supra note 13. 
348  17 CFR 242.600 through 242.614. 



   

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information to the SIPs for dissemination in consolidated market data.349  FINRA has the only 

SRO display-only facility (the ADF).  No broker-dealer, however, currently uses it to display 

quotations in NMS stocks in consolidated market data.  Disseminated quotation information 

includes each exchange's current highest bid and lowest offer and the shares available at those 

prices, as well as the NBBO. 

 For transaction information, currently all of the national securities exchanges that trade 

NMS stocks and FINRA provide real-time transaction information to the SIPs for dissemination 

in consolidated market data.  Such information includes the symbol, price, size, and exchange of 

the transaction, including odd-lot transactions. 

Unimplemented Market Data Infrastructure Rules 

 Among other things, the unimplemented MDI Rules update and expand the content of 

consolidated market data to include: (1) certain odd-lot information;350 (2) information about 

certain orders that are outside of an exchange’s best bid and best offer (i.e., certain depth of book 

data);351 and (3) information about orders that are participating in opening, closing, and other 

auctions.352  The MDI Rules also introduced a four-tiered definition of round lot that is tied to a 

                                                 

349  See supra note 334. 
350  See 17 CFR 242.600(b)(59); MDI Adopting Release, supra note 38, 86 FR at 18613.  The 

Commission outlined a phased transition plan for the implementation of the MDI Rules, 
including the implementation of odd-lot order information.  See MDI Adopting Release, 
86 FR at 18698-701. 

351  See MDI Adopting Release, supra note 38, 86 FR 18596. 
352  See id. at 18630. 



   

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stock’s average closing price during the previous month.353  For stocks with prices greater than 

$250, a round lot is defined as consisting of between 1 and 40 shares, depending on the tier.354   

The MDI Rules also introduce a decentralized consolidation model under which competing 

consolidators, rather than the existing exclusive SIPs, will collect, consolidate, and disseminate 

certain NMS information.355 

 In the MDI Adopting Release, the Commission established a transition period for 

implementation of the MDI Rules.356  The “first key milestone” for the transition period was to 

be an amendment of the effective national market system plan(s), which “must include the fees 

proposed by the plan(s) for data underlying” consolidated market data (“Proposed Fee 

Amendment”).357  The compliance date for the MDI Rules was set with reference to the date that 

the Commission approved the Proposed Fee Amendment.358  The end of the transition period 

                                                 

353 See id. at 18617. 
354  See id.  The Commission adopted a four-tiered definition of round lot: 100 shares for 

stocks priced $250.00 or less per share, 40 shares for stocks priced $250.01 to $1,000.00 
per share, 10 shares for stocks priced $1,000.01 to $10,000.00 per share, and 1 share for 
stocks priced $10,000.01 or more per share. 

355  See id. at 18637. 
356  Id. at 18698-18701. 
357  Id. at 18699. 
358  See, e.g., id. at 18700 n. 355 (compliance date for amendment to Rule 603(b) to be 180 

calendar days from the date of the Commission’s approval of the amendments to the 
effective national market system plan(s)). 



   

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was to be at least two years after the date the Commission approved the Proposed Fee 

Amendment.359 

 The MDI Adopting Release did not specify a process for continuing the transition period 

if the Commission disapproved the Proposed Fee Amendment.  On September 21, 2022, the 

Commission disapproved the Proposed Fee Amendment, because the Participants had not 

demonstrated that the proposed fees were fair, reasonable and not unreasonably 

discriminatory.360  Accordingly, there currently is no date to begin the at-least-two-year period 

for implementation of the MDI Rules, and there is no date that can be reasonably estimated for 

the implementation of the MDI Rules to be completed.  

 Given that the MDI Rules have not yet been implemented, they have not affected market 

practice and therefore data that would be required for a comprehensive quantitative analysis of a 

baseline that includes the effects of the MDI Rules is not available.  It is possible that the 

baseline (and therefore the economic effects relative to the baseline) could be different once the 

MDI Rules are implemented.  The following discussion reflects the Commission’s assessment of 

the anticipated economic effects of the MDI Rules as described in the MDI Adopting Release.361  

                                                 

359  Id. at 18700-18701 (specifying consecutive periods of 90 days, 90 days, 90 days, 180 
days, 90 days, a period for filing and approval of another national market system plan 
amendment to effectuate the cessation of the operations of the SIPs (with a 300-day 
maximum time for Commission action after filing to approve or disapprove the filing). . 

360  Securities Exchange Act Release No. 95851 (Sept. 21, 2022) (Order Disapproving the 
Twenty-Fifth Charges Amendment to the Second Restatement of the CTA Plan and 
Sixteenth Charges Amendment to the Restated CQ Plan). 

361  See MDI Adopting Release, supra note 38, 86 FR 18741-18799. 



   

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 The Commission anticipated that the new round lot definition will result in narrower 

NBBO spreads for most stocks with prices greater than $250 because, for these stocks, fewer 

odd-lot shares will need to be aggregated together (possibly across multiple price levels)362 to 

form a round lot and qualify for the NBBO.363  The reduction in spreads will be greater in 

higher-priced stocks because the definition of a round lot for these stocks will include fewer 

shares, such that even fewer odd-lot shares will need to be aggregated together.364  This could 

cause statistics that are measured against the NBBO to change because they will be measured 

against the new, narrower NBBO. For example, execution quality statistics on price 

improvement for higher-priced stocks may show a reduction in the number of shares of 

marketable orders that received price improvement because price improvement will be measured 

against a narrower NBBO.  In addition, the Commission anticipated that the NBBO midpoint in 

stocks priced higher than $250 could be different under the MDI Rules than it otherwise would 

                                                 

362  The calculation of the NBBO includes odd-lots that, when aggregated, are equal to or 
greater than a round lot.  As stated in CFR 242.600(b)(21)(ii), “such aggregation shall 
occur across multiple prices and shall be disseminated at the least aggressive price of all 
such aggregated odd-lots.”  For example, if there is one 50-share bid at $25.10, one 50-
share bid at $25.09, and two 50-share bids at $25.08, the odd-lot aggregation method 
would show a protected 100-share bid at $25.09. 

363  For example, if there is one 20-share bid at $250.10, one 20-share bid at $250.09, and 
two 50-share bids at $250.08, prior to MDI the NBB would be $250.08, as even 
aggregated together the odd lot volume would not add up to at least a round lot.  After 
MDI, the NBB would be $25.09, as the odd-lot aggregation method would show a 
protected 40-share round lot bid at $25.09. 

364  See supra note 354. An analysis in the MDI Adopting Release showed that the new round 
lot definition caused a quote to be displayed that improved on the current round lot quote 
26.6% of the time for stocks with prices between $250.01 and $1,000, and 47.7% of the 
time for stocks with prices between $1,000.01 and $10,000.  See MDI Adopting Release, 
supra note 38, 86 FR 18743. 



   

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be, resulting in changes in the estimates for statistics calculated using the NBBO midpoint, such 

as effective spreads.  In particular, at times when bid odd-lot quotations exist within the current 

NBBO but no odd-lot offer quotations exist (and vice versa), the midpoint of the NBBO resulting 

from the rule will be higher than the current NBBO midpoint.365  More broadly, the Commission 

anticipated that the adopted rules will have these effects whenever the new round lot bids do not 

exactly balance the new round lot offers.  However the Commission stated that it does not know 

to what extent or direction such odd-lot imbalances in higher priced stocks currently exist, so it is 

uncertain of the extent or direction of the change.366 

 The Commission also anticipated that the MDI Rules could result in a smaller number of 

shares at the NBBO for most stocks in higher-priced round lot tiers.367  To the extent that this 

occurs, there could be an increase in the frequency with which marketable orders must walk the 

book to execute.  This would affect statistics that are calculated using consolidated depth 

information, such as measures meant to capture information about whether orders received an 

execution of more than the displayed size at the quote, i.e., “size improvement.” 

 The MDI Rules may also result in a higher number of odd-lot trades, as the inclusion of 

odd-lot quotes that may be priced better than the current NBBO in consolidated market data may 

                                                 

365  For example, if the NBB is $260 and the NBO is $260.10, the NBBO midpoint is 
$260.05. Under the adopted rules a 40 share buy quotation at $260.02 will increase the 
NBBO midpoint to $260.06.  Using this new midpoint, calculations of effective spread 
will be lower for buy orders, but will be higher for sell orders. 

366  See MDI Adopting Release, 86 FR 18750. 
367  However, this effect will depend on how market participants adjust their order 

submissions.  See id. at 18746, for further discussion. 



   

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attract more trading interest from market participants that previously did not have access to this 

information.368  However, the magnitude of this effect depends on the extent to which market 

participants who rely solely on SIP data and lack information on odd-lot quotes choose to receive 

the odd-lot information and trade on it.  The Commission states in the MDI Adopting Release 

that it believes it is not possible to observe this willingness to trade with existing market data.369 

 The MDI Rules may have implications for broker-dealers’ order routing practices.  For 

those market participants that rely solely on SIP data for their routing decisions and that choose 

to receive the expanded set of consolidated market data, the Commission anticipated that the 

additional information contained in consolidated market data will allow them to make more 

informed order routing decisions.  This in turn would help facilitate best execution, which would 

reduce transaction costs and increase execution quality.370  

 The MDI Rules may also result in differences in the baseline competitive standing among 

different trading venues, for several reasons.  First, for stocks with prices greater than $250, the 

Commission anticipated that the new definition of round lots may affect order flows as market 

participants who rely on consolidated data will be aware of quotes at better prices that are 

currently in odd-lot sizes, and these may not be on the same trading venues as the one that has 

the best 100 share quote.371  Similarly, it anticipated that adding information on odd-lot quotes 

                                                 

368  See id. at 18754. 
369  See id. 
370  See id. at 18725. 
371  See id. at 18744. 



   

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priced at or better than the NBBO to expanded core data may cause changes to order flow as 

market participants take advantage of newly visible quotes.372  However, the Commission stated 

that it was uncertain about the magnitude of both of these effects.373  To the extent that it occurs, 

a change in the flow of orders across trading venues may result in differences in the competitive 

baseline in the market for trading services.  

 Second, national securities exchanges and ATSs have a number of order types that are 

based on the NBBO, and so the Commission anticipated that the changes in the NBBO caused by 

the new round lot definitions may affect how these order types perform and could also affect 

other orders with which they interact.374  The Commission stated that these interactions may 

affect relative order execution quality among different trading platforms, which may in turn 

affect the competitive standing among different trading venues, with trading venues that 

experience an improvement/decline in execution quality attracting/losing order flow.375  

However, the Commission stated that it was uncertain of the magnitude of these effects.376 

 Third, the Commission anticipated that, as the NBBO narrows for securities in the 

smaller round lot tiers, it may become more difficult for the retail execution business of 

wholesalers to provide price improvement and other execution quality metrics at levels similar to 

                                                 

372  See id. at 18754. 
373  See id. at 18745, 18754. 
374  See id. at 18748. 
375  See id. 
376  See id. 



   

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those provided under a 100 share round lot definition.377  To the extent that wholesalers are held 

to the same price improvement standards by retail brokers in a narrower spread environment, the 

wholesalers’ profits from executing individual investor orders might decline,378 and to make up 

for lower revenue per order filled in a narrower spread environment, wholesalers may respond by 

changing how they conduct their business in a way that may affect retail brokers.  However, the 

Commission stated that it was uncertain as to how wholesalers may respond to the change in the 

round lot definition, and, in turn, how retail brokers may respond to those changes, and so was 

uncertain as to the extent of these effects.379  If wholesalers do change how they conduct 

business, it may impact wholesalers’ competitive standing in terms of the execution quality 

offered, particularly to individual investor orders.  

 Where implementation of the above-described MDI Rules may affect certain numbers in 

the baseline, the description of the baseline below notes those effects. 

c. Market Access 

 Some broker-dealers that connect directly to one or more exchanges and other trading 

centers offer order routing to smaller broker-dealers that may not directly connect to exchanges.   

This is, in part, driven by the requirement that in order to directly route orders to an exchange, 

                                                 

377  See id. at 18747. 
378  Individual investor orders typically feature lower adverse selection than other types of 

orders, such as institutional orders.  It is generally more profitable for any liquidity 
provider, including wholesalers, to execute against orders with lower adverse selection 
risk.  See, e.g., David Easley, Nicholas M. Kiefer & Maureen O’Hara, Cream‐skimming 
or profit‐sharing? The curious role of purchased order flow, 51 J. FIN. 811 (1996). 

379  See id. at 18748. 



   

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broker-dealers need to be a member of that exchange.380  It is also driven by economies of scale 

in being able to distribute high fixed costs related to exchange connectivity and proprietary 

market data feeds.381  Most large broker-dealers connect to multiple exchanges.382  These broker-

dealers may use their connections to provide order-routing and execution services, such as access 

to smart order routers (SORs), to smaller broker dealers who may find direct connections to 

exchanges prohibitively expensive.383  To this end, such smaller broker-dealers access exchanges 

through intermediaries, i.e., larger broker-dealers, allowing these intermediaries to compete with 

exchanges in the trade execution and order-routing markets.384  These intermediaries often 

compete on both the quality of their order execution and the fees they charge.385 

                                                 

380  Membership on an exchange also gives the broker-dealer access to exchange-provided 
order routers that re-route orders to other exchanges at a per-order fee. 

381  Broker-dealers may choose to incur these costs in order to gain faster access through 
direct exchange connectivity as well as proprietary exchange data feeds, both of which 
may improve order handling and execution capabilities, and thus their competitive 
position.  See Section V.B.3.(e) of Market Data Infrastructure Adopting Release (for 
discussions on broker-dealer competitive trading strategies).   

382  See MDI Adopting Release, supra note 38, at 86 FR 18740 (for analysis indicating that 
50 firms connected to all but one of the exchanges in a sample of FINRA audit trail data 
from December 2016), available at https://www.govinfo.gov/content/pkg/FR-2021-04-
09/pdf/2020-28370.pdf. 

383  The number of broker-dealers providing access is thus limited due to the expenses of 
being an exchange member and ATS subscriber. In addition, membership on an exchange 
also gives the broker-dealer access to exchange-provided order routers that re-route 
orders to other exchanges at a per-order fee.  Thus, membership on one exchange can 
effectively provide access, though not directly, to all exchanges. 

384  Providing market access can mean rerouting customer orders and it can also involve 
sponsoring access for the broker to send customer orders directly to a market center.   

385  The types of fees charged by routing brokers can vary, some charge a per-order/share fee 
or a fee that is part of other bundled services they may offer. 

https://www.govinfo.gov/content/pkg/FR-2021-04-09/pdf/2020-28370.pdf
https://www.govinfo.gov/content/pkg/FR-2021-04-09/pdf/2020-28370.pdf


   

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d. Retail Order Handling in NMS Stocks 

The Commission estimates that in 2021 approximately 1,037 retail brokers originated 

orders from retail investors in NMS stocks.386  Retail brokers route most of their customers’ 

marketable order flow to wholesalers.387  Wholesalers do not typically directly charge retail 

brokers for their order routing and execution services.  In fact, they may pay some retail brokers 

for the opportunity to handle their order flow with PFOF.  Wholesalers’ vertical integration of 

routing and execution services for the orders of individual investors provides them flexibility 

with regard to their handling of order flow.  They utilize sophisticated algorithmic trading 

technology to deliver their services.388  In particular, wholesalers determine which orders to 

internalize (i.e., execute in a principal capacity) and which to execute in a riskless principal or 

                                                 

386  This number is estimated using CAT data for broker-dealers that originated an order from 
an “Individual Customer” CAT account type in 2021.  See infra note 422 for more info 
CAT account types. 

387  Commission analysis of broker-dealer Rule 606 report order routing data in infra Table 3 
indicates that retail brokers route over 90% of their marketable orders to wholesalers.  

388 Wholesalers, similar to other market makers, must establish connections with the 
numerous venues in which they wish to operate and provide liquidity.  They also must 
design smart order routers that can locate and provide liquidity in real time, as well as 
maintain fast data processing capabilities that enable them to respond to market 
conditions while abiding by the relevant trade execution regulations.  Wholesalers also 
face the costs associated with price risk. As wholesalers trade against market participants, 
they take positions at the opposite side, accumulating inventory.  Holding inventory 
exposes wholesaler profits to inventory (price) risk, where the value of inventory, and 
hence, that of the wholesaler’s holdings, may fluctuate as security prices vary.  Scaling 
up the size of the business to ensure steady incoming flow from opposite sides of the 
markets is a common strategy pursued by wholesalers. This strategy enables them to 
execute buy and sell transactions, offsetting order flow from opposite sides, reducing the 
possibility of accumulating prolonged, unwanted inventory.  However, among other 
costs, scaling up requires more comprehensive, efficient connectivity networks, and adds 
to the costs of establishing and maintaining such networks. 



   

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agency capacity.  Commission analysis indicates that wholesalers internalize over 90% of the 

executed dollar volume from individual investor marketable orders that are routed to them and 

executed.389 

One aspect of the wholesaler business model is the segmentation of the order flow of 

individual investors, which typically have lower adverse selection risk than the orders of other 

types of market participants.390  Wholesalers are market makers that can identify orders with low 

adverse selection risk.391  Through segmentation, wholesalers typically internalize marketable 

orders with lower adverse selection risk and generally execute them at prices better than the 

current NBBO, i.e., because of segmentation, wholesalers are typically able to execute the 

marketable orders of individual investors at better prices than they would receive if they were 

routed to an exchange.  An analysis of marketable NMS stock orders presented below indicates 

that the orders that wholesalers internalize present lower adverse selection risk and receive 

                                                 

389  See analysis in infra Table 7. 
390  Wholesalers and other liquidity providers face adverse selection risk when they 

accumulate inventory, for example, by providing liquidity to more informed traders, 
because of the risk of market prices moving away from market makers before they are 
able to unwind their positions.  Wholesalers and other market makers are usually not 
privy to the motives or information of the investors they are trading with.  As such, 
should the liquidity provider trade with an investor possessing short-lived price 
information about the security price, it is exposing its inventory to adverse selection risk. 
Hence, liquidity providers normally choose their trading strategies to minimize their 
interaction with order flow with increased adverse selection risk.  Wholesalers do this by 
attracting marketable orders of individual investors, known to be the order flow with the 
lowest adverse selection risk.  Pursuing this strategy also requires scaling up the part of 
the business that interacts with retail order flow.  

391  See infra Table 7 and corresponding discussion.  Adverse selection is based on various 
characteristics of the order, including the identity of the originating broker. 



   

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higher execution quality relative to marketable orders wholesalers receive and execute in a 

riskless principal or agency capacity.392  Additional results393 show that, relative to orders 

executed on exchanges, orders internalized by wholesalers are associated with lower price 

impacts (i.e., lower adverse selection risk),394 lower effective half-spreads (i.e., higher price 

                                                 

392  See analysis in infra Table 7. 
393  See infra Table 5 and Table 6 for a comparison of exchange and wholesaler execution 

quality. 
394  “Price impact” is the extent to which the NBBO midpoint moves against the liquidity 

provider for a marketable order in a short time period after the order execution.  For Rule 
605 reporting, the time period is five minutes after the time of order execution. For the 
analyses of CAT data provided later in this section, the time period is one minute after 
the time of order execution, which was chosen to reflect the increase in trading speed in 
the years since Rule 605 was adopted.  By measuring the difference between the 
transaction price and the prevailing market price for some fixed period of time after the 
transaction (e.g., one minute), price impact measures the extent of adverse selection costs 
faced by a liquidity provider. For example, if a liquidity provider provides liquidity by 
buying shares from a trader who wants to sell, thereby accumulating a positive inventory 
position, if the liquidity provider wants to unwind this inventory position by selling 
shares in the market, it will incur a loss if the price has fallen in the meantime. In this 
case, the price impact measure will be positive, reflecting the liquidity provider’s 
exposure to adverse selection costs.    



   

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improvement),395 and higher realized half-spreads (i.e., higher potential profitability).396  

Academic studies have also found that retail orders in NMS stocks benefit from being segmented 

                                                 

395  The effective half-spread is calculated by comparing the trade execution price to an 
estimate of the stock’s value (i.e., the midpoint of the prevailing NBBO at the time of 
order receipt) and thus captures how much more than the stock’s estimated value a trader 
has to pay for the immediate execution of their order. The effective spread will be smaller 
(or less positive) when it is closer to the NBBO midpoint, reflecting the order receiving a 
greater amount of price improvement.  See, e.g., Bjorn Hagströmer, Bias in the Effective 
Bid-Ask Spread, 142 J. FIN. ECON. 314 (2021). For the remainder of this analysis, we will 
use the term “effective spread” to refer to the “effective half-spread.”  See also results in 
Thomas Ernst & Chester S. Spatt, supra note 77.  Rule 600(b)(8) of Regulation NMS 
defines “average effective spread” as the share-weighted average of effective spreads for 
order executions calculated, for buy orders, as double the amount of difference between 
the execution price and the midpoint of the NBB and NBO at the time of order receipt 
and, for sell orders, as double the amount of difference between the midpoint of the NBB 
and NBO at the time of order receipt and the execution price. 

396  The realized half-spread is calculated similarly to the effective half-spread, but, instead of 
using the NBBO midpoint at the time of order receipt, the realized spread calculation 
uses the NBBO midpoint a short time period after the execution of a marketable order.  
For Rule 605 reporting, the time period is five minutes after the time of order execution.  
For the analyses of CAT data provided later in this section, the time period is one minute 
after the time of order execution.  The realized half-spread proxies for the potential 
profitability of trading for liquidity providers after accounting for the adverse selection 
risk (i.e., price impact) of the trade.  See, e.g., Securities Exchange Act Release No. 
43590 (Nov. 17, 2000), 65 FR 75423-75424 (Dec. 1, 2000) (Disclosure of Order 
Execution and Routing Practices) (“The smaller the average realized spread, the more 
market prices have moved adversely to the market center's liquidity providers after the 
order was executed, which shrinks the spread ‘realized’ by the liquidity providers. In 
other words, a low average realized spread indicates that the market center was providing 
liquidity even though prices were moving against it for reasons such as news or market 
volatility.”); See also Larry Harris, Trading and Exchanges: Market Microstructure for 
Practitioners at 286 (Oxford University Press 2003) (“Informed traders buy when they 
think that prices will rise and sell otherwise. If they are correct, they profit, and whoever 
is on the other side of their trade loses.  When dealers trade with informed traders, prices 
tend to fall after the dealer buys and rise after the dealer sells.  These price changes make 
it difficult for dealers to complete profitable round-trip trades.  When dealers trade with 
informed traders, their realized spreads are often small or negative.  Dealers therefore 
must be very careful when trading with traders they suspect are well informed.”).  See 
also Joel Hasbrouck, Empirical Market Microstructure: The Institutions, Economics, and 



   

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and internalized by wholesalers, because wholesalers can offer the segmented retail orders more 

price improvement due to their lower adverse selection risk.397  

Segmentation and Routing of Individual Investor Orders in NMS Stocks 

Most individual investor orders are non-directed, so individual investor order routing 

choices are largely made by retail brokers.  Specifically, retail brokers choose how to access the 

market in order to fill their individual investor customers’ orders.  Wholesalers are the dominant 

providers of market access for retail brokers and bundle their market access services with 

execution services.  

                                                 

Econometrics of Securities Trading at 147 (Oxford University Press 2007) (“The 
execution cost based on the pretrade bid-ask midpoint (BAM) is also known as the 
effective cost.  Since 2001, the U.S. SEC has required U.S. equity markets to compute 
effective costs and make summary statistics available on the Web . . . The rule . . . also 
requires computation of the realized cost. . . . The difference between effective and 
realized costs is sometimes used as an estimate of the price impact of the trade. The 
realized cost can also be interpreted as the revenue of the dealer who sold to the customer 
. . . and then covered his position at the subsequent BAM.”).  For the remainder of this 
analysis, we will use the term “realized spread” to refer to the realized half-spread. Rule 
600(b)(9) of Regulation NMS generally defines “average realized spread” as the share-
weighted average of realized spreads for order executions calculated, for buy orders, as 
double the amount of difference between the execution price and the midpoint of the 
NBB and NBO five minutes after the time of order execution and, for sell orders, as 
double the amount of difference between the midpoint of the NBB and NBO five minutes 
after the time of order execution and the execution price.  

397  See Ernst & Spatt, supra note 77 and Kothari, S. P., So, E., & Johnson, T. Commission 
Savings and Execution Quality for Retail Trades (Working paper, 2021).  See also 
Adams, Kasten, & Kelley, Do investors save when market makers pay? Retail Execution 
costs under PFOF models (Working paper, 2021), available at 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3975667 (retrieved from Elsevier 
database). 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3975667221 

 

Retail brokers may route to wholesalers because the cost of sending orders to wholesalers 

is lower than the various alternatives available to their customers for market access.  While some 

broker-dealers have SORs,398 exchange memberships, and ATS subscriptions, and are thus able 

to provide market access to retail brokers, other broker-dealers incur costs in handling order flow 

for retail brokers in the form of exchange access fees, ATS access fees, and administrative and 

regulatory costs such as recordkeeping and the risk management controls of Rule 15c3-5.  While 

wholesalers could incur some of these marginal costs as well, they benefit on the margin from 

individual investor order flow because it gives them the option to internalize the most profitable 

of that order flow, i.e., the individual investor orders with the lowest adverse selection risk.399  

This ability to capture, identify, and internalize profitable orders from individual investors allows 

wholesalers to provide market access to retail brokers at low explicit cost, either by providing 

PFOF or by not charging retail brokers explicitly for market access.  This service of obtaining 

market access on behalf of retail brokers assists retail brokers by allowing them to avoid routing 

expenses (even in cases where the wholesaler further routes the order instead of internalizing) or 

costly liquidity searches, and may increase retail brokers’ reliance on wholesalers beyond any 

payment they receive for routing their order flow to wholesalers. 

                                                 

398  Individual investors and professional traders relying on displayed screens to access 
financial markets generally do not have access to these low-latency (algorithmic, high 
speed) technologies. 

399  See infra Table 7 and corresponding discussion. 



   

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Indeed, Table 2 shows that retail brokers who accept PFOF (“PFOF brokers”) pay less to 

route their orders to wholesalers than to route them elsewhere.400  In fact, they are paid to route 

their order flow to wholesalers for every order type reported in the table.  On average, rates paid 

by wholesalers for both market and marketable limit orders are higher than those paid by 

alternative venues, with wholesalers paying an average of 13 cents per 100 shares for market 

orders and 12.6 cents for marketable limit orders across S&P 500 and non-S&P 500 stocks 

during Q1 2022.  In contrast, exchanges, on average, charged PFOF brokers when they routed 

their marketable order flow to exchanges.  This likely indicates that most of the volume that 

PFOF brokers sent to exchanges was routed to maker-taker exchanges (where fees are assessed 

on marketable orders).401  Furthermore, since retail brokers that do not accept PFOF (“non-PFOF 

brokers”) also incur fees when they route marketable orders to exchanges, they are incentivized 

to route their marketable order flow to wholesalers, who do not charge them explicit costs to 

route and execute their orders. 

                                                 

400  In Table 2, average payment rates reported in Rule 606 reports for PFOF brokers in S&P 
500 stocks and non-S&P 500 stocks in Q1 2022 are broken down by trading venue and 
order type, with rates given in cents per 100 shares. 

401  Furthermore, wholesaler rates for non-marketable orders are more than double the rates 
for marketable orders, averaging 27.1 cents per hundred shares compared to 13 cents for 
market orders and 12.6 cents for marketable limit orders.  Additionally, Table 2 shows 
that the average payment rates PFOF brokers receive from routing non-marketable limit 
orders to wholesalers is greater than the average rates they receive from routing them to 
exchanges.  This may be driven by wholesalers passing through exchange rebates for 
these orders, for which they may receive higher volume-based tiering rates compared to 
retail brokers, back to broker-dealers. 

 



   

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Table 2: Average Rule 606 Payment Rates for Q1 2022 to PFOF Brokers by Trading Venue Type 

 
 

Market 
Orders 

Marketable 
Limit Orders 

Non-
Marketable 

Limit Orders 
Other 
Orders 

S&P 500 
Exchange -5.9 -23.9 30.9 20.8 

OMM - Wholesaler 15.2 21.8 41.1 24.1 
Other 4.5 -0.6 -0.6 7.5 

Non-S&P 
500 

Exchange -14.9 -15.3 17.9 16.5 
OMM - Wholesaler 12.5 11.8 24.6 10.1 

Other 1.5 -3.7 -4.6 1.5 

Combined 
Exchange -12.4 -15.7 19.3 17.1 

OMM - Wholesaler 13.0 12.6 27.1 11.9 
Other 1.7 -3.7 -4.5 2.0 

This table shows the average payment rates (in cents per 100 shares) made from different types of trading venues in 
Q1 2022 to 14 retail PFOF brokers from wholesalers based on their Rule 606 reports. The table breaks out average 
rates from exchanges, wholesalers, and other trading venues for market orders, marketable limit orders, non-
marketable limit orders, and other orders in S&P 500 stocks and non-S&P 500 stocks. Other venues include any 
other venue to which a retail broker routes an order other than a wholesaler or an exchange. The 43 broker-dealers 
were identified from the 54 retail brokers used in the CAT retail analysis (see infra note 422). This analysis uses the 
retail broker’s Rule 606 report if it publishes one or the Rule 606 report of its clearing broker if it did not publish a 
Rule 606 report itself (the sample of 43 broker-dealer Rule 606 reports include some broker-dealers that were not 
included in the CAT analysis because some clearing broker Rule 606 reports are included). Some broker-dealers 
reported handling orders only on a not held basis and did not have any Rule 606. 

 

Table 3 confirms that wholesalers dominate the business of providing market access for 

retail brokers and that PFOF is a factor in retail broker routing decisions.402  Data from Table 3 

                                                 

402  Table 3 summarizes order routing decisions of 43 of the most active retail brokers about 
non-directed orders. Table 4 repeats the analysis but separately summarizes routing 
choices for 14 retail brokers who accept PFOF in equity markets and 29 who do not. Note 
that some brokers do not accept PFOF for orders in equities but do accept PFOF for 
orders in options. Consistent with Rule 606, routing statistics are aggregated together in 
Rule 606 reports based on whether the stock is listed in the S&P500 index. Rule 606 
reports collect routing and PFOF statistics based on four different order types for NMS 
stocks: (1) market orders, resulting in immediate execution at the best available price; (2) 
marketable limit orders, resulting in immediate execution at the best price that is not 
worse that the order’s quoted limit price; (3) non-marketable limit orders whose quoted 
limit price less aggressive than the NBBO, often preventing immediate execution; and (4) 
all other orders.  See supra note 336 for a summary of the requirements of Rule 606(a)(1) 
of Regulation NMS. 



   

224 

 

indicates that orders of individual investors for NMS stocks are primarily routed to wholesalers, 

although, a small fraction of individual investor orders are routed to exchanges and other broker-

dealers providing market access or other market centers (i.e., ATSs), some of which may be 

affiliated with the broker that received the original order. 

 



   

225 

 

Table 3: Retail Broker Order Routing in NMS Stocks for Q1 2022, Combining PFOF and non-PFOF Brokers  
Panel A: Non S&P 500 Stocks 

Venue Type Market Marketable 
Limit 

Non-
marketable 

Limit 
Other Total 

Other 6.0% 4.7% 3.1% 1.5% 3.6% 
Exchange 0.2% 5.5% 22.5% 0.8% 8.5% 

Wholesaler 93.9% 89.8% 74.4% 97.6% 87.9% 

Total 26.5% 12.6% 33.6% 27.3% 100.0% 

Panel B: S&P 500 Stocks 

Venue Type Market Marketable 
Limit 

Non-
marketable 

Limit 
Other Total 

Other 6.6% 5.9% 1.8% 1.7% 3.6% 
Exchange 0.2% 4.6% 25.1% 0.8% 9.1% 

Wholesaler 93.3% 89.6% 73.1% 97.5% 87.3% 

Total 30.6% 9.6% 33.5% 26.4% 100.0% 

This table aggregates Rule 606 reports from retail brokers and shows the percentage of market orders, marketable 
limit orders, non-marketable limit orders, and other orders that retail brokers route to different types of venues in Q1 
2022. Other venues include any other venue to which a retail broker routes an order other than a wholesaler or an 
exchange. Order type classifications are based on the order types broker-dealers are required to include in their Rule 
606 reports. 

This table aggregates routing information from 43 broker-dealer Rule 606 reports from Q1 2022. The 43 broker-
dealers were identified from the 54 retail brokers used in the CAT retail analysis (see infra note 422). This analysis 
uses the retail broker’s Rule 606 report if it publishes one or the Rule 606 report of its clearing broker if it did not 
publish a Rule 606 report itself (the sample of 43 broker-dealer Rule 606 reports include some broker-dealers that 
were not included in the CAT analysis because some clearing broker Rule 606 reports are included). Some broker-
dealers reported handling orders only on a not held basis and did not have any Rule 606 reports. Because Rule 606 
only include percentages of where there order flow is routed and not statistics on the number of orders, the reports 
are aggregated together using a weighting factor based on an estimate of the number of non-directed orders each 
broker-dealer routes each month. The number of orders is estimated by dividing the number of non-directed market 
orders originating from a retail broker in a given month (based on estimates from CAT data) by the percentage of 
market orders as a percent of non-directed orders in the retail broker’s Rule 606 report (the weight for a clearing 
broker consists of the aggregated orders from the introducing brokers in the CAT retail analysis that utilize that 
clearing broker). 

 

 

Table 4: Retail Broker Order Routing in NMS Stocks for Q1 2022 



   

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Panel A: Non-S&P 500 Stocks 
Non-PFOF Brokers 

Venue 
Type Market Marketable 

Limit 

Non-
marketable 

Limit 
Other Total 

Other 24.1% 22.3% 4.2% 41.6% 16.0% 

Exchange <0.1% 25.3% 80.8% 19.7% 39.8% 

Wholesaler 76.0% 52.4% 15.0% 38.8% 44.2% 

Total 38.4% 12.4% 44.2% 5.0% 100.0% 

PFOF Brokers 

Venue 
Type Market Marketable 

Limit 

Non-
marketable 

Limit 
Other Total 

Other <0.1% 1.2% 2.8% 0.3% 1.1% 

Exchange 0.2% 1.5% 5.8% 0.2% 2.1% 

Wholesaler 99.7% 97.3% 91.4% 99.5% 96.8% 

Total 24.1% 12.7% 31.5% 31.8% 100.0% 

Panel B: S&P 500 Stocks 

Non-PFOF Brokers 

Venue 
Type Market Marketable 

Limit 

Non-
marketable 

Limit 
Other Total 

Other 24.8% 27.0% 3.2% 23.4% 15.4% 

Exchange <0.1% 19.6% 83.2% 8.2% 39.0% 

Wholesaler 75.2% 53.4% 13.6% 68.3% 45.6% 

Total 39.0% 9.2% 43.8% 8.0% 100.0% 

PFOF Brokers 

Venue 
Type Market Marketable 

Limit 

Non-
marketable 

Limit 
Other Total 

Other <0.1% 0.5% 1.3% 0.3% 0.6% 

Exchange 0.2% 0.9% 3.4% 0.3% 1.3% 

Wholesaler 99.8% 98.6% 95.3% 99.5% 98.2% 

Total 28.4% 9.7% 30.7% 31.2% 100.0% 

This table aggregates Rule 606 reports from PFOF and non-PFOF retail brokers and separately shows the 
percentage of market orders, marketable limit orders, non-marketable limit orders, and other orders PFOF brokers 
and non-PFOF brokers route to different types of venues in Q1 2022. PFOF brokers are retail brokers that receive 
payments for routing marketable orders to wholesalers. Other venues include any other venue to which a retail 
broker routes an order other than a wholesaler or an exchange. Order type classifications are based on the order 
types broker-dealers are required to include in their Rule 606 reports. 



   

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This table aggregates routing information from PFOF and non-PFOF broker-dealer Rule 606 reports from Q1 2022. 
Fourteen retail brokers are identified as PFOF brokers that receive payments for routing orders in NMS stocks to 
wholesalers. Twenty-nine non-PFOF brokers are identified as retail brokers that do not receive monetary 
compensation when they route orders in NMS stocks to wholesalers. The 43 broker-dealers were identified from the 
54 retail brokers used in the CAT retail analysis (see infra note 422). This analysis uses the retail broker’s Rule 606 
report if it publishes one or the Rule 606 report of its clearing broker if it did not publish a Rule 606 report itself 
(the sample of 43 broker-dealer Rule 606 reports include some broker-dealers that were not included in the CAT 
analysis because some clearing broker Rule 606 reports are included). Some broker-dealers reported handling orders 
only on a not held basis and did not have any Rule 606 reports. Because Rule 606 only include percentages of 
where there order flow is routed and not statistics on the number of orders, the reports are aggregated together using 
a weighting factor based on an estimate of the number of non-directed orders each broker-dealer routes each month. 
The number of orders is estimated by dividing the number of non-directed market orders originating from a retail 
broker in a given month (based on estimates from CAT data) by the percentage of market orders as a percent of 
non-directed orders in the retail broker’s Rule 606 report (the weight for a clearing broker consists of the aggregated 
orders from the introducing brokers in the CAT analysis that utilize that clearing broker). 

 

CAT data analysis indicates that about 80% of the share volume and about 74% of the 

dollar volume of individual investor marketable orders that were routed to wholesalers and 

executed comes from PFOF brokers.403  Data from Table 4 indicates that, while retail brokers 

who accept PFOF from wholesalers tend to send more of their orders to those wholesalers, 

wholesalers even dominate the market access services for non-PFOF brokers, though non-PFOF 

brokers route a significantly lower fraction (i.e., 75.2% to 76%) of their market orders to 

wholesalers, compared to 99.7% to 99.8% of market orders for PFOF brokers. Moreover, non-

PFOF brokers route 24.1% to 24.8% of their market orders to other non-exchange market 

centers, e.g., ATSs, while PFOF brokers route less than 1% of their market orders to these 

market centers.  However, regardless of whether the retail broker accepts PFOF, the order type, 

or the S&P500 index inclusion of the stock,404  Table 3 shows that retail brokers route over 87% 

of their customer orders to wholesalers. 

                                                 

403  See infra Table 15. 
404  Rule 606 reports require that broker-dealers separate their disclosure information for S&P 

500 stocks, non-S&P 500 stocks, and options. 



   

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This result suggests that, while PFOF may be a factor in retail brokers’ routing decisions, 

wholesalers likely also compare favorably to other market access (including retail brokers 

pursuing their own market access) along other dimensions.  The routing behavior in Table 4 

may, in part, reflect a tendency of non-PFOF brokers to route customer orders to market centers 

such as their own ATSs for mid-point execution and the lack of an affiliated ATS for PFOF 

brokers.  However, even broker-dealers with their own ATSs do not route the majority of their 

individual investor order flow to those ATSs and typically do not internalize order flow. Further, 

retail brokers with membership on multiple exchanges primarily route their marketable orders to 

wholesalers.  These results could point to a lower marginal costs of routing to wholesalers 

relative to other routing and execution alternatives.  Table 5 shows that wholesalers appear to 

compare favorably to exchanges in the execution quality of orders routed to them, suggesting 

that execution quality could be another key factor in the decision of retail brokers to route to 

wholesalers.405  In particular, marketable orders routed to wholesalers appear to have higher fill 

rates, lower effective spreads, and lower E/Q ratios.406  These orders are also more likely to 

receive price improvement and, conditional on receiving price improvement, receive greater 

price improvement when routed to wholesalers as compared to exchanges.  

In addition, wholesalers may provide additional valuable services to retail brokers that 

route order flow to them.  Based on staff experience, the Commission understands that 

wholesalers are more responsive to retail brokers that provide them with order flow, including, 

                                                 

405  See infra Table 5 and corresponding discussions. 
406  The E/Q ratio is the ratio of a stock’s effective spread over quoted spread. A lower value 

indicates smaller effective spreads (i.e., trading costs) as a percentage of the quoted 
spread.  



   

229 

 

for example, following customer instructions not to internalize particular orders.  More broadly, 

wholesalers appear to provide retail brokers with a high degree of consistency with regard to 

execution quality.  More specifically, wholesalers receive order flow from retail brokers that 

contains orders that vary with regard to quoted spreads and adverse selection risk.  While 

wholesalers receive order flow from retail brokers that contains variation in quoted spreads and 

adverse selection risk, wholesalers could target an average level of price improvement across this 

heterogeneous order flow, resulting in a relatively consistent degree of execution quality. 

When wholesalers do not internalize an order, they obtain an execution from another 

market center by either routing in an agency capacity or using what is known as a riskless 

principal transaction.  In a riskless principal transaction, after receiving an order from a retail 

broker, a wholesaler may send a principal marketable order similar to the retail broker order to 

an exchange and, upon execution of the principal order at the exchange, execute the original 

retail broker order at the same price.407  

Commission analysis shows that wholesalers internalize over 90% of the executed dollar 

value in NMS stocks from the marketable order flow routed to them by retail brokers, which 

amounts to more than 80% of share volume.408  Results also show that the marketable NMS 

stock orders wholesalers choose to internalize have less adverse selection risk: orders that 

wholesalers execute in a principal capacity have a price impact of 0.9 bps, compared to a price 

                                                 

407  See supra note 182 for further discussions on riskless principal transactions. 
408  See analysis in infra Table 7.  



   

230 

 

impact of 4.6 bps for those executed via other methods.  This is consistent with the dealer 

incentive to hold inventory that is less likely to experience adverse changes in price. 409 

Fractional Share Orders 

A number of retail brokers allow individual investors to trade and enter orders for 

fractional shares of a security, e.g., an individual investor could submit an order to buy 0.2 shares 

of a stock.410  This type of trading has grown dramatically since 2019, with an increasing number 

of broker-dealers offering this functionality.  Evidence suggests that this growth is in great part 

due to the rise in direct retail participation in equity markets.411  It is the Commission’s 

understanding that retail or executing brokers generally trade in a principal capacity against their 

customers’ fractional share orders and in turn, send out principal orders that are in a whole 

number of shares (i.e., not containing a fractional share component) for execution to manage 

their inventory risk.     

An analysis using CAT data reveals that more than 46 million fractional share orders 

were executed in March 2022, originating from more than 5 million unique accounts.  Over 31 

million of these orders were for less than 1 share, and they originated from more than 3.3 million 

accounts.  The overwhelming majority (92%) of fractional share orders were attributed to natural 

                                                 

409  See, e.g., David Easley, et. al. supra note 378. 
410  Fractional shares often arise from retail brokers allowing individual investors to submit 

orders for a fixed dollar value. 
411  See, Zhi Da, et. al., Fractional Trading (working paper, November 18, 2021), available at 

https://ssrn.com/abstract=3949697 (retrieved from SSRN Elsevier database). Also see 
Rick Steves, Fractional Shares Experts Weigh In Amid Exploding Retail Trading 
Volumes, FinanceFeeds (Jun. 7, 2021), available at https://financefeeds.com/fractional-
shares-experts-weigh-in-amid-exploding-retail-trading-volumes/, which shows that 
trading volume increased substantially (in one case, more than 1,400%) for brokers after 
they introduced the use of fractional shares.  

https://ssrn.com/abstract=3949697
https://financefeeds.com/fractional-shares-experts-weigh-in-amid-exploding-retail-trading-volumes/
https://financefeeds.com/fractional-shares-experts-weigh-in-amid-exploding-retail-trading-volumes/


   

231 

 

persons, (i.e., individual investors).  While fractional shares orders only represented a small 

fraction (2.1%) of total executed orders, they represent a much higher fraction (15.3%) of 

executions received by individual investors. 

Execution Quality of Individual Investor Marketable Orders 

The wholesaler business model relies on segmentation and internalization of marketable 

order flow of individual investors, which is characterized by low adverse selection risk.  An 

analysis of the execution quality of market and marketable limit orders handled by wholesalers 

retrieved from Rule 605 reports412 and presented in Table 5413 shows that orders in NMS stocks 

                                                 

412  Rule 605 requires market centers to make available, on a monthly basis, standardized 
information concerning execution quality for covered orders in NMS stocks that they 
received for execution.  See 17 CFR 242.605. Covered orders are defined in 17 CFR 
242.600(b)(22) to include orders (including immediate-or-cancel orders) received by 
market centers during regular trading hours at a time when a national best bid and 
national best offer is being disseminated, and, if executed, is executed during regular 
trading hours, and excludes orders for which the customer requests special handling for 
execution (such as not held orders).  Rule 605 reports contain a number of execution 
quality metrics for covered orders, including statistics for all non-marketable limit orders 
with limit prices within ten cents of the NBBO at the time of order receipt as well as 
separate statistics for market orders and marketable limit orders.  Under the Rule, the 
information is categorized by individual security, one of five order type categories (see 
17 CFR 242.600(b)(14)), and one of four order size categories, which does not include 
orders for less than 100 shares or orders greater than or equal to 10,000 shares (see 17 
CFR 242.600(b)(11)).  As such, Rule 605 does not require reporting for orders smaller 
than 100 shares, including odd-lot orders. Rule 605 requires market centers to report 
execution quality information for all covered orders that the market center receives for 
execution, including orders that are executed at another venue (i.e., because they are 
effectively rerouted to another trading center by the market center). 

413  The following filters were applied to the Rule 605 data to remove potential data errors.  
Observations where the total shares in covered orders were less than the sum of the 
canceled shares, share executed at the market center, and share executed away from the 
market center were deleted.  Observations with missing order size code, order type code, 
total covered shares, or total covered orders were deleted. Realized and effective spread 



   

232 

 

handled by wholesalers are associated with lower price impact414 compared to those executed on 

exchanges, indicating that orders handled by wholesalers on average have lower adverse 

selection costs.415  This lower adverse selection cost allows wholesalers to provide these orders 

with better execution quality, manifested in lower effective spreads416 and E/Q ratios compared 

                                                 

values are set to missing values if the total shares executed at and away from the market 
center are zero.  Per share dollar realized spreads, per share dollar effective spreads, and 
per share dollar price improvements were winsorized at 20% of the volume weighted 
average price of the stock for the month as calculated from NYSE Daily TAQ data. 

414  See supra note 394 and accompanying text for a definition and discussion of price 
impact. Table 5 estimates the average price impact associated with marketable orders 
routed to wholesalers to be 1.2 bps.  This means that for a $10 stock the NBBO midpoint 
would move up (down) by an average of 0.12 cents in the five minutes following the 
execution of marketable buy (sell) order.    

415  Once implemented, the changes to the current arrangements for consolidated market data 
in the MDI Adopting Release, 86 FR 18621 may impact the numbers in Table 5, 
including by reducing those for realized spread, effective spread, and amount of price 
improvement.  The NBBO will narrow in stocks priced greater than $250 because it will 
be calculated based off a smaller round lot size.  This narrower NBBO will decrease price 
improvement statistics in Rule 605 reports, which is measured against the NBBO.  The 
effects on effective and realized spreads is more uncertain, because they are measured 
against the NBBO midpoint, which may not change if both the NBB and NBO decrease 
by the same amount.  However, if marketable orders are more likely to be submitted 
when there are imbalances on the opposite side of the limit order book (i.e., more 
marketable buy orders are submitted when there is more size on the offer side of the limit 
order book than the bid side), then the NBBO midpoint may change such that it is closer 
to the quote the marketable order executes against, which may decrease the effective and 
realized spreads in stocks above $250 when Market Data Infrastructure is implemented. It 
is uncertain how likely this NBBO midpoint is to change.  It is also uncertain how or to 
what degree these changes would differ between exchange and wholesaler Rule 605 
reports.  If both changed similarly, then there would not be changes in relative differences 
between their reported spread measures. See supra section V.B.3.a).i.b.  

416  See supra note 395 for a definition and discussion of effective spreads. 



   

233 

 

to exchanges.417  The higher realized spreads418 associated with orders handled by wholesalers 

observed in Table 5 suggest that wholesalers have an opportunity to earn higher economic profits 

than liquidity suppliers on exchanges after accounting for adverse selection costs (i.e., after 

adjusting for price impact).419  This is despite the finding that the orders handled by wholesalers 

eventually execute at better prices than those received by and executed on exchanges, as 

                                                 

417  The E/Q ratio is the ratio of a stock’s effective spread over quoted spread.  A lower value 
indicates that smaller effective spreads (i.e., trading costs) as a percentage of the quoted 
spread.  

418  See supra note 396 and accompanying text for a definition and discussion of realized 
spreads as a measure of the economic profits earned by liquidity providers. Realized 
spreads do not measure the actual trading profits that market makers earn from supplying 
liquidity.  In order to estimate the trading profits that market makers earn, we would need 
to know at what times and prices the market maker executed the off-setting position for a 
trade in which it supplied liquidity (e.g., the price at which the market maker later sold 
shares that it bought when it was supplying liquidity). If market makers offset their 
positions at a price and time that is different from the NBBO midpoint at the time lag 
used to compute the realized spread measure (Rule 605 realized spread statistics are 
measured against the NBBO midpoint 5 minutes after the execution takes place), then the 
realized spread measure is an imprecise proxy for the profits market makers earn 
supplying liquidity.  Additionally, realized spread metrics do not take into account any 
transaction rebates or fees, including PFOF, that a market maker might earn or pay, 
which would also affect the profits they earn when supplying liquidity. Furthermore, 
realized spreads also do not account for other costs that market makers may incur as part 
of their business, such as fixed costs for setting up their trading infrastructure and costs 
for connecting to trading venues and receiving market data. 

419  The execution quality information in Rule 605 combines information about orders 
executed at a market center with information on orders received for execution at a market 
center but executed by another market center; see supra note 412. As such, the execution 
quality statistics presented in Table 5 include orders that are effectively rerouted by 
wholesalers.  Furthermore, note that Rule 605 does not specifically require market centers 
to prepare separate execution quality reports for their SDPs, and as such these 
calculations reflect all covered market and marketable limit orders in NMS stocks 
received and executed by wholesalers, including those on SDPs.  



   

234 

 

observed by the lower effective spreads shown in Table 5 for marketable orders handled by 

wholesalers.  

Additionally, the results in Table 5 show that approximately 79% of the executed dollar 

volume in marketable orders handled by wholesalers are market orders.  The Commission 

believes that these outcomes reflect the heavy utilization of market orders for NMS stocks by 

individual investors whose orders are primarily handled by wholesalers, contrary to the heavy 

utilization of limit orders by other market participants. 

Table 5 also highlights significantly higher fill rates, i.e., the percentage of the shares in 

an order that execute in a trade, for marketable orders sent to wholesalers as compared to 

exchanges.420  Wholesalers execute the vast majority of orders that they receive against their 

own capital, i.e., they internalize the vast majority of orders they receive.421  Wholesalers expose 

themselves to inventory risk when internalizing order flow, but mitigate this risk by internalizing 

orders that possess low adverse selection risks. 

 

 

Table 5: Comparison of Rule 605 Execution Quality Statistics Between Exchanges and Wholesalers for NMS Common Stocks 
and ETFs in Q1 2022 

                                                 

420  Marketable orders may not fully execute if there isn’t sufficient liquidity on the exchange 
to fill the order within its limit price and/or if it contains other instructions that limit their 
execution, such as if they are designated as IOC orders or their instructions not to route 
the order to another exchange. 

421  See analysis in infra Table 7 and corresponding discussion. 



   

235 

 

 
Combined Marketable 

Orders Market Marketable Limit 

 WH EX WH EX WH EX 
Average Price $47.89 $58.14 $56.19 $85.45 $30.66 $58.08 
Share Volume (billion shares) 106.97 179.49 72.20 0.39 34.77 179.10 
Dollar Volume (billion $) $5,122.91 $10,436.02 $4,056.85 $33.53 $1,066.06 $10,402.49 
Fill Rate (%) 69.32% 25.77% 99.79% 58.08% 34.81% 25.77% 
Effective Spread (bps) 1.81 2.06 1.47 3.29 3.11 2.06 
Realized Spread (bps) 0.61 -0.38 0.39 2.40 1.43 -0.39 
Price Impact (bps) 1.20 2.44 1.08 0.90 1.68 2.45 
E/Q ratio 0.48 1.01 0.40 1.65 0.83 1.01 
Pct of Shares Price Improved 83.17% 8.78% 88.99% 15.95% 61.01% 8.75% 
Constrained Amount of Price 
Improvement (bps) 2.17 1.50 2.33 1.92 1.24 1.50 

This table computes aggregated execution quality statistics for marketable orders covered orders received by exchanges 
and wholesalers from Rule 605 reports for Q1 2022 for NMS common stocks and ETFs. See supra note 412 for a 
definition of covered orders. Individual wholesaler and exchange Rule 605 reports are aggregated together at the stock-
month level, into two categories, WH and EX, such that aggregate execution quality data is averaged for, a) wholesalers 
(WH) and, b) exchanges (EX), for each stock during each month.  

The following metrics were calculated: Average Price is the stock’s average execution price from the Rule 605 data 
(Dollar Volume/Share Volume), Share Volume is the total executed shares (in billions) from the Rule 605 data. Dollar 
Volume is the total executed dollar volume (in billions), calculated as the executed share volume from the Rule 605 data 
multiplied by the stock’s monthly VWAP price, as derived from NYSE Daily Trade and Quote data (TAQ). Fill Rate is 
the weighted average of the stock-month total executed share volume/total covered shares from the Rule 605 data. 
Effective Spread is the weighted average of the stock-month percentage effective half spread in basis points (bps). 
Realized Spread is the weighted average of the stock-month percentage realized half spread in basis points (bps). Price 
Impact is the weighted average of the stock-month percentage price impact in basis points (bps). E/Q ratio is the 
weighted average of the stock-month ratio of the effective spread/quoted spread. Pct of Shares Price Improved is the 
weighted average of the stock-month ratio of shares executed with price improvement/total executed share volume. 
Conditional Amount of Price Improvement is the weighted average of the stock-month of the amount of percentage 
price improvement in basis points (bps), conditional on the executed share receiving price improvement. 

Aggregated effective and realized percentage spreads are measured in half spreads in order to show the average cost of 
an individual investor order and are calculated by dividing the aggregated Rule 605 reported per share dollar amount by 
twice the stock’s monthly volume weighed average price (VWAP), as derived from NYSE Daily Trade and Quote data 
(TAQ), for trades executed during regular market hours during the month. Percentage price impact is calculated as the 
aggregated Rule 605 reported per share dollar effective spreads minus per share dollar realized spreads divided by twice 
the stock’s monthly volume weighed average price (VWAP), as derived from NYSE Daily Trade and Quote data 
(TAQ). Percentage amount of price improvement is calculated as the aggregated Rule 605 reported per share dollar 
amount of price improvement divided by the stock’s monthly volume weighed average price (VWAP), as derived from 
NYSE Daily Trade and Quote data (TAQ). Percentage spreads and amount of price improvement percentages are 
reported in basis points (bps). The Combined Market and Marketable Limit order type category is constructed for each 
security-month-order size category by combining the market and marketable limit order categories and computing the 
total and share weighted average metrics for the order size category for each security-month. 



   

236 

 

The sample includes NMS common stocks and ETFs that are present in the CRSP 1925 US Stock Database, Ctr. Rsch. 
Sec. Prices, U. Chi. Booth Sch. Bus. (2022). The CRSP 1925 US Indices Database, Ctr. Rsch. Sec. Prices, U. Chi. 
Booth Sch. Bus. (2022), was used to identify if a stock was a member of the S&P 500. The stock did not have to be in 
the CRSP 1925 US Indices Database to be included in the analysis. NMS Common stocks and ETFs are identified, 
respectively, as securities in TAQ with a Security Type Code of ‘A’ and ‘ETF’. For each stock-month-order-type (such 
that aggregate execution quality data is averaged for, a) wholesalers and, b) exchanges, for each stock during each 
month) the per dollar share weighted measures from Rule 605 reports are aggregated together by share-weighting across 
different trading venues and order-size categories within the stock-month-order-type and venue type (i.e. trading venue 
Rule 605 reports for exchanges and wholesalers are aggregated into different categories). Percent values are then 
calculated for each stock month by dividing by the stock’s monthly volume weighed average price (VWAP). These 
percentage stock-month values are averaged together into order-type categories (market orders, marketable limit orders, 
and the combined market and marketable limit order type category, for both wholesalers and exchanges) based on 
weighting by the total dollar trading volume for the wholesaler or exchange category in that stock-month-order type, 
where dollar trading volume is estimated by multiplying the Rule 605 report total executed share volume, i.e., the share 
volume executed at market center + share volume executed away from the market center, for the stock-month-order 
type by the stock’s monthly VWAP). See supra note 413 for a discussion of filters that were applied to the Rule 605 
data in this analysis. This analysis uses data from prior to the implementation of the MDI Rules and specific numbers 
may be different following the implementation of the MDI Rules. See supra note 415. 

 

To supplement the analyses using Rule 605 data and test for the robustness of the results 

that it generated, CAT data422 was analyzed to look at the execution quality of marketable orders 

                                                 

422 This analysis used CAT data to examine the execution quality of marketable orders in 
NMS Common stocks and ETFs that belonged to accounts with a CAT account type of  
“Individual Customer” and that originated from a broker-dealer MPID that originated 
orders from 10,000 or more unique “Individual Customer” accounts during January 2022.  
The number of unique “Individual Customer” accounts associated with each MPID was 
calculated as the number of unique customer account identifiers with an account 
customer type of  “Individual Customer” that originated at least one order during the 
month of January 2022.  The Commission found that 58 broker-dealer MPIDs associated 
with 54 different broker-dealers originated orders from 10,000 or more unique Individual 
Customer accounts in January 2022. For the Consolidated Audit Trail, account type 
definitions are available in Appendix G to the CAT Reporting Technical Specifications 
for Industry Members (https://catnmsplan.com/), for the field name 
“accountHolderType.” Account types represent the beneficial owner of the account for 
which an order was received or originated, or to which the shares or contracts are 
allocated. Possible types are: Institutional Customer, Employee, Foreign, Individual 
Customer, Market Making, Firm Agency Average Price, Other Proprietary, and Error.  
An Institutional Customer account is defined by FINRA Rule 4512(c) as a bank, 
investment adviser, or any other person with total assets of at least $50 million.  An 
Individual Customer account means an account that does not meet the definition of an 
“institution” and is also not a proprietary account.  Therefore, the CAT account type 

https://catnmsplan.com/


   

237 

 

of individual investors in NMS Common Stocks and ETFs that were less than $200,000 in value 

and that executed and were handled by wholesalers during Q1 2022 (“CAT retail analysis”).423  

This was compared to a sample of CAT data examining the execution quality of executed market 

                                                 

“Individual Customer” includes natural persons as well as corporate entities that do not 
meet the definitions for other account types.  The Commission restricted that analysis to 
MPIDs that originated orders from 10,000 or more “Individual Customer” accounts in 
order to ensure that these MPIDs are likely to be associated with retail brokers to help 
ensure that the sample is more likely to contain marketable orders originating from 
individual investors.  NMS Common stocks and ETFs are identified, respectively, as 
securities in TAQ with a Security Type Code of ‘A’ and ‘ETF’.   

423  Fractional share orders with share quantity less than one share were excluded from the 
analysis.  The analysis included market and marketable limit orders that originated from 
one the 58 retail broker MPIDs and were received by a market center that was associated 
with one of the six wholesalers CRD numbers (FINRA’s Central Registration Depository 
number) during some point in the order’s lifecycle.  Orders that were received by the 
wholesaler or executed outside of normal market hours were excluded. Orders were also 
excluded if they had certain special handling codes so that execution quality statistics 
would not be skewed by orders being limited in handling by special instructions (e.g., 
pegged orders, stop orders, post only orders). Orders identified in CAT as Market and 
Limit orders with no special handling codes or one of the following special handling 
codes were included in the analysis: NH (not held), CASH (cash), DISQ (display 
quantity), RLO (retail liquidity order), and DNR (do not reduce). These special handling 
codes were identified based on their common use by retail brokers and descriptions of 
their special handling codes.  The marketability of a limit order was determined based on 
the consolidated market data feed NBBO at the time a wholesaler first receives the order.  
Limit orders that were not marketable were excluded.  The dollar value of an order was 
determined by multiplying the order’s number of shares by either its limit price, in the 
case of a limit order, or by the far side quote (i.e., NBO for a market buy order and NBB 
for a market sell) of the consolidated market data feed NBBO at the time the order was 
first received by a wholesaler, in the case of a market order. Orders with dollar values 
greater than or equal to $200,000 were excluded from the analysis. The analysis includes 
NMS Common Stocks and ETFs (identified by security type codes of ‘A’ and ‘ETF’ in 
NYSE TAQ data) that are also present in CRSP data. Price improvement, effective 
spreads, realized spreads, quoted spreads, and price impacts were winsorized if they were 
greater than 20% of a stock’s VWAP during a stock-week. See Table 6 for a detailed 
description of the analysis. 



   

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and marketable limit orders in NMS Common Stocks and ETFs received by exchanges that were 

less than $200,000 in value over the same time period (“CAT exchange analysis”).424   

Table 6 reports the results from CAT data analysis. 425  In addition to reporting results for 

all stocks, it also breaks out results based by if a stock is an ETF or is in the S&P 500 or not.   

Generally, the results from this analysis are consistent with results from the analysis of Rule 605 

data from Table 5.  Specifically, wholesalers display lower price impacts (WH Price Impact) and 

                                                 

424  The Commission analysis used CAT data to examine the execution quality of market and 
marketable limit orders in NMS Common Stocks and ETFs that were under $200,000 in 
value that were received and executed by exchanges during normal market hours in Q1 
2022. The analysis employed filters to clean the data and account for potential data 
errors. The analysis is limited to orders identified in CAT as market and limit orders 
accepted by exchanges. Orders were excluded from the analysis if they had certain 
special handling codes, such as post or add-liquidity only orders, midpoint orders, orders 
that can only execute in opening and closing auctions, orders with a minimum execution 
quantity, pegged orders, or stop order or stop-loss orders. Orders were also required to 
execute in normal trades during normal trading hours to be included in the analysis. 
Normal trades are identified in CAT data by sale conditions “blank, @, E, F, I, S, Y” 
which correspond to regular trades, intermarket sweep orders, odd lot trades, split trades, 
and yellow flag regular trades. For orders submitted to exchanges, the NBBO the 
exchange records seeing at the time of order receipt is used to measure the NBBO and 
NBBO midpoint for calculating statistics that are based on the time of order receipt (e.g., 
effective spreads, price improvement, quoted spreads, etc.). The marketability of 
exchange orders was determined based on the NBBO observed by the exchange at the 
time of order receipt. The dollar value for a market order was calculated as the price of 
the far side NBBO quote (NBO for a market buy order and NBB for a market sell) times 
the shares in the order. The dollar value for a limit order was calculated as the price of the 
limit order times the number of shares in the order. Orders with dollar values greater than 
or equal to $200,000 were excluded from the analysis. The consolidated market data feed 
NBBO was used to calculate statistics that use the NBBO or NBBO one minute after 
execution (e.g., realized spreads, price impacts, etc.). The analysis includes NMS 
Common Stocks and ETFs (identified by security type codes of ‘A’ and ‘ETF’ in NYSE 
TAQ data) that are also present in CRSP data. Price improvement, effective spreads, 
realized spreads, quoted spreads, and price impacts were winsorized if they were greater 
than 20% of a stock’s VWAP during a stock-week. See Table 6 for a detailed description 
of the analysis.  

425 Certain items in Table 6 may also be affected by the MDI rules once they are 
implemented.  See supra note 415. 



   

239 

 

E/Q ratios (WH E/Q Ratio), indicating that orders internalized by wholesalers receive better 

execution quality relative to order executed on exchanges (EX Price Impact and EX E/Q Ratio 

containing the corresponding statistics for exchanges).  Despite this enhanced execution quality, 

realized spreads of wholesalers (WH Realized Spread) exceed those produced by exchanges (EX 

Realized Spread).  

Table 6 also reports some statistics for wholesalers that are not available in Rule 605 

reports, including statistics on midpoint executions (WH Pct Shares Executed at Midpoint) and 

sub-penny trades (WH Pct of Shares Executed as Subpenny Prices).  In all NMS common stock 

and ETF orders, wholesalers execute approximately 44% of shares at prices at or better than the 

NBBO midpoint (WH Pct Shares Executed at Midpoint or Better).  However, wholesalers also 

offer less than 0.1 cents price improvement to approximately 18.6% of shares that they execute 

(WH Pct Shares Executed with <0.1 cent Price Improvement).  Wholesalers execute more than 

65% of shares at sub-penny prices (WH Pct of Shares Executed as Subpenny Prices), with over 

40% of shares being executed at prices with four decimal points (i.e., the fourth decimal place is 

not equal to zero, which is measured by the WH Pct of Shares Executed at Subpenny Prices with 

4 Decimals variable).  

 

Table 6: Wholesaler CAT Analysis of Exchange Individual Investor Order Execution 
Quality for Marketable Orders in NMS Common Stocks and ETFs by Type of Stock 

Panel A: Wholesaler and Exchange Execution Quality 

Variable All SP500 NonSP500 ETF 

Average Price $29.87 $110.31 $10.52 $53.14 

WH Principal Execution Rate 90.44% 93.07% 87.66% 88.12% 

WH Share Volume (billion shares) 87.11 11.63 63.17 12.31 



   

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EX Share Volume (billion shares) 281.90 66.98 140.82 74.10 

WH Dollar Volume (billion $) $2,601.44 $1,282.62 $664.41 $654.41 

EX Dollar Volume (billion $) $16,194.84 $6,479.89 $3,246.09 $6,468.85 

WH Effective Spread (bps) 2.11 0.67 6.23 0.76 

EX Effective Spread (bps) 3.18 1.52 8.11 1.42 

WH Realized Spread (bps) 0.85 0.42 2.00 0.51 

EX Realized Spread (bps) -1.22 -0.28 -3.90 -0.34 

WH Price Impact (bps) 1.26 0.25 4.22 0.25 

EX Price Impact (bps) 4.40 1.80 12.00 1.75 

WH E/Q Ratio 0.39 0.32 0.50 0.41 

EX E/Q Ratio 1.04 1.01 0.98 1.17 

Panel B: Wholesaler Price Improvement 

Variable All SP500 NonSP500 ETF 

WH Pct Executed with Price 
Improvement 89.95% 93.33% 85.43% 87.93% 

WH Conditional Amount Price 
Improvement (bps) 2.54 1.47 6.16 0.99 

WH Pct Shares Executed at Midpoint 
or Better 44.57% 47.37% 39.76% 43.97% 

WH Pct Shares Executed at Midpoint 31.69% 32.47% 28.46% 33.44% 

WH Pct Shares Executed at NBBO 8.38% 5.86% 10.97% 10.69% 

WH Pct Shares Executed Outside 
NBBO 1.67% 0.81% 3.61% 1.38% 

WH Pct Shares Executed with <0.1 
cent Price Improvement 18.64% 16.62% 20.58% 20.64% 

WH Pct of Shares Executed as 
Subpenny Prices 66.98% 65.10% 64.16% 73.55% 

WH Pct of Shares Executed at 
Subpenny Prices without 
Midpoint Trades 

47.60% 46.82% 47.03% 49.68% 

WH Pct of Shares Executed at 
Subpenny Prices with 4 Decimals 41.36% 40.80% 41.76% 42.06% 

This table uses CAT data to compare aggregated execution quality statistics for Q1 2022 broken out for 
different security types for executed marketable orders with order size under $200,000 in NMS Common 
Stocks and ETFs received by wholesalers from individual investors to similar orders received by 
exchanges. Aggregated statistics in the table labeled WH are based on analysis of CAT data of executed 
marketable orders in NMS Common Stocks and ETFs from individual investors for under $200,000 in 
value belonging to one of 58 retail broker MPIDs that were handled by one of 6 wholesalers during 
normal market hours in Q1 2022 (see supra note 423 for additional discussions on the CAT data used in241 

 

the CAT retail analysis). Aggregated statistics in the table labeled EX are based on a corresponding 
analysis of CAT data of executed marketable orders in NMS Common Stocks and ETFs receive by 
exchanges that were under $200,000 in value and received and executed during normal market hours in 
Q1 2022 (see supra note 424 for additional discussions on the CAT data used in CAT exchange analysis). 

The following metrics are calculated for all stocks and for each of the stock-types. EX indicates 
aggregated statistics for executed marketable orders routed to exchanges and WH indicates aggregated 
statistics for executed marketable orders from individual investors that were routed to wholesalers. 
Average Price is the average execution price. WH Principal Execution Rate is the percentage of dollar 
volume of individual investor trades that a wholesaler executed in a principal capacity. Share Volume is 
the total executed share volume. Dollar Volume is the total executed dollar volume. Effective Spread is 
the weighted average of the percentage effective half spread in basis points (bps) (measured as average 
(execution price – NBBO midpoint at time of order receipt) * average transaction price). Realized Spread 
is the weighted average of the percentage one minute realized spread in bps (measured as average 
(execution price – NBBO midpoint one minute after execution) * average transaction price). Price Impact 
is the weighted average of the percentage one-minute price impact spread in bps (measured as average 
(NBBO midpoint one minute after execution - NBBO midpoint at time of order receipt) / average 
transaction price). E/Q Ratio is the weighted average of the ratio of the effective dollar spread divided by 
its quoted spread at the time of order receipt. WH Pct Executed with Price Improvement is the weighted 
average of the percentage of share volume that is routed to wholesalers and executed at a price better than 
the NBBO. WH Conditional Amount Price Improvement is the weighted average amount of percentage 
price improvement given by wholesalers conditional on the order receiving price improvement in bps 
(measured for a marketable buy order as average (NBO at time of order receipt – execution price) and 
measured for a marketable sell order as average (execution price - NBB at time of order receipt) and then 
dividing the difference by the average transaction price). WH Pct Share Executed at Midpoint or Better is 
the weighted average of the percentage of shares that are routed to a wholesaler and executed at prices 
equal to or better than the NBBO midpoint at the time of order receipt. WH Pct Share Executed at 
Midpoint is the weighted average of the percentage of shares that are routed to a wholesaler and executed 
at a price equal to the NBBO midpoint at the time of order receipt. WH Pct Shares Executed at NBBO is 
the weighted average of the percentage of share volume routed to a wholesaler and executed at the 
NBBO at the time of order receipt (executed at the NBB for marketable sell orders and the NBO for 
marketable buy orders). WH Pct Shares Executed Outside NBBO is the weighted average of the 
percentage of share volume routed to wholesalers and executed at prices outside the NBBO at the time of 
order receipt (executed a price less than the NBB for marketable sell orders and a price greater than the 
NBO for marketable buy orders). WH Pct Shares Executed with <0.1 cent Price Improvement is the 
weighted average of the percentage of shares that are executed with an amount of price improvement less 
than 0.1 cents measured against the NBBO at the time of order receipt. WH Pct Shares Executed 
Subpenny Prices is the weighted average of the percentage of shares that execute at a subpenny price (a 
dollar execution price with a non-zero value in the third or fourth decimal place). WH Pct Shares 
Executed at Subpenny without Midpoint Trades is the weighted average of the percentage of shares that 
execute at a subpenny price (an dollar execution price with a non-zero value in the third or fourth decimal 
place), excluding executions with subpenny prices that occur at the NBBO midpoint. WH Pct Shares 
Executed at Subpenny Prices with 4 Decimals is the weighted average of the percentage of shares that 
execute at a subpenny price where there is a dollar execution price with a non-zero value in the fourth 
decimal place. Average transaction prices used in calculating the metrics are calculated as the total dollar 
trading volume divided by the total share trading volume in the category and time period. 

For the wholesaler (WH) CAT metrics used in the sample, the analysis includes marketable orders for 
under $200,000 in value that originate from a customer with a CAT account type of “individual” at one 
of the 58 retail broker MPIDs and are routed to a wholesaler (see supra note 422 for more info on CAT 
account types and retail broker identification methodology and supra note 423 for more details on how 
the CAT retail analysis sample was constructed). Fractional share orders with share quantity less than one 
share were excluded from the analysis. Orders were also excluded if they had certain special handling 
codes. The marketability of a limit order is determined based on the consolidated market data feed NBBO 
at the time a wholesaler first receives the order.  



   

242 

 

For the exchange (EX) CAT metrics, executed market and marketable limit orders received by exchanges 
during normal market hours were over the same period were used to calculate the exchange execution 
quality statics (see supra note 424 for more details on how the CAT exchange sample was constructed). 
Exchange orders were filtered if they had certain special handling codes. The marketability of exchange 
orders was determined based on the NBBO observed by the exchange at the time of order receipt.  

The dollar value of an order was determined by multiplying the order’s number of shares by either its 
limit price, in the case of a limit order, or by the far-side quote of the NBBO at the time of order receipt, 
in the case of a market order. The analysis includes NMS Common Stocks and ETFs (identified by 
security type codes of ‘A’ and ‘ETF’ in NYSE TAQ data) that are also present in CRSP data from CRSP 
1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022). The CRSP 1925 US 
Indices Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022), was used to identify if a stock 
was a member of the S&P 500. The stock did not have to be in the CRSP 1925 US Indices Database to be 
included in the analysis. Time of order receipt is defined as the time the wholesaler or exchange first 
receives the order. Wholesaler metrics based on the time of order receipt are measured against the NBBO 
from the consolidated market data feed. Exchange metrics based on time of order receipt are measured 
against the NBBO the exchange reports observing. Realized spreads for both exchange and wholesaler 
metrics are calculated with respect to the NBBO midpoint from the consolidated market data feed 
observed one minute after the time of order execution.  

Separately, for both the exchange and wholesaler samples, total share volume, total dollar volume, 
average transaction price, percentage volume metrics, and share weighted average dollar per share 
spread, price impact, and price improvement metrics were calculated at a stock-week-order size category 
level by aggregating together execution quality statistics calculated for individual orders. The order-size 
categories were defined as orders less than 100 shares, 100-499 shares, 500-1,999 shares, 2,000-4,999, 
5,000-9,999 shares, and 10,000+ shares. For each stock-week-order size category, percentage spread, 
price impact, and price improvement metrics were calculated by dividing the average dollar per share 
metric by the average transaction price calculated for each stock-week-order size category.  E/Q ratios 
were calculated for each stock-week-order size category by dividing the average dollar per share effective 
spread by the average dollar per share quoted spread. 

Exchange sample metrics for E/Q ratios and percentage spread, price impact, and price improvement 
metrics for a for each stock-week-order size category were then merged with the corresponding stock-
week-order size category in the wholesaler sample. Weighted averages for both wholesaler and exchange 
metrics and the wholesaler percentage volume metrics are then calculated for the security type in the 
sample by averaging across stock-week-order size category levels based on their total dollar transaction 
volume during the sample period in the wholesaler CAT sample (i.e., for both exchanges and 
wholesalers, using the stock’s total dollar trading volume in wholesaler executed transactions as the 
weight when averaging the share weighted average stock-week- size category values). Weighting the 
exchange and wholesaler execution metrics by the same weights helps to ensure the samples are 
comparable across stocks. Total dollar volume and share volume for the exchange and wholesaler 
samples are calculated by summing across all executions in a security type in each sample. The 
wholesaler Principal Execution Rate is calculated for a security type in the wholesaler sample by 
summing the total dollar volume in trades wholesalers executed in a principal capacity across the security 
type in the wholesaler sample and dividing by the total dollar volume in traded in the security type in the 
wholesaler sample. 

This analysis uses data from prior to the implementation of the MDI Rules and specific numbers may be 
different following the implementation of the MDI Rules. See supra note 415. 

 

  Table 7 uses CAT data to summarize how individual investor marketable NMS stock 

order execution quality varies based on whether the wholesaler executes the order in a principal 



   

243 

 

capacity (i.e., internalizes the order) or effectively reroutes the order (i.e., executes in a riskless 

principal or handles it in an agency capacity).  This analysis supports the interpretation that 

wholesalers identify and tend to internally execute individual investor orders associated with the 

lower adverse selection costs.426  Internalized orders have a lower price impact (0.91 bps as 

compared to 4.63 bps for those effectively rerouted, measured by WH Price Impact), and lower 

effective spreads (1.77 compared to 5.36 for other transactions, measured by WH Effective 

Spread).  Wholesalers also earn higher realized spreads on the orders they execute as principal 

(0.86 bps for principal transactions compared to 0.72 bps earned by those providing liquidity for 

the riskless principal or agency transactions, measured by WH Realized Spread), despite 

executing them at lower effective spreads. 

Table 7: Wholesaler CAT Analysis of Individual Investor Order Execution Quality by Wholesaler Execution Capacity 

                                                 

426  Certain items in Table 7 may also be affected by the MDI Rules once they are 
implemented.  See supra note 415. 



   

244 

 

Variable Internalized Effectively Rerouted 

Average Price $33.48 $14.78 
WH Orders (million) 236.95 34.36 
WH Trades (millions) 251.32 74.36 
WH Share Volume (billion shares) 70.28 16.83  
WH Pct of Executed Share Volume 80.68% 19.32% 
WH Dollar Volume (billion $) $2,352.80 $248.64 
WH Pct of Executed Dollar Volume 90.44% 9.56% 
WH Effective Spread (bps) 1.77 5.36 
WH Realized Spread (bps) 0.86 0.72 
WH Price Impact (bps) 0.91 4.63 
WH E/Q Ratio 0.35 0.70 
WH Pct Executed with Price Improvement 93.37% 57.65% 
WH Conditional Amount Price Improvement (bps) 2.45 3.74 
WH Pct Shares Executed at Midpoint or Better 46.05% 30.65% 
WH Pct Shares Executed at Midpoint 32.23% 26.53% 
WH Pct Shares Executed at NBBO 5.51% 35.49% 
WH Pct Shares Executed Outside NBBO 1.12% 6.86% 
WH Pct Shares Executed with <0.1 cent Price Improvement 20.38% 2.22% 

The table summarizes execution quality statistics from the CAT retail analysis based on whether the wholesaler 
executed the individual investor NMS stock order in a principal capacity or in another capacity (i.e., in an agency or 
riskless principal capacity). The majority of the other transactions are executed by the wholesaler in a riskless principal 
capacity. See supra Table 6 for additional details on the sample and metrics used in the analysis. Share-weighted 
percentage metrics are averaged together at the individual execution capacity-stock-week-order-size category level for 
the wholesaler sample using the methodology in Table 6. Weighted averages for the metrics are then calculated for 
each execution capacity by averaging across execution capacity-stock-week-order size category levels based on their 
total dollar transaction volume during the sample period in the wholesaler CAT sample. This analysis uses data from 
prior to the implementation of the MDI Rules and specific numbers may be different following the implementation of 
the MDI Rules. See supra note 415. 

 

The analysis in Table 7 presents evidence that wholesalers execute 46% of the shares 

they internalize at prices equal to or better than the midpoint.  However, additional analysis of 

CAT data indicates that there is often midpoint liquidity on exchanges and NMS Stock ATSs 

when wholesalers internalize individual investor orders at prices worse than the midpoint.   

Table 8 uses CAT data from March 2022 to examine the non-displayed liquidity 

available at the NBBO midpoint on exchanges and NMS Stock ATSs at a moment in time when 

a wholesaler internalizes an individual investor marketable order at a price less favorable (to the 



   

245 

 

customer) than the NBBO midpoint.427  The results indicate that, on average,428 51% of the 

shares internalized by wholesalers are executed at prices less favorable than the NBBO midpoint 

(Wholesaler Pct Exec Shares Worse Than Midpoint).  Out of these individual investors shares 

that were executed at prices less favorable than the midpoint, on average, 75% of these shares 

                                                 

427  More specifically, the analysis uses CAT data to look at the total shares available at the 
NBBO midpoint that originate from hidden midpoint pegged orders on exchanges and 
NMS Stock ATSs. The analysis compares the size of an individual investor marketable 
order that was internalized in a principal capacity by a wholesaler at a price less favorable 
than the NBBO midpoint (measured at the time the wholesaler received the order) to the 
total shares of midpoint liquidity (originating from midpoint peg orders) at the NBBO 
midpoint on exchanges and NMS Stock ATSs at the time the individual investor order is 
executed in order to hypothetically see how many additional shares could have gotten 
price improvement if they had executed against the hidden liquidity available at the 
NBBO midpoint. A midpoint peg order is a type of hidden order whose price 
automatically adjusts with the NBBO midpoint. The analysis looks at midpoint peg 
orders on exchanges and ATSs during normal market hours (midpoint peg orders with an 
Immediate or Cancel or Fill or Kill modifier are excluded). The total potential shares in 
orders that were available at the NBBO midpoint from midpoint peg orders on exchanges 
and ATSs was calculated each stock day by adding shares when midpoint peg orders 
were received by an exchange or ATS and subtracting shares in these orders that were 
canceled or traded. Shares were also subtracted from the total when a wholesaler 
internalized an individual investor marketable order at a price worse than the NBBO 
midpoint and shares were available at the midpoint on exchanges and ATSs that the order 
could have hypothetically executed against. This ensures that that analysis is not 
overestimating the available midpoint liquidity (i.e., it ensures that we do not estimate 
two individual investor 100 share orders could have executed against the same resting 
100 share midpoint order). The analysis also kept track of the total amount of dollars of 
additional price improvement that individual investors would have received if their orders 
had hypothetically executed against the liquidity available at the NBBO midpoint instead 
of being internalized by the wholesaler. Note that this analysis might underestimate the 
total non-displayed liquidity available at the NBBO midpoint because it only looks at 
orders that pegged to the midpoint and not other orders, such as limit orders with a limit 
price equal to the NBBO midpoint. 

428  As discussed in Table 8, percentages were computed at a stock-week level and then 
averaged across stock-weeks by weighting by the total dollar volume the wholesaler 
internalized during that stock-week. 



   

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could have hypothetically executed at a better price against the non-displayed liquidity resting at 

the NBBO midpoint on exchanges and NMS Stock ATSs. Under the current market structure, 

this liquidity is not displayed, so wholesalers may not have been aware of this liquidity and able 

to execute the individual investor marketable orders against it. Currently, if wholesalers wanted 

to detect this hidden liquidity, they would have had to ping each individual exchange or NMS 

Stock ATS to see if midpoint liquidity was available on that venue.429    

Table 8 also estimates that the additional dollar price improvement that these individual 

investor marketable orders would have received if they had executed against the available 

midpoint liquidity instead of being internalized.  The total amount of additional price 

improvement that all of these individual investor orders would have received was about 51% of 

the total dollar price improvement provided by wholesalers to all of the individual investor 

marketable orders that they internalized (i.e., the marketable orders internalized at prices better 

or equal to the midpoint plus marketable orders internalized at prices worse than the 

midpoint).430 

In addition, the results in Table 8 also indicate the availability of NBBO midpoint 

liquidity is only slightly lower for less liquid (non-S&P 500 stocks) as liquid (S&P500) stocks.  

That is, while about 57% of the shares in individual investor marketable orders in non-S&P500 

                                                 

429  Pinging for midpoint liquidity at multiple venues could increase the risk of information 
leakage or that prices may move, possibly resulting in some market participants canceling 
midpoint orders they posted. 

430  This estimate of the potential additional price improvement if orders are executed against 
midpoint liquidity only accounts for differences in the potential execution prices of the 
order and does not account for any other differences in costs of executing the order at 
different venues, such as differences in PFOF or access fees and rebates. 



   

247 

 

stocks internalized by wholesalers received executions at less favorable prices than the NBBO 

midpoint, there was nevertheless hidden liquidity available at the NBBO midpoint for about 68% 

of these non-S&P500 shares.  Moreover, the potential additional price improvement that could 

have been gained by if these individual investor orders had executed against this NBBO 

midpoint liquidity is almost 55% of the total price improvement provided by wholesalers in these 

stocks.  

Table 8: Available Midpoint Liquidity When Wholesaler Internalizes a Retail Trade 

Stock Type Price Group 
Liquidity 
Bucket 

Wholesaler Pct Exec 
Shares Worse Than 

Midpoint 

Pct Shares MP 
Price 

Improvement 
Additional Dollar 

Price Improvement Pct 
All All  51.05% 74.60% 51.05% 

SP500 All  48.41% 72.32% 41.43% 
SP500 1) <$30  64.36% 60.08% 50.00% 
SP500 2) $30-$100  47.82% 60.36% 29.29% 
SP500 3) $100+  47.69% 75.69% 43.27% 

NonSP500 All  57.45% 68.10% 54.51% 
NonSP500 1) <$30 Low 73.30% 49.52% 67.63% 
NonSP500 1) <$30 Medium 71.30% 60.25% 82.85% 
NonSP500 1) <$30 High 66.77% 52.18% 59.74% 
NonSP500 2) $30-$100 Low 63.60% 80.69% 68.88% 
NonSP500 2) $30-$100 Medium 57.71% 85.24% 61.80% 
NonSP500 2) $30-$100 High 50.24% 71.79% 44.58% 
NonSP500 3) $100+ Low 61.62% 84.32% 61.49% 
NonSP500 3) $100+ Medium 55.40% 93.29% 55.96% 
NonSP500 3) $100+ High 47.15% 90.99% 45.57% 

ETF All  49.93% 86.06% 58.28% 
ETF 1) <$30 Low 66.58% 39.75% 31.61% 
ETF 1) <$30 Medium 57.95% 54.91% 38.35% 
ETF 1) <$30 High 62.24% 78.47% 88.70% 
ETF 2) $30-$100 Low 61.01% 62.00% 41.78% 
ETF 2) $30-$100 Medium 53.94% 77.54% 46.85% 
ETF 2) $30-$100 High 49.87% 84.09% 49.56% 
ETF 3) $100+ Low 52.45% 72.28% 40.13% 
ETF 3) $100+ Medium 47.51% 87.20% 45.35% 
ETF 3) $100+ High 46.93% 90.28% 48.33% 

This table summarizes midpoint liquidity available on exchanges and ATSs during March 2022 when a 
wholesaler internalizes an individual investor marketable order less than $200,000 in an NMS common stock or 



   

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ETF on a principal basis at a price less favorable than the NBBO midpoint (at the time of the wholesaler 
receives the order) from one of the 58 retail broker MPIDs in the CAT retail analysis. Stocks are broken out 
into buckets based on their security type, price, and liquidity. Stock type is based on whether a security is an 
ETF, or a common stock in the S&P 500 or Non-S&P 500. Price buckets are based on a stock’s weekly average 
VWAP price as estimated from TAQ.  Stocks within each security type-price bucket, except S&P 500 stocks, 
are sorted into three equal liquidity buckets based on the stock’s total share trading volume during the week 
estimated using TAQ data. See supra Table 6 for additional details on the sample and CAT analysis of 
wholesaler executions of the orders of individual investors.  

Wholesaler Pct Exec Shares Worse Than Midpoint is the average percentage of individual investor shares that 
wholesalers executed on a principal basis at a price less favorable than the NBBO midpoint (measured at the 
time the wholesaler receives the order). Pct Shares MP Price Improvement is the average percentage of shares 
that the wholesaler executed at a price less favorable than the NBBO midpoint that could have executed at a 
better price against resting liquidity available at the NBBO midpoint on exchanges and NMS Stock ATSs at the 
time the wholesaler executed the order. Additional Dollar Price Improvement Pct is the ratio of the total 
additional dollars of price improvement of the sample period that individual investors whose orders were 
executed at a price less favorable than midpoint would have received if their orders would have executed 
against available midpoint liquidity, divided by the total dollars in price improvement (measured relative to the 
NBB or NBO at the time of order receipt) that wholesalers provided over the sample period when they 
internalized individual investor orders (i.e. the total price improvement for orders wholesalers internalized at 
prices less favorable than the midpoint plus the total price improvement for orders wholesalers internalized at 
prices more favorable than the midpoint). 

Midpoint liquidity is measured based on resting midpoint peg orders on exchanges and NMS Stock ATSs 
during normal market hours identified from CAT data. Midpoint peg orders with an Immediate or Cancel or 
Fill or Kill modifier are excluded. The total potential shares in orders that were available at midpoint on 
exchanges and ATSs at a point in time were calculated keeping a running total each stock day by adding shares 
when midpoint peg orders were received by an exchange or NMS Stock ATS and subtracting shares when 
shares in these midpoint peg orders were canceled or traded. When a wholesaler executes an order at a price 
less favorable than the NBBO midpoint (at the time the wholesaler receives the order), then the executed shares 
are compared to the available resting liquidity at the NBBO midpoint. If the NBBO midpoint at the time the 
order is executed would provide price improvement over the price the wholesaler would have executed the 
order at, then the shares executed by the wholesaler are subtracted from the total resting shares available at the 
NBBO midpoint, up to the lesser of the number of shares executed by the wholesaler or the total resting shares 
available (i.e. the total resting shares will not drop below zero). These are counted as the total shares that would 
have received additional price improvement at the midpoint. This methodology ensures that that analysis is not 
overestimating the available midpoint liquidity (i.e. it ensures that we do not estimate two individual investor 
100 share orders could have executed against the same resting 100 share midpoint order). NBBO midpoints for 
both time of order receipt and time of execution are estimated from the consolidated market data feed. 

The additional dollars of price improvement individual investors whose orders were executed at a price less 
favorable than the midpoint would have received if their orders would have executed against available midpoint 
liquidity was calculated as the difference between the price the wholesaler executed the order at and the NBBO 
midpoint at the time the wholesaler executed the order (i.e., executed price – NBBO midpoint at the time of 
execution for a marketable buy order and midpoint – executed price for a marketable sell order ) times the 
number of shares that would have received the additional price improvement.  

Weighted averages are calculated for the variables Wholesaler Pct Exec Shares Worse Than Midpoint and Pct 
Shares MP Price Improvement using the following methodology. Percentages based on share volume are 
calculate for each stock-week (e.g., total shares executed at a price worse than the midpoint during a stock-
week divided by the total shares of individual investor marketable orders executed by a wholesaler in a 
principal capacity during the stock-week). Weighted averages are then calculated for each stock-type-price-
liquidity bucket by averaging these stock-week percentages over the month by weighting each stock-week by 
the total dollar trade volume internalized by the wholesaler during the stock-week (i.e., using the stock’s total 



   

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dollar trading volume internalized by the wholesaler as the weight when averaging the stock-week percentage 
values).  

The Additional Dollar Price Improvement Pct is not weighted and is calculated as the ratio of the month’s total 
additional dollar price improvement orders executed at a price less favorable than the NBBO would have 
received if their orders would have executed against available midpoint liquidity, divided by the month’s total 
dollars in price improvement (measured relative the NBBO at the time of order receipt) that wholesalers 
provided when they executed individual investor orders (i.e. the total price improvement for orders wholesalers 
internalized at prices less favorable than the midpoint plus the total price improvement for orders wholesalers 
internalized at prices more favorable than the midpoint. 

 

ii. Listed Options 

a. Options Trading Services Overview 

Registered exchanges are the sole providers of trading services in the market for listed 

options, and the Options Clearing Corporation (OCC) is the sole entity clearing trades for 

exchange-listed options and security futures.431  All listed options trading occurs on exchanges.  

Exchanges compete with each other by offering different cost structures to participate on the 

exchange, and offering differing order types to allow customers advanced trading strategies.  

Options exchanges offer the ability to route orders to competing options exchanges in the event 

of a competing option exchange having the best price for a given options order.432   

                                                 

431  See What Is OCC?, The Options Clearing Corporation, available at 
https://www.theocc.com/Company-Information/What-Is-OCC. Listed options can only be 
traded on a registered options exchange.  See By-Laws of The Options Clearing 
Corporation, Article I, Section 1(C)(28) (defining “confirmed trade”) and Article VI, 
Section 1. 

432  See e.g., Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 
(August 6, 2009) (approving the national market system plan relating to options order 
protection and locked/crossed markets) (File No. 4-546). 

https://www.theocc.com/Company-Information/What-Is-OCC


   

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There are sixteen options exchanges433 in the U.S. options market.  Each of the sixteen 

exchanges is operated by one of five exchange groups.434  Table 9 presents the market share, as  

measured by contract volume, for each option exchange and each exchange group based on  

OPRA data from 2022/01/01 to 2022/03/31.  Cboe is the exchange with the largest market 

share,435 at close to 15%.  However, on the exchange group level, the Nasdaq group, with its six 

exchanges, has the highest market share.  

Table 9: U.S. Options Exchange Market 
Share 

Group Exchange Market Share 

BOX BOX 5.78% 

Cboe 

Cboe 14.81% 
C2 3.66% 
EDGX 4.86% 
BZX 7.91% 

Nasdaq 

Nasdaq 7.93% 
BX 2.01% 
PHLX 10.91% 
GEMX 2.32% 
ISE 5.63% 
MRX 1.69% 

NYSE 
AMEX 6.68% 
Arca 12.54% 

MIAX 
MIAX 5.39% 
PEARL 4.26% 
EMERALD 3.61% 

                                                 

433  Eight exchanges trade only options.  Eight trade both options and equities. 
434  Exchange groups are collection of exchanges operated by one parent entity. 
435  This is in part due to the fact that there are several very liquid Cboe-listed only products 

such as SPX and SPXW. 



   

251 

 

 

There is one ATS in the market for listed options.436  As the Commission understands, 

this ATS offers subscribers an RFQ protocol.437  A customer may accept the quote the ATS 

returns from the RFQ protocol, after which the order is sent to an exchange for execution. 

Most option exchanges do not provide midpoint liquidity, and marketable orders routed 

to the limit order book can only be executed at the NBBO prices when there is no price 

improvement order present.  The Nasdaq Option Exchange first introduced an order type called 

price improvement order which allows market participants to enter the order at a non-displayed 

limit price within the NBBO spread at 1 cent increments regardless of the tick size of the option 

series.  Marketable customer orders are able interact with the resting price improving orders and 

receive better prices than the prevailing NBBOs.   

b. Retail Order Handling in Options 

The Commission understands the majority of retail orders for options are handled by 

wholesalers.438   Rule 606 data from Q1 2022 show that all but one of the top 15 retail options 

brokers routed all of their non-directed439 orders from customers to wholesalers.  Some of this 

flow is routed directly to wholesalers, while some goes through a third-party clearing firm, but is 

                                                 

436  In contrast to the market for NMS Stocks, ATS trades in NMS Options are still executed 
on an exchange. 

437  See, DASH Financial Technologies, Execution Services: Dash ATS available at 
https://dashfinancial.com/execution-services/dash-ats/. 

438  See supra section III.A. 
439  According to the Rule 606 filings for the top 15 retail brokers for listed options, on 

average non-directed orders made up around 99.13% of all retail orders in Q1 of 2022. 



   

252 

 

at some point handled by at least one wholesaler.  Sometimes retail brokers do route to 

exchanges, either directly or through a third-party firm.  

Table 10 summarizes order routing choices of 45 major retail brokers for non-directed 

orders for listed options.  Routing decisions are summarized separately for 23 retail brokers who 

accept PFOF from wholesalers or clearing firms in option markets (PFOF brokers) and those 

who do not (non-PFOF brokers).  Within each category of brokers, routing statistics for each 

order type440 is reported separately.   

Similar to results for NMS stocks, the composition of order types differ between non-

PFOF and PFOF brokers.  Market orders and marketable limit orders comprise a smaller 

proportion of orders routed by non-PFOF brokers than PFOF brokers.  For example, market 

orders make up 9.97% and 14.60% of non-directed orders of non-PFOF and PFOF brokers, 

respectively.  Consequently, the non-marketable limit order type and other order type make up 

smaller shares of orders routed by PFOF brokers. 

Non-PFOF brokers route a significantly lower fraction, 46%, of their customer orders to 

wholesalers, compared to over 99% of customer orders that PFOF brokers route to wholesalers.  

Additionally, Non-PFOF brokers also route 17% of customer orders to clearing firms, whereas 

essentially no orders from PFOF brokers are routed in this manner.  Finally, as an alternative to 

the previously mentioned routing choices, Non-PFOF brokers route a significantly higher 

fraction, 38%, of customers’ orders directly to the exchanges than PFOF brokers, which route 

less than 0.1% of the order flow to the exchanges. 

Table 10: Retail Broker Order Routing in Listed Options for March 2022 

                                                 

440  See supra section V.C.2.e.i. 



   

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Non-PFOF Retail Brokers 

Venue Type Market Marketable 
Limit 

Non-
marketable 

Limit 
Other Total 

Clearing firm 4.49% 1.46% 10.62% 0.27% 16.84% 
Exchange 0.01% 0.44% 5.47% 31.70% 37.61% 

Wholesaler 5.48%     7.88% 47.14% 35.01% 45.55% 
Total 9.97% 9.25% 51.18% 20.66% 100.00% 

PFOF Retail Brokers 

Venue Type Market Marketable 
Limit 

Non-
marketable 

Limit 
Other Total 

Clearing firm 0.00% 0.00% 0.02% 0.01% 0.04% 
Exchange 0.00% 0.00% 0.06%  0.01% 0.07% 

Wholesaler 14.59% 8.19% 44.71% 32.41% 99.90% 
Total 14.60% 8.20% 44.78% 32.42% 100.00% 

This table shows the percentage of market orders, marketable limit orders, non-
marketable limit orders, and other orders that retail brokers route to different types of 
venues in March 2022.  Other venues include any other venue to which a retail broker 
routes an order other than a wholesaler or an exchange. Twenty-three retail brokers 
are identified as PFOF retail brokers that receive payments for routing orders in listed 
options to wholesalers or clearing firms. Twenty-two non-PFOF retail brokers are 
identified as retail brokers that do not receive monetary compensation when they 
route orders in listed options to wholesalers.  The reports are aggregated together 
using a weighting factor based on an estimate of the number of orders non-directed 
orders each broker-dealer routes each month.  The number of orders is estimated by 
dividing the number of market orders a retail broker routes according to a CAT 
analysis by the percentage of market orders the retail broker routes for March 2022. 

 

Similar market forces that drive internalization of orders in the equity markets exist in 

option markets as well.441  In the options market, internalization442 can occur on the limit order 

                                                 

441  See supra section V.B.3.i.d). 
442  In contrast to the market for NMS Stocks, NMS options are typically internalized after 

being sent to an exchange.  Broker-dealers wishing to internalize orders are able to use 
the rules of exchanges to internalize some orders completely, through routing to affiliated 
market makers (partial internalization), or through price improvement auctions (partial 
internalization), which offer competition advantages over competing market participants. 



   

254 

 

book or through price improvement auction mechanisms.443  Internalization on the limit order 

book requires the wholesalers’ own quotes to be at the NBBOs, and some exchanges develop 

certain features (e.g., specialist model)444 to facilitate and improve the internalization rate.  From 

the Consolidated Audit Trail data for March 2022, the Commission estimates that wholesalers 

internalize 70.6% of the single-leg orders routed to the price improvement auctions and 19.1% of 

the single-leg orders routed to the limit order books.445  For multi-leg orders, the internalization 

rates are 82.4% and 9.27% respectively.446  Combining single-leg and multi-leg orders, the 

Commission estimates wholesalers internalize around 31% of the executed orders routed to the 

option exchange: 73% of orders routed to price improvement auctions and 17% of orders routed 

to the limit order book.447 

 

Table 11: Execution Protocol and Allocation of Limit Order 

Book by Options Exchange 

                                                 

443  Price improvement auctions can be used by institutional broker-dealers to seek price 
improvement opportunities for their institutional clients’ orders as well.  Some exchanges 
have developed auctions for large orders with an “all-or-none” feature. 

444  “Specialist model” is a general term.  The term to describe a “specialist” varies by 
exchange.  Some exchanges may formally call this “Designated Market Marker,” or other 
similar terms. 

445        A single-leg order involves buying or selling a single options series. For example, buying 
a call option on XYZ stock with a strike price of $5.00. 

446  A multi-leg order involves buying or selling multiple options series simultaneously.  For 
example, buying a call option on XYZ stock with a strike price of $5.00, and, in the same 
order, selling a call option on XYZ stock with a strike price of $10.00.  

447  The internalization rate measure throughout this paragraph is based on the contract 
volume.  A given customer’s order can be partially internalized.  For example, suppose a 
wholesaler routes an order with 10 contracts to a price improvement auction and is 
allocated 7 contracts after the auction concludes, then the wholesaler is deemed as 
internalizing 70% of the order. 



   

255 

 

Group Exchange Specialist Auction Pro-
Rata 

BOX BOX Y Y Y 

CBOE 

CBOE C2 N N Y 
CBOE Y Y Y 

CBOE BZX N N N 
CBOE EDGX N Y Y 

MIAX 

MIAX Y Y Y 
MIAX 

Emerald Y N Y 

MIAX 
PEARL N N N 

Nasdaq 

Nasdaq BX Y Y Y 
Nasdaq 
GEMX Y Y Y 

Nasdaq ISE Y Y Y 
Nasdaq MRX Y Y Y 
Nasdaq NOM N N N 

Nasdaq 
PHLX Y N Y 

NYSE 
NYSE 

American Y Y Y 

NYSE Arca N Y N 
 

 To internalize a given customer’s marketable order on the exchange limit order book, the 

wholesaler needs to provide a quote that is at the NBBO.448  This form of internalization may not 

yield complete internalization of the order because there could be quotes from other market 

makers, some of whom are quoting at the same price and may have priority over the wholesaler 

(e.g., the other market makers will have priority if the wholesaler joins the NBBO set by other 

                                                 

448  Internalizing a customer’s non-marketable limit order with a price between the prevailing 
NBBO spread would require the wholesaler to route the customer’s order to the limit 
order book first and then submit an immediate-or-cancel order to fill the limit order. The 
internalization rate may not be 100% since other market makers can react to the limit 
order after the exchange books the book in the limit order book. 



   

256 

 

market makers in a price-time priority exchange or they quote with a larger trading interest than 

the wholesaler in a pro-rata exchange).  Being a specialist enables the wholesaler to further 

internalize more orders more than a pro-rata allocation model would allow.449  Some exchanges 

appoint a firm to be the specialist for each equity option class.  According to Table 11, 10 out of 

16 option exchanges adopt the specialist model for quoting and executing single-leg orders on 

the limit order book.  The specialist has greater quoting requirements than other exchange 

members or market makers.  To compensate specialists for continuous provision of two-sided 

quotes to match buyers and sellers, the exchanges reward specialists by allowing the specialist to 

receive a greater allocation (40%+) of incoming orders if they are at the NBBO and/or provide 

them with a guarantee of 100% allocation of orders of 5 contracts or less (the “five-lot rule”).  

Some exchanges allow executing brokers to route customers’ orders in the form of directed 

orders to the affiliated market makers with heightened allocation (40%+) and small order 

guarantees with 100% of the orders of one contract.  According to the table, all exchanges that 

adopted the specialist model are pro-rata exchanges, meaning that trading interests are allocated 

based on the size of the quote in proportion to the total depth on the NBBO.  Therefore, when 

wholesalers are also specialists, wholesalers may receive a disproportionate allocation of the 

customer order, even though, as the specialist, the wholesaler might not be providing the most 

depth at the best prices.  A recent academic study450 shows that the execution quality is worse for 

specialists who pay PFOF than the specialists who do not: the realized spreads for the 400 to 500 

                                                 

449  All the exchanges that appoint specialists are pro-rata exchanges.  In a pro-rata exchange, 
allocations are proportional to the trading interests at the best prices for each options 
series. 

450  See Ernst & Spatt, supra note 77. 



   

257 

 

share orders, which can be fully internalized by the specialists, are 3 basis points higher when the 

specialists pay PFOF compared to when the specialists do not pay PFOF, suggesting that the 

process is not fully efficient. 

Another way to internalize customer orders without being a specialist is through price 

improvement auctions.  Some option exchanges451 provide two-sided price improvement 

mechanisms for both single-leg and multi-leg orders originated from customers.  To start a price 

improvement auction (PIA), the affiliated market maker (“MM”) of an executing broker usually 

submits a two-sided order representing a customer’s order and its own “contra” order, which is 

on the opposite side of the customer’s order, to the exchange.  The PIA usually lasts for 0.1 

seconds, during which time, the exchange would expose and broadcast the customer order to 

other exchange members (competing market participants) for price improvement opportunity 

over the current NBBO price, and the competing market participants then submit responding 

orders to the auction to the exchange.  After the PIA concludes, the allocation of the execution 

will begin with the best price received from the contra order and responding orders and end with 

the price where the remaining volume of the customer’s order will be filled.  In addition to the 

previously mentioned benefits to specialists, option exchanges have developed certain 

arrangements or schedules to give wholesalers advantages to conduct operations on the exchange 

by further facilitating the ability of wholesalers to internalize the customer orders they receive 

through the auctions.  Such preferential advantages include, but are not limited to the following: 

(1) asymmetric fee schedule in which initiating MMs pay a much smaller transaction fee than 

                                                 

451  According to Table 11, 10 out of 16 option exchanges provide price improvement auction 
mechanisms to wholesalers and other executing brokers. 



   

258 

 

competing market participants, (2) price auto-match in which the exchanges allow the PIA 

initiating exchange members to match the best price among the responding orders from the 

competing market participants, and (3) guaranteed allocation in which the initiating exchange 

members are allowed to execute at least 40% of the customer’s order exposed in a PIA.  

Academic studies suggest that the preferential treatment of wholesalers provided by the 

exchanges leads to less than fully competitive liquidity provision in auctions.452 

iii. Payment for Order Flow in NMS Securities453 

Rule 10b-10(d)(8) defines payment for order flow as any monetary payment, service, 

property, or other benefit that results in remuneration, compensation, or consideration to a broker 

or dealer from any broker or dealer, national securities exchange, registered securities 

association, or exchange member in return for the routing of customer orders by such broker or 

dealer to any broker or dealer, national securities exchange, registered securities association, or 

exchange member for execution.454  PFOF includes any payments from a wholesaler to a retail 

broker-dealer in return for order flow.  It also includes any exchange rebates paid to a broker-

                                                 

452 See supra note 450 and see also Terrance Hendershott, Saad Khan, & Ryan Riordan, 
Option Auctions, (Working paper, May 15, 2022) available at 
https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=4110516 (retrieved from Elsevier 
database). 

453  See infra section V.B.3.c) for a discussion of PFOF in the market for crypto asset 
securities. 

454  See supra note 43 for discussion of payment for order flow definition under Rule 10b-
10(d)(8).  In certain circumstances, broker-dealers are required to disclose their PFOF 
arrangements.  For example. Rule 10b-10 requires extensive disclosures in confirmations, 
including specific disclosures about PFOF.  Additionally, Rule 606 reports require the 
disclosure of PFOF arrangements and the average PFOF rates broker-dealers receive on 
non-directed orders in NMS stocks and options for routing orders to a trading venue.  

https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=4110516


   

259 

 

dealer in return for sending orders to the exchange.  PFOF has the potential to adversely affect 

routing decisions to the extent it is not directly passed on to the customer. 455  However, it is also 

possible that there is a tradeoff between PFOF and execution quality that does not adversely 

affect order routing decisions.     

Studies have found that PFOF may adversely affect order execution quality.  For 

example, one study looked at the effect of exchange rebates in the routing of non-marketable 

limit orders in the equities markets and found evidence that broker-dealers tend to route customer 

orders to the venues that pay high rebates, but offer lower execution quality in the form of lower 

fill rates and longer times to order execution.456  Similarly, in the options market, a study457 finds 

that some brokers tend to route non-marketable limit orders for listed options to exchanges that 

offer large rebates.  The study’s analysis indicates that non-marketable limit orders routed to 

                                                 

455  FINRA has stated that obtaining price improvement is a heightened consideration when a 
broker-dealer receives payment for order flow and it is especially important to determine 
that customers are receiving the best price and execution quality opportunities 
notwithstanding the payment for order flow.  See FINRA Regulatory Notice 21-23, supra 
note 294. 

456  See, e.g.,  Robert H. Battalio, Shane A. Corwin & Robert H. Jennings, Can Brokers Have 
It All? On the Relation Between Make-Take Fees and Limit Order Execution Quality, 71 
J. FIN. 2193 (2016), available at 
https://onlinelibrary.wiley.com/doi/10.1111/jofi.12422/full (“We identify retail brokers 
that seemingly route orders to maximize order flow payments by selling market orders 
and sending limit order to venues paying large liquidity rebates. . . . [W]e document a 
negative relation between limit order execution quality and rebate/fee level. This finding 
suggests that order routing designed to maximize liquidity rebates does not maximize 
limit order execution quality. . . .”). 

457  See, e.g., Robert Battalio, Todd Griffith & Robert Van Ness, Do (Should) Brokers Route 
Limit Orders to Options Exchanges That Purchase Order Flow?, 56 J. FIN. QUAN. ANAL. 
183 (2020). 

https://onlinelibrary.wiley.com/doi/10.1111/jofi.12422/full


   

260 

 

exchanges that pay higher liquidity rebates receive worse execution quality than non-marketable 

limit orders routed to exchanges that do not offer liquidity rebates. One study finds no relation, 

potentially as a result of low statistical power.458  Evidence on the potential adverse effects 

appears stronger in the options market than in the equity market.459  Section V.B.3.a).iii.a 

presents Commissions analysis.   

a. PFOF Amounts and Rates 

 Table 12 summarizes information on PFOF payments in NMS Stocks and Options for Q1 

2022 received by 52 retail broker-dealers and aggregated based on the order type and type of 

trading venue.460  Wholesalers paid more than $750 million dollars, about 94% of the total PFOF 

payments of approximately $850 million.  Note also that PFOF for options represent the largest 

share of these payments (70%), equal to more than $550 million.  In addition, PFOF for non-

S&P 500 orders was about 24% of total wholesale PFOF disbursements, substantially larger than 

                                                 

458  See Christopher Schwarz, et. al., The ‘Actual Retail Price’ of Equity Trades (Working 
paper, September 14, 2022) (“Schwarz”), available at 
https://ssrn.com/abstract=4189239 (retrieved from Elsevier database) do not find a 
relationship between the amount of PFOF a retail broker receives and the amount of price 
improvement their customers’ orders receive.  However, see infra note 466 for a 
discussion comparing the results in Table 16. 

459  See Ernst & Spatt, supra note 77, at 1 (“We exploit variation in the Designated Market 
Maker (DMM) assignments at option exchanges to show that retail traders receive less 
price improvement, and worse prices, from those DMMs who pay PFOF to brokers.”).  
The paper also finds PFOF amounts from wholesalers in the NMS stock market are small 
(compared to the options market) and that individual investor orders executed at 
wholesalers receive meaning price improvement.     

460  The PFOF data was aggregated from Rule 606 reports from the 52 retail brokers. The 
order types are based on those included in Rule 606 reports.  Other Trading Venues 
includes any other trading center to which a retail broker routes an order other than a 
wholesaler or an exchange, including ATSs.  See supra note 404 for more details on what 
is included in Rule 606 reports.261 

 

the 6% share of PFOF paid for S&P 500 orders.  Finally, note that wholesaler PFOF for 

marketable orders (market and marketable limit orders) was equal to 51% of all wholesaler 

PFOF, while PFOF for non-marketable limit orders equaled about 38% of wholesaler PFOF 

disbursements.    

 

Table 12: Aggregated 606 payments for Q1 2022 to Retail Broker-Dealers by venue type, asset class, and 
order type 

 

 
Market 
Orders 

Marketable Limit 
Orders 

Non-Marketable 
Limit Orders Other Orders Total 

Wholesalers 

S&P 500 $20,169,292 $6,861,406 $15,675,087 $4,963,329 $47,669,114 
Non-S&P 

500 $74,313,900 $45,711,676 $53,253,329 $14,502,924 $187,781,828 

Options $69,221,438 $185,987,581 $235,507,979 $70,361,954 $561,078,951 

Total $163,704,629 $238,560,663 $304,436,395 $89,828,206 $796,529,894 

National 
Securities 
Exchanges 

S&P 500 -$2,883 -$1,600,326 $4,151,796 -$1,058,038 $1,490,549 
Non-S&P 

500 -$14,624 -$13,794,526 $24,538,646 -$2,224,848 $8,504,649 

Options -$54,106 $4,838,611 $19,019,112 $13,334,942 $37,138,559 

Total -$71,613 -$10,556,240 $47,709,554 $10,052,056 $47,133,756 

Other 
Trading 
Venues 

S&P 500 -$14,335 -$87,299 $514,713 $16,715 $429,794 
Non-S&P 

500 $41,513 -$1,397,974 $1,736,516 -$5,007 $375,049 

Options $185,367 -$305,579 $4,740,343 $649,611 $5,269,742 

Total $212,545 -$1,790,852 $6,991,572 $661,319 $6,074,585 

 Grand 
Total $163,845,562 $226,213,571 $359,137,521 $100,541,581 $849,738,235 

This table shows the aggregate payments made from different types of venues in Q1 2022 to 52 broker-dealer based 
on their Rule 606 reports.  The table breaks out payments from exchanges, wholesalers, and other trading venues for 
market orders, marketable limit orders, non-marketable limit orders, and other orders in S&P 500 stocks, Non-S&P 
500 stocks and Options. Other Trading Venues includes any other trading center to which a retail broker routes an 
order other than a wholesaler or an exchange, including ATSs.     

 

Table 13, Panel A summarizes the total PFOF dollars paid to the 52 broker-dealers in Q1 

2022 based on their total assets.  The majority of payments, more than 750 million dollars, went 

to broker-dealers with more than 1 billion dollars in assets.  As shown earlier, most of this 

payment came from the options market. 



   

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Table 13, Panel B summarizes the distribution of total PFOF dollars paid to the 52 

broker-dealers as a percentage of their total revenue in Q1 2022.  On average, the payments 

reported on Rule 606 reports accounted for 21% of the broker-dealer’s total revenue.  However, 

there was considerable variation across broker-dealers.  Rule 606 reported payments accounted 

for less than 5.9% of total revenue for over 50% of the broker-dealers in the sample.  However, 

for the top 10% of broker-dealers by revenue, Rule 606 reported payments accounted for more 

than 74% their total revenue in Q1 2022. 

Table 13: Rule 606 Report Broker-Dealer Sample and Payments by Asset Size and Distribution of Payments as Percent 
of Broker-Dealer Total Revenue 

Panel A: Broker-Dealers and Payments in Rule 606 Sample by Asset Size 
 Size of Broker-Dealer (Total Assets) 

Variable >50bn 1bn-50bn 
500mn-

1bn 
100mn-
500mn 

10mn-
100mn 

1mn-
10mn <1mn 

Number of Firms in 606 
Sample 10 20 2 13 7 0 0 

Number of Firms with 
Positive 606 Payments 5 11 1 5 4 0 0 

606 Total Dollar Payments $323,768,783 $437,613,668 $4,122 $72,400,510 $15,951,151 $0 $0 

606 Total Equity Payments $112,360,651 $108,639,249 $4,122 $23,525,311 $1,721,651 $0 $0 

606 Total Options Payments $211,408,132 $328,974,419 $0 $48,875,200 $14,229,501 $0 $0 

        
     
Panel B: Distribution of Firm Payments Reported in Rule 606 as Percentage of Broker-Dealers' Total Revenue 

Variable Mean Std Dev 
10th 
Pctl 25th Pctl 50th Pctl 

75th 
Pctl 

90th 
Pctl 

606 Total Payments % of 
Total Revenue 20.94% 32.31% 0.02% 0.08% 5.82% 28.66% 74.29% 

606 Equity Payments % of 
Total Revenue 6.67% 11.57% 0.00% 0.02% 1.24% 7.70% 16.23% 

606 Options Payments % of 
Total Revenue 14.28% 27.52% 0.00% 0.02% 2.52% 17.50% 49.96% 

This table summarizes total payments from the Q1 2022 Rule 606 Reports for 52 broker-dealers based on their 
total assets and total revenue.  Panel A shows how many broker-dealers fall within each asset size category and 
the total payments reported on their Rule 606 Reports that they received in the equity and options markets from 
venues to which they routed orders in Q1 2022.  Panel B shows the distribution of the equity and options 
payments as a percentage of a firm’s total revenue for Q1 2022. Total Assets are estimated by Total Assets 
(allowable and non-allowable) from Part II of the FOCUS filings (Form X-17A-5 Part II) from Q4 2021 and 
correspond to balance sheet total assets for the broker-dealer. Total Revenue is reported by each broker-dealer 
during Q1 2022 in their FINRA Supplemental Statement of Income Form.   

 



   

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From the Rule 606 reports of 15 major retail brokers for listed options, we can infer that 

as of Q4 of 2020, 11 of them had PFOF arrangements with wholesalers, one firm routed the 

orders directly to the exchanges, one firm routed the orders to its parent firm, and the remaining 

two firms routed the orders to wholesalers but did not have PFOF arrangements.  According to 

the Rule 606 reports, wholesalers paid $560 million in PFOF to the 11 retail brokers for non-

directed orders in listed options in Q1 2022. 

Table 14 presents the average payment rates reported in Rule 606 reports for PFOF 

broker-dealers in listed options in Q1 2022.  The statistics are further broken down by trading 

venue and order type, with rates given in cents per 100 shares.461  The average PFOF rates are 

negative for the marketable limit orders and other orders routed to exchanges, but the rate is 

positive for non-marketable limit orders suggesting the brokers route most of the non-marketable 

limit orders to the maker-taker exchanges to collect rebates.  According to the table, the average 

PFOF rates paid by clearing firms are smaller but not much smaller than wholesalers across all 

order types suggesting that clearing firms pass majority of the monetary compensation from 

wholesalers to the retail brokers with which they have PFOF arrangements. 

 

Table 14: Average Rule 606 Payment Rates for Q1 2022 to PFOF Broker-Dealers by Venue Type for Listed Options 

Venue Type Market Orders Marketable Limit 
Orders  

Non- Marketable 
Limit Orders  Other Orders 

Exchange N/A -43.1 42.6 -59.6 
Clearing firm 38.4 33 35.2 39.8 

                                                 

461  The PFOF rate is missing for the market orders routed directly to the options exchanges 
because, according to the rule 606 reports, these brokers neither paid fees nor received 
rebates from exchanges for the market orders in Q1 2022. 



   

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Wholesaler 39.9 52.5 51.8 40.4 
This table shows the average payment rates (in cent per 100 shares) made from different types of 
venues in Q1 2022 to 23 broker-dealers that received PFOF from wholesalers based on their Rule 606 
reports. The table breaks out average rates from wholesalers and clearing firms for market orders, 
marketable limit orders, non-marketable limit orders, and other orders in listed options. Twenty-three 
retail brokers are identified as PFOF retail brokers that receive payments for routing orders to 
wholesalers or clearing firms. This analysis uses the retail broker-dealer's Rule 606 report if it 
publishes one or the Rule 606 report of its clearing broker if the retail broker did not produce a Rule 
606 report itself. The reports are aggregated using a weighting factor equal to the PFOF amount. 

 

b. Empirical Relation between PFOF and Price Improvement  

Although wholesalers provide individual investor orders with price improvement relative 

to exchanges, the magnitude of this price improvement is not uniform across retail brokers.462  

Analysis in this section shows that two factors driving variation in the price improvement 

wholesalers provide are the amount of PFOF the wholesaler pays to the retail brokers and the 

average adverse selection risk posed by the customers of the retail broker.  

Commission analysis presented in Table 15 compares average execution quality for 

PFOF and non-PFOF brokers for executed marketable orders of individual investors under 

$200,000 in NMS common stocks and ETF orders that are routed to wholesalers.463  Results are 

                                                 

462  Several recent working papers found that price improvement varies across retail brokers; 
see Schwarz, supra note 458, and Bradford Lynch, Price Improvement and Payment for 
Order Flow: Evidence from A Randomized Controlled Trial (Working paper, June 27, 
2022), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4189658 
(retrieved from Elsevier database) (“Lynch”). These studies only included trades that 
were initiated by the authors, and do not include other trades that were handled by the 
brokers in their samples. In contrast, the Commission’s analysis is based on the data 
reflecting all orders routed by 58 broker-dealer MPIDs. 

463  Some brokers that do not accept PFOF for orders in equities accept PFOF for orders in 
options.  Certain items in Table 15 may also be affected by MDI Rules once they are 
implemented. See supra note 415. 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4189658


   

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divided between orders that were executed by the wholesaler on a principal basis (i.e., 

internalized) and those executed via other methods (the majority of which are in a riskless 

principal capacity).   

Table 15: Comparison of PFOF and Non-PFOF Broker Execution Quality in NMS Common Stocks and ETFs 

 Principal Transactions Other Transactions 

 Non-PFOF PFOF Non-PFOF PFOF 

Average Price $41.79 $31.35 $23.90 $12.47 
Wholesaler (WH) Share Volume (billion shares) 14.32 55.96 3.40 13.43 
WH Dollar Volume (billion $) $598.44 $1,754.36 $81.23 $167.41 
Pct of Executed Dollar Volume 23.00% 67.44% 3.12% 6.44% 
WH Effective Spread (bps) 1.50 1.86 4.57 5.75 
WH Realized Spread (bps) 0.88 0.85 0.83 0.66 
WH Realized Spread Adj PFOF (bps) 0.88 0.43 0.83 -0.55 
WH Price Impact (bps) 0.62 1.01 3.74 5.07 
WH E/Q Ratio 0.30 0.37 0.78 0.67 
WH Pct Executed with Price Improvement 90.59% 94.32% 46.89% 62.87% 
WH Conditional Amount Price Improvement (bps) 2.75 2.34 2.31 4.30 

The table summarizes execution quality statistics from the CAT retail analysis in Common Stocks and ETFs based on whether 
the retail broker MPID receives PFOF from wholesalers (PFOF) or does not (Non-PFOF) and whether the wholesaler executed 
the individual investor order in a principal capacity or in another capacity (i.e., in an agency or riskless principal capacity). A 
broker-dealer MPID was determined to be a PFOF broker if the broker-dealer reported receiving PFOF on its Q1 2022 606 
report, or if the report of its clearing broker reported receiving PFOF in the event that the broker did not publish a Rule 606 
report. Broker-dealers or clearing brokers that handled orders on a not held basis and did not disclose PFOF information in their 
Rule 606 report were classified as PFOF brokers if disclosures on their websites indicated they received PFOF. Twenty-two 
MPIDs belonging to 19 retail brokers were classified as receiving PFOF. The majority of the other transactions are executed by 
the wholesaler in a riskless principal capacity. See supra Table 6 for additional details on the sample and metrics used in the 
analysis. WH Realized Spread Adj PFOF is the estimated realized spread in bps earned by the wholesaler after adjusting the 
realized spread for the estimated PFOF they pay to retail brokers.a  Share-weighted percentage metrics are averaged together at 
the individual PFOF-execution capacity-stock-week-order-size category level for the wholesaler sample using the methodology 
in Table 6. Weighted averages for the metrics are then calculated for each PFOF-execution capacity category by averaging 
across execution capacity-stock-week-order size category levels based on their total dollar transaction volume during the sample 
period in the wholesaler CAT sample.  This analysis uses data from prior to the implementation of the MDI Rules and specific 
numbers may be different following the implementation of the MDI Rules. See supra note 415 
a  See infra note 467 for further details on estimated PFOF retail brokers receive. Realized spreads for marketable orders routed 
to wholesalers are adjusted for PFOF by subtracting the estimated dollar per share PFOF rate the retail broker receives from the 
average per share dollar realized spread in the execution capacity-stock-week-order type-order size category and then dividing 
by the average transaction price to calculate the percentage metric as discussed in further detail in supra Table 6. 

  

The results in Table 15 show that wholesaler internalized orders (Principal Transactions) 

originating from PFOF brokers are associated with (1) higher effective spreads, (2) higher E/Q 



   

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ratios, and (3) slightly smaller price improvement on orders that achieved at least some price 

improvement (WH Conditional Amount Price Improvement), relative to wholesaler internalized 

orders originating from non-PFOF brokers. However, the results also show that orders 

internalized from non-PFOF brokers also have lower adverse selection risk and similar realized 

spreads (before PFOF is paid), indicating the lower adverse selection risk could explain 

differences in the observed execution quality. 

Because the results in Table 15 are averages across broker-dealers, they cannot 

disentangle the effects of PFOF on execution quality from differences in the adverse selection 

risk of different broker-dealers.464  In order to control for these differences, the Commission 

analyzed the effects of PFOF and differences broker-dealer adverse selection risk on execution 

quality in a regression framework that controls for other factors that could affect the price 

improvement provided by wholesalers.  

 Table 16 displays regression results from Commission CAT retail analysis of NMS 

Common stock and ETF orders,465 and shows that the previous results indicating that brokers 

that receive PFOF receive inferior execution quality are robust to the inclusion of controls for 

differences in the type of order flow coming from different broker-dealers.466   The regression 

                                                 

464  They also cannot disentangle the effects of differences in the stocks traded by PFOF and 
non-PFOF brokers.  

465  Certain items in this Table 16 may also be affected by the amendments in the MDI Rules 
once they are implemented.  See supra note 415. 

466  Schwarz et. al., supra note 458, did not find a relationship between the amount of PFOF a 
retail broker receives and the amount of price improvement its customers’ orders receive.   
However, they noted that the variation in the magnitude of price improvement they saw 
across retail brokers was significantly greater than the amount of PFOF the retail broker 



   

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tests whether there is a relationship between execution quality and the amount of PFOF a broker-

dealer receives and includes several individual stock- and market-level controls467 as well as the 

                                                 

received, which could indicate their sample was not large enough to observe a 
statistically significant effect. Similarly, when we examine variation in effective spreads 
across retail brokers based on their average price impact (i.e., their average adverse 
selection risk), we observe that the differences between the effective spreads of PFOF 
and non-PFOF brokers as shown in Table 15, infra, are significantly smaller than the 
differences observed across retail brokers based on variation in their average price 
impacts.  Lynch, supra note 462, compares the execution quality of similar orders routed 
to two different retail brokers that receive different amounts of PFOF from wholesalers. 
The study finds that the retail broker that received a greater amount of PFOF from 
wholesalers (i.e., had a higher per share PFOF rate reported in their Rule 606 reports) 
provided less price improvement compared to a similar order routed to a retail broker that 
received less PFOF.  Importantly, both studies only included trades that were initiated by 
the authors and do not include other trades that were handled by the brokers in their 
samples, preventing them from examining the attributes of a typical retail order handled 
by each broker.  As such, these studies do not observe the variation in price 
improvements that reflect differences in the adverse selection risk associated with the 
order flow of different brokers, and hence, likely conflate the impacts of PFOF with those 
of adverse selection risk.  That is, these studies cannot control for the possibility that a 
wholesaler would offer smaller price improvement to order flows with higher adverse 
selection risk.  In contrast, the Commission relies on CAT data to examine the adverse 
selection risk at the broker level, which is a determinant of the amounts of price 
improvements that a given wholesaler would offer to different brokers.  The regression 
framework in infra Table 16 controls for the adverse selection risk of the retail broker and 
finds that is has a negative relationship with the magnitude of price improvement their 
customers’ orders receive.  We also find a negative relationship between the amount of 
PFOF a broker-dealer receives and the magnitude of the price improvement their 
customers’ orders receive after controlling for the retail broker adverse selection risk.  

467  Broker-dealer cents per 100 shares PFOF rates (dollar PFOF rates) are determined from 
their Q1 2022 Rule 606 reports (see supra Table 2) or the Rule 606 reports of its clearing 
broker reported receiving PFOF in the event that the broker did not publish a Rule 606 
report.  A PFOF rate of 20 cents per 100 shares was used for the introducing broker-
dealers and clearing broker that reported handled orders on a not held basis and did not 
disclose PFOF information in their Rule 606 report but disclosed on their website that 
they received PFOF for their order flow. 20 cents per 100 shares was the PFOF rate that 
the clearing broker that handles orders on a not held basis disclosed on their website that 
they received. Twenty-two MPIDs belonging to 19 retail brokers were classified as 
receiving PFOF. Dollar PFOF rates for each retail broker were merged with the 



   

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retail broker’s average price impact and size (as measured by percent of executed individual 

investor dollar volume).  Four different measures of execution quality are used for the dependent 

variable, including E/Q ratio, effective spread, realized spread, and price improvement.468 

Table 16: Regression Analysis showing Relationship Between Execution Quality and PFOF in NMS 
Common Stocks and ETFs 

  (1) (2) (3) (4) 

VARIABLES 
E/Q 

 Ratio 
Effective spread 

(bps) 
Realized spread 

(bps) 

Amount Price 
Improvement 

(bps) 
          
PFOF Rate 0.0132*** 0.217*** 0.211*** -0.170*** 

 [2.82] [6.31] [7.13] [-5.52] 

Stock Share Volume 0.0379 -0.0462 -0.886* -0.533** 

 [0.51] [-0.14] [-1.65] [-2.53] 

Stock VWAP -0.000028 0.000233 -0.000450 0.000014 

 [-1.06] [0.61] [-0.78] [0.04] 

Stock Return -0.000273 -0.0200* -0.0120 0.00840 

 [-0.21] [-1.93] [-0.36] [0.84] 

VIX 0.00968*** 0.0122* 0.0607*** -0.000256 

                                                 

corresponding stock (S&P 500 and non-S&P 500) and order type in the CAT sample.  
For the regressions in Table 16, percentage PFOF rates are estimated in basis points by 
dividing the PFOF cents per 100 share values from Rule 606 reports (after converting 
them to dollar per share values) by the stock-week VWAP for the security in the CAT 
sample. Stock-level controls include average share volume, VWAP, return, average 
effective spread, average realized spread, and average quote volatility during a week.  
Market-level controls include market volatility, market return, and the market’s average 
daily trading volume during week.  

468  The regression also includes variables to control for differences in execution quality 
across different wholesalers and across different order size categories.  The analysis 
examines trades in Q1 2022 that wholesalers execute in a principal capacity from market 
and marketable limit orders from individual investors that are under $200,000 in value 
and are in NMS Common Stocks and ETFs.  See supra Table 6 for further discussion on 
the sample. The unit of observation for the regression is the average execution quality 
provided to trades that are aggregated together based on having the same stock, week, 
order type, order size category, wholesaler, and retail broker MPID.  The coefficients are 
estimated by weighting each observation by the total dollar volume of trades executed in 
that observation.     



   

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 [7.29] [1.79] [2.85] [-0.05] 

Market Return -0.00710** 0.00787 0.00686 -0.0150 

 [-2.02] [0.36] [0.15] [-0.96] 

Market Dollar Volume 0.0306*** 0.0641*** 0.164*** -0.0390*** 

 [9.70] [3.44] [3.07] [-2.69] 
Stock Avg Effective 
spread 

0.00700*** 0.122*** -0.0455* 0.00746 

 [3.34] [6.07] [-1.94] [0.52] 

Stock Avg Realized spread -0.00169* -0.00902 0.0730*** -0.00552 

 [-1.87] [-1.45] [2.98] [-1.48] 

Stock Quote Volatility 0.457** 2.232 -1.799 4.458** 

 [2.09] [1.05] [-0.65] [2.03] 
Broker-Dealer Average 
Price Impact 

0.145*** 0.414*** 0.316*** -0.417*** 

 [14.74] [9.83] [8.50] [-10.21] 

Broker-Dealer Pct Volume -2.45e-05 -0.00207* -0.00546*** 0.000124 

 [-0.07] [-1.76] [-3.77] [0.12] 

Average Trade Qspread -0.00720*** 0.517*** 0.378*** 0.392*** 

 [-10.12] [19.78] [10.84] [21.14] 

     
Wholesaler Fixed Effects Yes Yes Yes Yes 
Order Size Category Fixed 
Effects Yes Yes Yes Yes 
Stock Fixed Effects Yes Yes Yes Yes 
Observations 13,365,122 13,365,122 13,365,122 12,453,440 
Adjusted R-squared 0.279 0.574 0.060 0.594 

This table presents the results of a regression analysis examining the effect of retail brokers receiving PFOF from 
wholesalers on levels of price improvement and the execution quality of their customers’ orders when the 
wholesaler internalizes the order on a principal basis.  

The analysis examines trades in Q1 2022 that wholesalers execute in a principal capacity from market and 
marketable limit orders from individual investors that are under $200,000 in value and are in NMS Common 
stocks and ETFs. See supra Table 6 for further discussion on the CAT retail sample. The unit of observation for 
the regression is the average execution quality provided to trades that are aggregated together based on having the 
same stock, week, order type, order size category, wholesaler, and retail broker MPID. Weighted regression are 
performed based on the total dollar value executed by the wholesaler in that observation (i.e., total shares 
executed for all orders that fit within that stock-week-retail broker-wholesaler-order type-order size category). 
This means that the regression coefficients capture the effect on execution quality on a per-dollar basis.  

Dependent variables include: the average E/Q ratio of the shares traded; the average percentage effective spread 
of the shares traded measured in basis points; the average percentage realized spread of the shares traded 
measured in basis points; and the average percentage value of the amount of price improvement measured in 
basis points, conditional on the order being price improved. These variables are from the CAT retail analysis and 
described in supra Table 6.   

Explanatory variables include: PFOF Rate is the retail brokers’ PFOF rates in bps (the per share rates were 
determined from retail broker Rule 606 reports and divided by the VWAP of the executed shares in the sample to 
determine the PFOF rate on a percentage basis, see supra note 467); Broker-Dealer Pct Volume is the retail 



   

270 

 

broker size (in terms of percentage total executed dollar trading volume in the sample); Stock Share Volume is 
the stock’s total traded share volume during the week (from TAQ in billions of shares); Stock VWAP is the 
VWAP of stock trades during the week (from TAQ); Stock Return is the stock’s return during the week (from 
CRSP 1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022)); VIX is the average 
value of the VIX index during the week (from CBOE VIX data); Market Return is the average CRSP value 
weighted market return during the week, Market Dollar Volume is the total market dollar trading volume during 
the week (from CRSP 1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. Bus. (2022)); Stock 
Avg Effective spread is the stock’s share weighted average percent effective half spread during the week 
measured in basis points (from TAQ); Stock Avg Realized spread is the stock’s share weighted average percent 
realized half spread during the week measured in basis points (from TAQ); Stock Quote Volatility is the stock’s 
average 1 second quote midpoint volatility measured in basis points (from TAQ); Broker-Dealer Average Price 
Impact is calculated for each Retail Broker MPID’s by share weighting their average percentage price impact half 
spread within an individual NMS common stock or ETF and then averaging across stocks using the weighting of 
the dollar volume the retail broker MPID executed in each security (see supra Table 6 for additional details on 
how the metric is constructed); Average Trade Qspread is the average percentage quoted half spread at the time 
of order submission for orders in that stock-week-retail broker-wholesaler-order type-order size category 
measured in basis points; wholesaler fixed effects (i.e., indicator variables for each wholesaler that control for 
time-invariant execution quality differences related to each wholesaler); order-size category fixed effects (i.e., 
indicator variables for each order-size category that control for time-invariant execution quality differences 
related to order-size category); and individual stock fixed effects (i.e., indicator variables for each stock that 
control for time-invariant execution quality differences related to individual stocks). The order size categories 
include less than 100 shares, 100-499 shares, 500-1,999 shares, 2,000-4,999, 5,000-9,999 shares, and 10,000+ 
shares. Brackets include t-statistics for the coefficients based on robust standard errors that are clustered at the 
stock level. ***, **, and * indicate the t-statistics for the coefficients are statistically significant at the 0.01, 0.05, 
and 0.1 levels, respectively.  

This analysis uses data from prior to the implementation of the MDI Rules and specific numbers may be different 
following the implementation of the MDI Rules. See supra note 415 

 

   

Regression results in Table 16 support the conclusion that wholesalers provide worse 

execution quality to brokers that receive more PFOF.  The coefficients on the PFOF Rate 

variable indicates that, all else equal, for the orders wholesalers internalize, execution quality 

declines as the amount of PFOF paid to the retail broker increases. Orders from retail brokers 

that receive a greater amount of PFOF have higher E/Q ratios and effective spreads and receive 

less price improvement.  The regression results (as measured by the coefficient on the PFOF 

Rate variable) indicate that, all else equal, wholesalers earn higher realized spreads on orders for 

which they pay more PFOF.  Note that PFOF is not taken out of the realized spread measure, so 



   

271 

 

the realized spread serves as a proxy for wholesaler’s economic profits before any fees are taken 

out. 

 The regression results in Table 16 also show that the retail broker’s adverse selection risk 

(as measured by the coefficient on the Broker-Dealer Average Price Impact variable) has a 

statistically significant effect on the execution quality wholesalers give on trades they internalize.   

The positive coefficient indicates that wholesalers provide worse execution quality to broker-

dealers whose customers’ orders pose a greater adverse selection risk.      

b) Fixed Income Securities 

i. Corporate Debt Securities 

The market for corporate debt securities (“corporate bonds”) represents a significant part 

of the fixed income market.  In July 2022, the average daily par value dollar volume of corporate 

bond trading was $34.2 billion.469  Estimates put the annualized growth rate of the corporate 

bond market at 5.2 percent between 2008 and 2019, a growth rate second only to that of U.S. 

Treasury securities within the fixed income space.470  

                                                 

469  Average daily par value dollar volume is reported by FINRA each month.  See FINRA 
Data, TRACE Monthly Volume Files, available at https://www.finra.org/finra-
data/browse-catalog/trace-volume-reports/trace-monthly-volume-files. The corporate 
bond market has over 58,000 outstanding issues.  Maureen O’Hara and Xing (Alex) 
Zhou, Corporate Bond Trading: Finding the Customers’ Yachts, 48 J. PORTFOLIO 
MGT MKT MICROSTRUCTURE 96, 98 (June 2022), available at https://jpm.pm-
research.com/content/early/2022/06/11/jpm.2022.1.373.  

470  Vega Economics, Trends in the U.S. Corporate Bond Market Since the Financial Crisis 
(Oct. 12, 2020), available at https://vegaeconomics.com/trends-in-the-us-corporate-bond-
market-since-the-financial-crisis.  

https://jpm.pm-research.com/content/early/2022/06/11/jpm.2022.1.373
https://jpm.pm-research.com/content/early/2022/06/11/jpm.2022.1.373
https://vegaeconomics.com/trends-in-the-us-corporate-bond-market-since-the-financial-crisis
https://vegaeconomics.com/trends-in-the-us-corporate-bond-market-since-the-financial-crisis


   

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Fixed income securities trading venues (e.g., ATSs, non-ATS trading venues (RFQ 

platforms), voice methods) compete on fees and trading protocols that help expose retail 

customer orders to attract order flows from retail broker-dealers.  Corporate bond ATSs are 

primarily used by broker-dealers to trade on behalf of retail customers or to rebalance excess 

inventories.471  In September 2021, corporate bond trading on ATSs accounted for 7.7 percent of 

total TRACE-reported corporate bond trading dollar volume (calculated using bond par 

value).472  Currently, the Commission understands that there are 12 ATSs with a Form ATS on 

file trading corporate bonds.473  Trading protocols offered on corporate bond ATSs include, 

                                                 

471  See, e.g., Matthew Kozora, Bruce Mizrach, Matthew Peppe, Or Shachar & Jonathan 
Sokobin, Alternative Trading Systems in the Corporate Bond Market, Fed. Res. B. N.Y. 
Staff Report No. 938 (Aug. 2020), available at 
https://www.newyorkfed.org/medialibrary/ sr938.pdf.  See, Louis Craig, Abby Kim & 
Seung Won Woo, Pre-trade Information in the Corporate Bond Market, SEC Division of 
Economic and Risk Analysis White Paper (Oct. 2020), available at 
https://www.sec.gov/files/corporate_bond_white_paper.pdf.  White papers and analyses 
are prepared by SEC staff in the course of rulemaking and other Commission initiatives. 
The U.S. Securities and Exchange Commission disclaims responsibility for any private 
publication or statement of any employee or Commissioner.  White papers express the 
authors’ views and do not necessarily reflect those of the Commission, the 
Commissioners, or other members of the staff.  This staff white paper on corporate bond 
ATSs finds that large dealers (i.e., those in the highest quartile of trading volume and 
number of bonds traded) are more likely to provide corporate bond quotes on ATSs than 
smaller dealers. 

472  See FINRA, TRACE Monthly Volume Files, available at https://www.finra.org/finra-
data/browse-catalog/trace-volume-reports/trace-monthly-volume-files.  One commenter 
referenced similar numbers for 2020, stating that corporate bond trades (including both 
investment-grade and high-yield bonds) on all ATSs represented 6.4 percent of the trade 
volume and 18.7 percent of the trade count reported to TRACE.  See MarketAxess Letter, 
at 1. 

473  In addition, a small percentage of corporate bonds are exchange-traded on trading 
systems such as NYSE Bonds and the Nasdaq Bond Exchange.  See generally, 
https://www.nyse.com/markets/bonds.  Trading volume in exchange-traded bonds was 

https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr938.pdf
https://www.sec.gov/files/corporate_bond_white_paper.pdf
https://www.finra.org/finra-data/browse-catalog/trace-volume-reports/trace-monthly-volume-files
https://www.finra.org/finra-data/browse-catalog/trace-volume-reports/trace-monthly-volume-files


   

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among other things, limit order books (LOBs), displayed and non-displayed trading interests, and 

auctions (e.g., RFQ, bids-wanted-in-competition (BWIC), and offers-wanted-in-competition 

(OWIC)).   

Table 17: Estimated Transaction Costs and Trade Price Dispersion across Fixed Income Categories 

  Panel A: Estimated Effective Spread 
Fixed Income 

Category 
Retail-Sized 

Trades (≤$100k) 
Large-Sized  

Trades (>$100k) Difference 

Agency 0.35 0.15 0.20 
Asset-Backed 1.05 0.16 0.89 

CMO 2.29 0.53 1.76 
Corporate 0.52 0.25 0.27 

MBS 0.85 0.20 0.65 
Municipal 0.57 0.29 0.28 
Treasury 0.07 0.04 0.03 

    
  Panel B: Standard Deviation Ratio 

Fixed Income 
Category 

Retail-Sized  
Trades (≤$100k) 

Large-Sized 
 Trades (>$100k) Difference 

Agency 1.66 2.59 -0.93 
Asset-Backed 1.63 2.75 -1.12 

CMO 4.42 4.16 0.26 
Corporate 2.87 1.92 0.94 

MBS 1.24 3.78 -2.54 
Municipal 4.56 4.99 -0.43 
Treasury 1.38 1.11 0.27 

This table presents summary statistics for trade price dispersion across fixed income categories (agency, 
asset-backed, collateralized mortgage obligations (CMO), corporate, mortgage backed securities (MBS), 
municipal, and treasury). The time period is defined as August 1, 2021 through July 31, 2022.  Estimated 
effective spread and average standard deviation ratio are defined below.  

Estimated effective spreads are computed daily for each bond as the difference between the average (par 
volume-weighted) dealer-to-customer buy price and the average (par volume-weighted) dealer-to-customer 
sell price, and then averaged across bonds using equal weighting. For each trading day, each security must 
have at least one customer purchase and one customer sale to be eligible for the analysis. 

                                                 

reported to be around $19 billion as of January 2020.  See Eric Uhlfelder, A Forgotten 
Investment Worth Considering: Exchange-Traded Bonds, Wall St. J. (Jan. 6, 2020) 
available at https://www.wsj.com/articles/a-forgotten-investment-worth-considering-
exchange-traded-bonds-11578279781.  (Retrieved from Factiva database).   



   

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The daily standard deviation in prices is calculated for each CUSIP, for customer and interdealer secondary 
markets, by averaging buy and sell order deviations separately. The ratio of standard deviations of customer 
trade prices and interdealer trade prices is then computed for each CUSIP for each day. Next, the standard 
deviation ratios are averaged with weights based on the total number of trades in each day, across all days 
and CUSIPs within each fixed income category. Average Standard Deviation Ratio is defined as: 

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 = �
𝜎𝜎𝑖𝑖𝑖𝑖𝑐𝑐

𝜎𝜎𝑖𝑖𝑖𝑖𝑑𝑑𝑖𝑖𝑖𝑖∈Ω

𝜔𝜔𝑖𝑖𝑖𝑖   

• 𝑖𝑖 is the CUSIP, 𝑗𝑗 is the date 
• 𝜔𝜔𝑖𝑖𝑖𝑖  is a weight based on the number of trades in CUSIP 𝑖𝑖 on day 𝑗𝑗 
• 𝜎𝜎𝑖𝑖𝑖𝑖𝑐𝑐  �𝜎𝜎𝑖𝑖𝑖𝑖𝑑𝑑� is the standard deviation of customer (interdealer) prices for CUSIP 𝑖𝑖 on day   

 

The aforementioned changes in bond market structure have fundamentally lowered the 

cost of trading.  Though the corporate bond market remains subject to periodic and security-

specific illiquidity constraints, one recent academic study finds that corporate bond transactions 

costs have decreased by 70% over the past decade.474  According to Commission analyses, par 

volume-weighted average effective spreads475 calculated in the year ending July 2022 in 

corporate bond markets were approximately 27 basis points.  Liquidity often concentrated in the 

largest and most recently issued bonds.476  Additional Commission analyses indicate that the top 

and bottom quartile of corporate bond effective spreads differ by more than 30 bps. 

                                                 

474  See O’Hara and Zhou, supra note 469. 
475 Effective spread calculation is defined in Table 17. 
476  See A Financial System That Creates Economic Opportunities, Capital Markets, U.S. 

Department of the Treasury, October 2017, available at https://www.treasury.gov/press-
center/press-releases/documents/a-financial-system-capital-markets-final-final.pdf 
(“Treasury Report”) at 85. 



   

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Effective spreads for retail-sized trades are nearly twice as wide as larger size trades (see 

Panel A of Table 17).477  The Commission estimates that effective spreads on riskless principal 

transactions are approximately 12 bps lower for retail-sized corporate bond trades, but the 

difference between large size trade effective spreads remains wide at 26 bps. 

The standard deviation ratio statistics of Panel B in Table 17 show dispersion in the 

execution quality for corporate bond trades.  The standard deviation ratio statistics compare 

interdealer trade execution prices to those of customers within a given bond-trading day.  Even 

for large trades, a standard deviation ratio of 1.92 suggests that for every dollar of price 

dispersion in the interdealer market customers see almost twice the dispersion in prices.  For 

retail trades, this difference increases to 2.87 suggesting an even wider range of price execution 

quality outcomes.478    

ii. Municipal Securities 

The market for municipal securities (“municipal bonds”) represents another important 

part of the fixed income market.  Unlike in the markets for other fixed income securities, which 

                                                 

477  Neither FINRA TRACE nor MSRB RTRS data provide explicit identification of trades as 
“retail” in fixed income markets.  We use the widely held convention of retail “size” 
trades of being under $100,000 consistent with studies including Lawrence Harris & 
Anindya Mehta, Riskless Principal Trades in Corporate Bond Markets (Aug. 26, 2020), 
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3681652 (retrieved from 
Elsevier database) and Griffin, supra note 66, in the corporate and municipal bond 
markets, respectively. 

478  Commission analyses for corporate debt securities trades with no remuneration/markups 
show the dispersion of customer execution prices was 65% greater than that of interdealer 
trades, suggesting that price dispersion in customer trades may not solely be driven by 
disparate markups.  

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3681652


   

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are mostly owned by institutional investors, retail investors play a prominent role in the 

ownership of municipal bonds, with 40 percent of municipal bonds held by households and 

nonprofits as of Q1 2022.479  This is largely due to the tax-exempt status of most municipal 

bonds, which makes them attractive to households but less attractive to institutional investors 

such as pension funds, whose holdings are already tax-deferred or tax exempt.  Municipal bond 

markets also tend to be highly localized, as investors that are located in geographic proximity to 

an issuer are more likely to be informed about that issuer, and tax benefits are often conferred on 

investors that are located in the same state as the issuer.480  Daily trading volumes in the 

municipal bond market averaged around $9 billion during the 2021 calendar year.481  Average 

trade sizes in this market tend to be smaller than in other fixed income markets: in July 2022, 81 

percent of trades were for $100,000 or less, reflecting the higher presence of retail investors in 

this market.482 

Municipal securities trading venues (e.g., ATSs, non-ATS trading venues (RFQ 

platforms), voice methods) compete on fees and trading protocols that help expose retail 

                                                 

479  See, John Bagley, Marcelo Vieira & Ted Hamlin, Trends in Municipal Securities 
Ownership, at 6, Munic. Sec. Rulemaking Bd (June 2022), available at 
https://www.msrb.org/sites/default/files/Trends-in-Municipal-Securities-Ownership.pdf.  
Data used by this paper is largely from the Federal Reserve’s Financial Accounts of the 
United States.  Id., at 2.  See also infra note 495 and accompanying text. 

480  See, Paul Schultz, The market for new issues of municipal bonds: The roles of 
transparency and limited access to retail investors, 106 J. FIN. ECON. 492, 492 (2012). 

481  See Municipal Securities Rulemaking Board, Muni Facts, available at 
https://www.msrb.org/News-and-Events/Muni-Facts. 

482  See Municipal Securities Rulemaking Board, Municipal Trade Statistics, available at 
https://emma.msrb.org/MunicipalTradeStatistics/ByTradeCharacteristic.aspx.  

https://www.msrb.org/sites/default/files/Trends-in-Municipal-Securities-Ownership.pdf
https://emma.msrb.org/MunicipalTradeStatistics/ByTradeCharacteristic.aspx


   

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customer orders in order to attract order flows from retail broker-dealers.  ATSs play an 

increasingly important role in the municipal bond market.  Between August 2016 and April 

2021, an estimated 56.4 percent of municipal bond interdealer trades (26 percent in terms of par 

volume) were executed on ATSs.483  Municipal bond ATSs are primarily used by broker-dealers 

to execute trades on behalf of retail customers or to rebalance excess inventories.  ATSs may 

help to reduce search costs.  Indeed, one study finds that dealers are more likely to access ATS 

systems for trades that are more difficult to price and that face substantial search costs, such as 

smaller size trades and trades involving municipal bonds with complex features.484  Accordingly, 

90 percent of quotes on municipal bond ATSs are offer quotes.485  On the other hand, the vast 

majority of RFQs on municipal bond ATSs are requests for bids, reflecting that RFQ protocols 

are more likely to be used when customers want to sell.  Similar to the case of corporate bond 

markets, RFQs may instead be preferred by traders that want to limit information leakage, such 

as in case of large size trades.  At least 43.6 percent of interdealer trades (74.1 percent in terms of 

par volume) in the municipal bond market take place via trading methods that are not ATSs, with 

                                                 

483  See Simon Z. Wu, Characteristics of Municipal Securities Trading on Alternative 
Trading Systems and Broker’s Broker Platforms, Municipal Securities Rulemaking Board 
(Aug. 2021), (“Wu (2021)”), available at https://msrb.org/sites/default/files/MSRB-
Trading-on-Alternative-Trading-Systems.pdf.  See also Letter from Edward J. Sisk, 
Chair, Municipal Securities Rulemaking Board, dated March 1, 2021 (“MSRB Letter”), 
stating that MSRB trade data shows that ATSs were involved in 21 percent of all trades 
and 55 percent of all inter-dealer trades in the municipal bond market. 

484  See Wu (2021), supra note 483.  
485  See Simon Z. Wu, John Bagley, & Marcelo Vieira, Municipal Securities Pre-Trade 

Market Activity: What Has Changed Since 2015?, Municipal Securities Rulemaking 
Board (2020), available at https://www.sec.gov/spotlight/fixed-income-advisory-
committee/msrb-staff-analysis-of-municipal-securities-pre-trade-data.pdf. 



   

278 

 

38.3 percent taking place on interdealer platforms and 5.3 percent on broker’s broker 

platforms.486   

Transaction costs in the municipal bond market have typically been large compared to 

other markets, and academic studies have attributed these large transaction costs to a lack of 

price transparency and subsequent information asymmetry between dealers and customers.487  

One MSRB staff report suggests that a movement away from voice trading and towards 

electronic trading may have helped reduce transaction costs for customer trades by 51 percent 

between 2005 and 2018.488  The Commission estimates that effective spreads for retail-sized 

trades remain approximately 23 basis points higher than that of larger municipal bond trades. 

Commission estimates in Panel B of Table 17 show average execution price standard 

deviation ratios, however, which suggest much higher price dispersion for customers in the 

municipal bond market relative to other fixed income market segments.  For retail-sized trades in 

municipal securities, the Commission estimates retail-size trades have more than four times the 

amount of price dispersion as dealers experience.  One recent academic specifically examines 

execution quality in the market for municipal bonds.489  Consistent with the Commission 

                                                 

486  See Wu (2021), supra note 483. 
487  See, e.g., Lawrence E. Harris, & Michael S. Piwowar, Secondary Trading Costs in the 

Municipal Bond Market, 61 J. Fin. 1361 (2006). 
488  See Simon Z. Wu, Transaction Costs for Customer Trades in the Municipal Bond 

Market: What is Driving the Decline?, Municipal Securities Rulemaking Board (July 
2018), at 15, available at https://www.msrb.org/sites/default/files/Transaction-Costs-for-
Customer-Trades-in-the-Municipal-Bond-Market.pdf.  

489  See, e.g., Griffin, supra note 66. 

https://www.msrb.org/sites/default/files/Transaction-Costs-for-Customer-Trades-in-the-Municipal-Bond-Market.pdf
https://www.msrb.org/sites/default/files/Transaction-Costs-for-Customer-Trades-in-the-Municipal-Bond-Market.pdf


   

279 

 

analysis in Table 17, the study examines bond prices for the same bond on the same trading day 

and finds significant dispersion in execution quality.  Furthermore, the study finds differences in 

execution quality discrepancies within each broker-dealer in the same bond trading day.490  

iii. Government Securities 

The market for U.S. government securities is large both in terms of the outstanding debt 

amount and trading volume.  According to the Treasury Department, the total amount 

outstanding for marketable Treasury securities was approximately $23.4 trillion.491  The 

Financial Accounts of the United States Z.1 released by the Federal Reserve Board shows that 

the amount outstanding for Agency- and GSE-Backed Securities is about $10.9 trillion, as of the 

end of Q1 2022.492  According to data published by SIFMA, in September 2021, the average 

daily trading volume in government securities was about $850.1 billion, which is roughly 95 

percent of all fixed income securities trading volume in the U.S.493  This includes $582.1 billion 

                                                 

490  The study finds that the range of differences in dealer fixed effects from the worst to best 
dealer markup is consistently 2% and retail-sized trades have, controlling for bond 
characteristics, 75 bps higher markups relative to larger trades.  Furthermore, the study 
summarizes by stating that municipal bond “markup differences represent different prices 
for the same security from the same dealer at essentially the same time, which would 
seem to be a clear failure of pricing fairness according to MSRB regulations and 
guidance.” 

491  See Monthly Statement of the Public Debt of the United States, dated July 31, 2020, 
available at https://fiscaldata.treasury.gov/datasets/monthly-statement-public-
debt/summary-of-treasury-securities-outstanding. 

492  See Financial Accounts of the United States Z.1, First Quarter 2022, at 177, available at 
https://www.federalreserve.gov/releases/z1/20220609/z1.pdf. 

493  See SIFMA Fixed Income Trading Volume, available at 
https://www.sifma.org/resources/research/us-fixed-income-securities-statistics/.  The 
stated figures include Treasury Securities, Agency MBS, and Federal Agency Securities.   



   

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average daily trading volume in U.S. Treasury securities, $265.7 billion in Agency MBSs, and 

$2.4 billion in other Agency securities.  

Government securities are traded through a diverse set of venues, including ATSs, RFQs, 

and bilateral protocols, such as voice methods.  Government securities trading venues (e.g., 

ATSs, non-ATS trading venues (RFQ platforms), voice methods) compete on fees and trading 

protocols that help expose retail customer orders in order to attract order flows from retail 

broker-dealers.  Currently, government securities ATSs account for a significant percentage of 

all U.S. Treasury securities trading activity reported to TRACE.494  The Commission estimates 

that ATSs account for approximately 37.8% percent of U.S. Treasury securities trading volume 

from April 2021 through March 2022.  Broker-dealers utilize ATSs to source liquidity in 

government securities, including the liquidity needed to efficiently fill customer orders outside 

                                                 

494  TRACE aggregation and analysis methods follow those used by Treasury market 
regulators and FINRA, including adjustments for multiple trade reports for a single 
transaction and counting only one trade report for an ATS or IDB.  The regulatory 
version of TRACE was used in the analysis.  A “Give-Up” ID is reported when a 
principal to a transaction delegates another participant to report a trade on its 
behalf.  When a “Give-Up” ID is reported, the corresponding reporting or contra- party is 
replaced with the “Give-Up” ID.  This ensures that trades are attributed to the principals 
to each transaction.  System control numbers are used to link corrected, canceled, and 
reversed trade messages with original new trade messages.  In these cases, only corrected 
trades are kept and all cancellation and reversal messages and their corresponding new 
trade messages are removed.  Special care must be taken when counting market 
volume.  When a FINRA registered broker directly purchases from another FINRA 
member, two trade messages are created.  If those FINRA registered brokers transact 
through an inter-dealer broker (IDB), four trade messages are created, two for the IDB 
and one for each member.  In both cases, the volume from only one report is needed.  To 
ensure that double counting of transactions does not occur, only the following trade 
messages are summed to calculate market volume: sales to non-IDB members, sales to 
identified customers, such as banks, hedge funds, asset managers, and PTFs, and 
purchases from and sales to customers and affiliates.  Any trade in which the contra-party 
is an IDB is excluded.  Thus, in the case of trades involving IDBs, only the IDBs’ sale 
message is added to overall volume.281 

 

ATSs.  The Commission understands that this means some portion of broker-dealer transactions 

on government securities ATSs are associated with the dealers’ activity in filling customer 

orders. 

 Effective spreads for Treasuries in Table 17 are the lowest among all of the presented 

fixed income securities categories.  Effective spreads for retail-sized trades are only 3 bps higher 

relative to larger trades.  Agency securities exhibit relatively higher effective spreads in 

comparison to U.S. Treasury securities but remain the second least costly fixed income securities 

category in terms of transaction costs.  There is less dispersion in execution quality for U.S. 

Treasury securities trades.  Price dispersion in large size customer trades is small relative to that 

of interdealer trades (1.11) but is somewhat larger, albeit at an overall level less than other fixed 

income securities categories, for retail-sized trades (1.38).  

iv. Market Access 

 With respect to fixed income securities trading, executing brokers provide market access 

to other broker-dealers including retail broker-dealers that qualify as introducing brokers under 

the FINRA/MSRB rules.  The Commission understands executing broker-dealers that provide 

market access to retail introducing brokers under the FINRA and MSRB rules do not engage in 

conflicted transactions as defined under the proposal.  Furthermore, the Commission understands 

that these executing brokers would consider factors, such as contemporaneous trade prices (e.g., 

interdealer prices), quotes, trade prices and quotes of similar fixed income securities, yield curve, 

matrix prices, and different types of trading protocols (e.g., RFQs and BWICs) in handling 

orders from other retail broker-dealers and also supply execution quality statistics to their 

customers.  These executing brokers compete on the basis of fees, efficiency in order handling 



   

282 

 

procedures, and efficiency in the selection of trading venues or counterparties, which determine 

overall execution quality. 

v. Retail Order Handling and Execution 

 Retail investors transacting in fixed income securities most often trade municipal 

securities, and to a smaller extent, corporate debt securities and U.S. Treasury securities. As of 

2021, household holdings of municipal securities hovered above 40 percent495 of outstanding 

municipal securities,496 but this share has been declining.497  Households owned only roughly 

one percent of outstanding corporate debt securities in 2021.498  U.S. Treasury securities have 

slightly higher household participation, at approximately three percent.  Households own a 

similar amount of U.S. agency securities, also at approximately two percent.499  In general, retail 

investors do not trade in the market for other fixed income securities, such as asset-backed 

securities, although broker-dealers offer trading services for these fixed income securities to their 

retail customers. 

                                                 

495  See Financial Accounts of the United States Z.1, Fourth Quarter 2021, available at 
https://www.federalreserve.gov/releases/z1/20220310/z1.pdf. 

496  In the Z.1 Financial Accounts of the United States, estimates for the ‘household’ sector 
include non-profits and domestic hedge funds.  See Financial Accounts of the United 
States Z.1, Technical Q&As (September 23, 2022), available at 
https://www.federalreserve.gov/releases/z1/z1_technical_qa.htm. 

497  See Heather Gillers, Municipal Bonds Increasingly Held by Funds, Not Individuals, Wall 
St. J. (Jun. 29, 2022).  Available at https://www.wsj.com/articles/municipal-bonds-
increasingly-held-by-funds-instead-of-individuals-11656408601. 

498  See id. 
499  See id. 

https://www.wsj.com/articles/municipal-bonds-increasingly-held-by-funds-instead-of-individuals-11656408601
https://www.wsj.com/articles/municipal-bonds-increasingly-held-by-funds-instead-of-individuals-11656408601


   

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The Commission understands that retail investors generally use one broker-dealer for 

fixed income securities trading services.  Broker-dealers execute retail customer orders mostly 

on a principal basis (e.g., riskless principal trades, internalized trades).  Broker-dealers may 

execute against resting orders (e.g., limit orders displayed on ATSs), conduct 

RFQs/BWICs/OWICs,500 and utilize voice methods (e.g., telephone) in handling retail customer 

orders.  For executing small or medium size retail customer orders, a broker-dealer may utilize 

limit orders or RFQs, while it might utilize voice methods for executing large retail customer 

orders or orders on illiquid fixed income securities.  Only a few broker-dealers offer a trading 

service to represent a retail customer order in a limit order book.  The Commission does not 

know the number of trading venues (e.g., ATSs, RFQ platforms, broker’s broker platforms, 

single dealer platforms) to which broker-dealers maintain access/connection for executing retail 

customer orders.  The Commission also does not know the number of broker-dealers that access 

or connect to these venues through each type of interface (e.g., via application programming 

interface (API), graphical user interface (GUI)).  Furthermore, the Commission does not know 

how broadly broker-dealers expose retail customer orders, for example, via RFQs or limit order 

books for the purpose of riskless principal transactions and internalization.   

The Commission understands that retail customer order handling practices for fixed 

income securities vary across retail broker-dealers offering different types of trading services and 

between the sides of the market (customer buy order vs. customer sell order).  Some broker-

                                                 

500  Bid wanted in competition (BWIC) is a request for bids on a single security or a list of 
securities, submitted by a market participant (a broker-dealer or an institutional investor) 
to a number of broker-dealers.  Offer wanted in competition (OWIC) is a request for 
offers on a single security or a list of securities, submitted by a market participant (a 
broker-dealer or an institutional investor) to a number of broker-dealers. 



   

284 

 

dealers offer self-directed trading to their retail customers, whereas for some broker-dealers, the 

firm’s brokers handle retail customer orders, and some offer both self-directed and broker-

assisted trading services.  Furthermore, some broker-dealers make only internal inventory, only 

external inventory (for brokers that do not carry inventory), or both internal and external 

inventory of fixed income securities available for retail customer trading.  The Commission 

understands that some broker-dealers whose primary service is not focused on fixed income 

securities trading outsource fixed income securities execution services to another broker (i.e., 

executing broker).  The Commission does not know how many executing brokers perform fixed 

income securities trading services on behalf of these brokers.  The Commission understands that 

executing brokers maintain access to multiple trading venues (e.g., ATSs, RFQ platforms, 

broker’s broker platforms, single dealer platforms) and generally handle orders from other 

broker-dealers, for which they provide execution services, on agency or riskless principal basis.   

Some broker-dealers ingest offer quotes from internal inventory and/or trading venues 

(e.g., ATSs, electronic venues) and then display them to their self-directed retail customers or the 

firm’s brokers who handle retail customer orders.  These offer quotes displayed to self-directed 

retail customers typically embed markup.  Self-directed retail customers are able to submit buy 

orders to execute against offer quotes displayed on their systems.  The Commission understands 

that some broker-dealers do not assess the competitiveness of ingested quotes or filter out quotes 

that may not be reflective of the prevailing market before displaying them to self-directed retail 

customers.  Furthermore, the Commission does not have information about how orders submitted 

by self-directed retail customers are handled: the Commission does not know how a broker-

dealer ensures the displayed quote, against which a self-directed retail customer submitted an 

order to execute, is reflective of the current market.  For a broker-assisted customer buy trade, a 



   

285 

 

broker handling a retail customer order would follow order handling procedures based on the 

FINRA/MSRB best execution rules.  The broker may consider, among other things, prices, such 

as trade prices, trade prices of similar fixed income securities, internal and/or external offer 

quotes, offer quotes of similar fixed income securities, matrix prices, and prices derived from 

yield curve, as well as trading protocols, such as limit order, RFQ, and OWIC, in handling the 

retail customer buy order.  The Commission understands that broker-dealers that carry inventory 

of fixed income securities may internalize retail customer buy orders by executing them against 

internal inventory after charging a markup.  Broker-dealers may use offer quotes resting on 

trading venues and/or offer responses to RFQ/OWIC as reference prices to match or improve 

(via last-look practice) for the purpose of internalization.   

 Only a few retail broker-dealers display external and/or internal bid quotes of fixed 

income securities to their self-directed retail customers or the firm’s brokers who handle retail 

customer orders.  To the extent that these retail broker-dealers display external and/or internal 

bid quotes of fixed income securities to their self-directed retail customers, self-directed retail 

customers are able to submit sell orders to execute against bid quotes displayed on their systems.  

For a broker-assisted customer sell trade, a broker handling a retail customer order would 

typically conduct RFQ or BWIC to collect multiple bids.  A broker would also consider other 

pricing sources, such as trade prices, trade prices of similar fixed income securities, bid quotes of 

similar fixed income securities, matrix prices, and prices derived from yield curve in handling 

the retail customer sell order.  For broker-dealers that carry inventory of fixed income securities, 

these broker-dealers may internalize customer sell orders by buying the bond from their 

customer into inventory after charging a markdown to have an opportunity to resell the bond to 

another customer (earning the bid-ask spread and markup when the broker-dealer resells the 



   

286 

 

bond to another customer).  In conducting RFQs or BWICs for the purpose of internalization, the 

Commission understands that some broker-dealers may use last-look to apply trade desk spreads 

(in the form of markdown) to external bids but not to internal bids, which results in more 

favorable comparisons for the internal bids, to win RFQs/BWICs.501 

vi. Principal Trading 

With respect to fixed income securities trading, principal transactions502 with retail 

customers, in which broker-dealers engage, include riskless principal503 and internalized 

trades.  With limited transparency in the fixed income securities markets, an internalized trade 

may represent conflicts of interest between a broker-dealer and its retail customer because the 

retail customer may not be able to assess broker-dealer compensation (e.g., markup/markdown).  

Provided that transaction costs of riskless principal transactions are disclosed on a post-trade 

basis in customer confirmations, these riskless principal transactions represent potentially fewer 

conflicts of interest compared to internalization.  When the transaction costs of riskless principal 

transactions are disclosed on a pre-trade basis via a markup/markdown schedule, there would be 

even fewer conflicts of interest between retail customers and broker-dealers handling their 

                                                 

501  See infra Section V.C.1.b for the discussion of last look practices and application of trade 
desk spreads. 

502  Principal transactions with retail customers would be subject to the requirements of the 
proposed rule 1101(b).  See also supra section IV.E. 

503  These riskless principal trades would include retail customer self-directed trades.  Some 
broker-dealers execute self-directed trades of retail customers on a riskless principal basis 
and charge markups/markdowns for their trading services.  Retail customer self-directed 
trades would not be considered unsolicited instructions from customers under FINRA 
Rule 5310.08. 



   

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orders.504  A significant portion of customer trades are executed on a principal basis.  Table 18 

shows that 87% and 80% of the corporate debt securities and municipal securities customer par 

volume trades, respectively, are executed on a principal basis.  Furthermore, Table 18 shows that 

riskless principal transactions represent 31% and 48% of principal trades in the corporate debt 

securities and municipal securities markets, respectively.505  An academic study has found a 

persistent increase in the frequency of riskless principal trades in the corporate debt securities 

market since 2014.506 

Table 18: Fixed Income Dealer Trading Capacity and Trade Size 

Panel A: Corporate Debt Securities 
      Total       Par  

Corporate Trade   Distinct   Trade Par Volume Volume 
Bond Size Type MPIDs Trades Percent (in billions) Percent 

Dealer 
Buy 

Retail 
Trades 

(≤$100k) 

Agency           446           782,685  7.9%              11.82  0.2% 

Principal           465        1,466,145  14.8%              42.63  0.6% 

Riskless Principal           474           553,908  5.6%              12.39  0.2% 

Large 
Trades 

(>$100k) 

Agency           241           163,505  1.6%            201.03  2.7% 

Principal           413        1,596,162  16.1%         3,164.41  43.3% 

Riskless Principal           392           183,391  1.8%            235.28  3.2% 

Dealer 
Sell 

Retail 
Trades 

(≤$100k) 

Agency           338        1,052,845  10.6%              18.40  0.3% 

Principal           460        1,341,692  13.5%              47.88  0.7% 

Riskless Principal           475           704,699  7.1%              19.71  0.3% 

                                                 

504  Some broker-dealers disclose a markup/markdown schedule broken out by trade size on a 
pre-trade basis for retail customer self-directed trading on customer facing websites.  

505  Principal trading represents a relatively smaller proportion of retail-sized customer trades 
in the U.S. Treasury securities market. Commission analyses show trades executed in an 
agency capacity represent approximately 36.7% of all retail-sized U.S. Treasury 
securities trades. The commission estimates that riskless principal trades represent 7.9% 
of principal trades in the U.S. Treasury securities market, whereas the share of riskless 
principal trades for retail-sized trades is 10.2%. 

506 See O’Hara and Zhou, supra note 469. The study suggests that implementation of the 
Volcker Rule in 2014 led to a large increase in riskless principal capacity trading, 
particularly among bank broker-dealers who are subject to proprietary trading restrictions 
under the rule. 



   

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Large 
Trades 

(>$100k) 

Agency           475           172,630  1.7%            213.28  2.9% 

Principal           458        1,698,176  17.1%         3,140.93  43.0% 

Riskless Principal           474           209,196  2.1%            203.39  2.8% 
Total            9,925,034  100%              7,311  100% 

Panel B: Municipal Securities 
      Total       Par  

Municipal Trade   Distinct   Trade Par Volume Volume 
Bond Size Type MPIDs Trades Percent (in billions) Percent 

Dealer 
Buy 

Retail 
Trades 

(≤$100k) 

Agency           331           263,505  5.1%                 6.49  0.3% 

Principal           325           737,050  14.4%              24.56  1.2% 
Riskless 
Principal           458           847,353  16.5%              24.80  1.2% 

Large 
Trades 

(>$100k) 

Agency           188             19,119  0.4%                 7.16  0.4% 

Principal           284           244,097  4.8%            458.28  22.5% 
Riskless 
Principal           354           138,851  2.7%            194.91  9.6% 

Dealer 
Sell 

Retail 
Trades 

(≤$100k) 

Agency           237           319,597  6.2%                 9.28  0.5% 

Principal           339        1,037,384  20.2%              35.86  1.8% 
Riskless 
Principal           365           817,050  15.9%              24.16  1.2% 

Large 
Trades 

(>$100k) 

Agency           365             34,090  0.7%              16.04  0.8% 

Principal           384           558,594  10.9%         1,115.44  54.7% 
Riskless 
Principal           440           119,447  2.3%            123.77  6.1% 

Total            5,136,137  100%              2,041  100% 
This table presents summary statistics for dealer trading capacity across corporate (using FINRA TRACE data) and municipal 
(MSRB RTRS) fixed income categories from April 1, 2021 through March 31, 2022.  We drop all interdealer trades keeping only 
customer trades from TRACE and RTRS main data files. We then collapse this file by Buy/Sell indicator, 
Agency/Principal/Riskless Principal indicator and Trade size bucket. The table reports the total distinct MPIDs in each group the 
total trade count (with percentage), total Par volume (with percentage), the weighted markup of riskless principal trades, and 
unweighted markup of riskless principal trades. Riskless principal trade indicators are not provided in the main data but are 
inferred using trade pairs matched by MPID and trade size over a 15-minute window. 

 

The Commission understands that there may be conflicts of interest in handling retail 

customer orders in fixed income securities markets, which could result in retail customers not 

receiving the most favorable prices under prevailing market conditions.  A broker-dealer that 



   

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submits an RFQ507 on behalf of a retail customer typically has the option of selecting potential 

counterparties, from which it is requesting prices, on behalf of its customer.  Applying 

counterparty filtering or limiting the number of counterparties in RFQs could result in less 

competitive prices for retail customer orders.508  An academic study links competitiveness (i.e., 

the number of bids and difference between winning and second best bid) directly to price 

improvement.509 Another market practice is price matching using the best response to RFQ via 

“last look” or “pennying” for the purpose of internalization rather than customer benefit.510  Such 

practice would discourage market participants from submitting competitive prices because 

responders to RFQs are not compensated for submitting competitive quotes (i.e., selected to 

trade). 

                                                 

507  The Commission understands that, in general, responding to RFQs is a manual process.  
Recently, some market participants (e.g., large broker-dealers) automated responses to 
RFQs for small order sizes.     

508  While filtering practices might be conducted by broker-dealer for order execution 
efficiency purposes (i.e., evaluating only counterparties who provide firm indications), a 
broker-dealer must evaluate any efficiency gains directly against filtering quotes that may 
be more favorable to the end customer. Filtering counterparties to reduce information 
leakages is likely to produce little benefit for retail trades.    

509  See Terrence J. Hendershott, Dmitry Livdan & Norman Schuerhoff, All-to-All Liquidity 
in Corporate Bonds, Swiss Finance Institute Research Paper No. 21-43 (October 27, 
2021), available at https://ssrn.com/abstract=3895270 or 
https://dx.doi.org/10.2139/ssrn.3895270. 

510  The Commission understands that such practice is more common in RFQs on the bid side 
of the market. 



   

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c) Crypto Asset Securities 

As discussed Section III.A.3, crypto asset securities, also called digital asset securities, 

refer to a range of assets that are issued and/or transferred using distributed ledger technology 

and that meet the definition of a security.511  The Commission has provided a statement 

regarding broker-dealers engaging in custody and transactions of crypto asset securities.512  

Broker-dealers transacting in crypto asset securities would be subject to the requirements of this 

proposal.513 

Because transaction data and other information on the crypto asset securities market is 

limited,514 the Commission does not have a complete understanding of market participants’ 

                                                 

511  See, e.g., Report of Investigation Pursuant to Section 21(a) of the Securities Exchange 
Act of 1934: The DAO, Exchange Act Release No. 81207 (July 25, 2017). See SEC v. 
W. J. Howey Co., 328 U.S. 293 (1946). See Framework for “Investment Contract” 
Analysis of Digital Assets, available at https://www.sec.gov/corpfin/framework-
investment-contract-analysis-digital-assets.  

512  See supra III.A.3.  Since 2013, the Commission has brought a significant number of 
enforcement actions against issuers of crypto asset securities and crypto asset security 
market participants. Such enforcement investigations and actions have been brought for, 
among other things, violations of the registration requirements of the Securities Act of 
1933 for offers and sales of crypto assets to the public as securities, violations of the 
exchange registration requirements of the Securities Exchange Act of 1934 for operating 
trading platforms for digital assets that are securities, and violations of the anti-fraud and 
other provisions of Federal securities laws.  See, e.g., Crypto Assets and Cyber 
Enforcement Actions, available at https://www.sec.gov/spotlight/cybersecurity-
enforcement-actions for more information about these enforcement actions. 

513  See supra section III.A.3 for criteria of applicability to crypto asset securities. 
514 See, e.g., FSOC Report, supra note 95, at 119, which notes that the digital asset 

“ecosystem is characterized by opacity that creates challenges for the assessment of 
financial stability risks. Collection and sharing of data, as appropriate, could help reduce 
this opacity.” See also Raphael Auer et al., supra at note 95 (discussing data gaps in the 
crypto market). 

https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets
https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets
https://www.sec.gov/spotlight/cybersecurity-enforcement-actions
https://www.sec.gov/spotlight/cybersecurity-enforcement-actions


   

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current practices with respect to order handling and best execution for crypto asset securities, 

including the extent to which current practices in the market for crypto asset securities are 

consistent with FINRA Rule 5310.515   

Most known, off-chain trading activity for crypto asset securities occurs on online, 

openly accessible centralized platforms.  These platforms are typically vertically integrated, 

combining account holding and trading services.  The prevalence of vertically integrated trading 

platforms distinguishes the crypto asset securities market from other asset markets.  These 

platforms often operate using a centralized limit order book, similar to exchanges for stocks and 

futures, but the volume is not audited or verified in any known manner.516  Some platforms that 

trade crypto asset securities are domiciled and operated outside the U.S.517  To trade on a 

centralized crypto asset securities platform, the only prerequisites for a retail investor are to sign 

up for an account with a location-accessible platform and link his or her bank account or digital 

asset wallet.518      

                                                 

515  As noted in supra Section III.A.3, circumstances have made it difficult for the 
Commission to have a full picture of the current market for crypto assets.  

516  See, for example, Le Pennec, G., Fiedler, I., and Ante, L.,  Wash trading at 
cryptocurrency exchanges, 43 Finance Research Letters 101982 (2021). 

517  Some platforms that purport to be located outside of US nevertheless seek to cater to US 
customers, among other ways, by complying with certain requirements set by the CFTC 
and FinCEN.  As of August 30, 2022, only three of the top 25 trading platforms 
(according to CoinMarketCap) have registered FINRA entities.  See CoinMarketCap’s 
Top Cryptocurrency Spot Exchanges, available at 
https://coinmarketcap.com/rankings/exchanges/ for further exchange level information. 

518  A digital asset wallet is a software, algorithm, or storage medium to store the public and 
private keys of the digital asset transactions.  See, for example the definition of wallet in 

https://coinmarketcap.com/rankings/exchanges/


   

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The Commission understands that retail customers represent approximately 30% of 

trading in crypto asset securities at the largest centralized trading platforms.519  Instead of trading 

directly on centralized platforms, some retail customers may choose to place crypto asset 

securities orders with retail businesses, which could be affiliates of SEC registrants, fintech 

firms, or even payment applications.520  Those businesses typically route the order flow to 

unregistered third-party wholesalers, proprietary traders, or market makers for execution.  Some 

of them provide zero or low commissions for trading crypto assets, and obtain all or a significant 

portion of their compensation through payments from the wholesalers for directed order flow.  

The Commission is not certain how these orders are handled (i.e., internalized, routed to 

centralized platforms, etc.), given the lack of reporting in the crypto asset securities market.  It is 

possible that crypto asset wholesalers internalize most of the order flow they purchased within 

their own proprietary trading desks and they may route any remaining order flow perceived to be 

from informed traders to a lit (i.e., transparent order book driven) venue.  

 The Commission lacks knowledge on the prevalence of broker-dealer activity in this 

market and the routing behavior of broker-dealers in this market.  The Commission likewise has 

                                                 

Cryptocurrencies glossary, Fidelity Investments, available at 
https://www.fidelity.ca/en/investor/cryptocurrencies-glossary/ 

519  This estimate comes from two different sources: (1) disclosures from Coinbase’s 2021 
10-K filings; and (2) a direct statement made by Binance US’s CEO at the 2022 
Georgetown Financial Market Quality Conference.  

520  Payment apps allow individuals and businesses to transfer funds outside of the traditional 
banking and payment processing systems. Many of these fintech or payment app entities 
are not registered with the Commission in any capacity.  Thus, this activity is not visible 
to the Commission.   



   

293 

 

limited information about the pervasiveness of payment for order flow in the crypto asset 

securities market.521 

d) Non-NMS Stock Equity Securities 

 Non-NMS stock equity securities trade in a market that appears to be a hybrid of the 

NMS securities market and the fixed income market.  The non-NMS stock equities market is 

informally referred to as the “OTC market.”  The securities traded in the non-NMS stock equities 

market are typically unregistered equities; however, many non-NMS equities traded were 

formerly registered and formerly exchange listed.  Analogous to the fixed income market, there 

are some securities which are very liquid, and also many securities that are difficult to trade.  For 

FINRA members, non-NMS stock equities trading is subject to FINRA Rule 5310 for execution 

standards; however, there are other standards that also affect this market (i.e., state law and/or 

platform/venue requirements).  Academic studies have found that differences in regulation can 

impact market quality.522  Trading in non-NMS stock equities primarily takes place via dealer-to-

dealer trades or on one of several ATSs that specialize in non-NMS stock equities.  In the 

interdealer market, broker-dealers interact directly with one another to fill customer orders or 

manage inventory.  ATSs in the non-NMS stock equities market offer opportunities for broker-

dealers to interact in either a traditional limit order book or in a negotiation feature somewhat 

                                                 

521  The Commission understands PFOF rates from wholesalers for crypto assets are 
significantly higher than the PFOF rates from wholesalers for NMS securities.  

522  See, e.g., Ulf Brüggemann, Aditya Kaul, Christian Leuz & Ingrid M. Werner, The 
Twilight Zone: OTC Regulatory Regimes and Market Quality, 31 Rev. Fin. Stud. 898 
(March 2018), available at https://doi.org/10.1093/rfs/hhx102. The authors find that 
increased regulation of OTC trading improves market quality in US OTC stocks. 

https://doi.org/10.1093/rfs/hhx102


   

294 

 

similar to RFQs in fixed income markets.  Some ATSs in this market allow direct participation 

by any client, including retail clients; however, as the Commission understands, most ATSs are 

accessible only by dealers.  

From the perspective of order handling, retail orders are processed in a manner very 

similar to NMS stocks.  Retail broker-dealers that offer the ability523 to trade in the non-NMS 

stock equities market typically route an order to a wholesaler, who may internalize the order, or 

if the broker-dealer is directly connected to a non-NMS stock equities liquidity source, such as 

an ATS, may trade in a principal capacity with the customer.  Orders that are not routed to 

wholesalers or internalized directly by the retail broker-dealer may be routed to an ATS to 

expose the order.  From the Commission’s analysis of non-NMS stock equities trades in March 

2022, 63.2 % of non-institutional trades were traded in a principal capacity.  As noted in this 

section, some ATSs allow direct participation of any trader who registers and connects to their 

platform.  Thus, some retail investors may be able to access liquidity without the aid of a broker-

dealer in this market. In terms of pricing orders, non-NMS stock equities are not protected by a 

trade-through rule.  Thus, pricing could be highly variable from one trade to the next in a given 

security.  The non-NMS stock equities market is not required by regulation to report individual 

trades for public dissemination.  This market frequently lacks quotes entirely, or lacks displayed 

quotes that are frequently updated.  Despite this lack of mandated transparency, the largest524 

                                                 

523  This ability often costs a premium compared to trading in NMS stocks. Many brokers 
will still charge commissions for trades in this market. 

524  See ATS Transparency Data Quarterly Statistics, FINRA.org, available at 
https://www.finra.org/filing-reporting/otc-transparency/ats-quarterly-statistics. This ATS 
is largest by number of OTC Stocks traded in Q2 2022. FINRA posts records on a 



   

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ATS serving this market offers pre-trade and post-trade information (e.g., quotes, transaction 

prices).525  

e) Institutional Customer Order Handling 

 The Commission understands that institutional investors generally use multiple broker-

dealers for NMS stock and options trading services.  Institutional broker-dealers typically engage 

in order splitting when handling large institutional customer orders, often utilizing SORs to break 

up large, institutional “parent” orders into multiple smaller “child” orders.526  It is the 

Commission’s understanding that when an institutional customer gives a large order to be 

executed on behalf of one account (e.g., a single mutual fund or pension fund), it expects the 

broker-dealer that handles and executes such large order to do so in a manner that ensures best 

execution is provided to the “parent” order.  In other words, to the extent that a parent order is 

split into smaller “child” orders, the institutional customer expects the best execution analysis to 

evaluate whether the parent order was executed at the most favorable price possible under 

                                                 

quarterly basis listing ATSs trading OTC Stocks and the share volume traded on the 
ATS. 

525  See Anna-Louise Jackson, What is the OTC Market?, Forbes Advisor (Jun. 9, 2022), 
available at https://www.forbes.com/advisor/investing/otc-market/.  See generally, OTC 
Markets Group, Inc. and OTC Link ATS, available at https://www.otcmarkets.com/. 

526  The small-sized and mid-sized institutional customer orders for options are typically 
routed to electronic order routing platforms.  These platforms allow order entry and 
provide smart routers and order and position management.  Furthermore, these platforms 
offer customized execution algorithms on an order-by-order basis.  See also Tyler Beason 
& Sunil Wahal, The Anatomy of Trading Algorithms, (working paper Jan. 21, 
2021), available at https://ssrn.com/abstract=3497001 (retrieved from SSRN Elsevier 
database) for a discussion of institutional investor parent and child order handling in 
NMS stocks.   

https://www.forbes.com/advisor/investing/otc-market/


   

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prevailing market conditions according to customer instructions. 527  A significant portion of 

institutional customer orders in NMS stocks and options is not held.528  The Commission 

understands that institutional customer orders handled on a not held basis may sometimes be 

executed based on customer-specified standards that may prioritize outcomes other than 

execution prices, such as reducing the price impact of an order or matching volume weighted 

average price (VWAP) over a certain time horizon.  An academic study looked at order routing 

by institutional brokers in the equity markets and found that institutional brokers who route more 

orders to affiliated ATSs are associated with lower execution quality in the form of lower fill 

rates and higher implementation shortfall costs than institution brokers that route more orders to 

non-affiliated ATSs.529 

 With respect to fixed income securities trading, the Commission understands that 

institutional investors, such as mutual funds, pension funds, insurance companies, and banks, in 

general directly trade with market participants (e.g., broker-dealers) by accessing RFQs, 

platform-wide RFQs, firm quotes, and indicative quotes on trading venues.  Institutional 

investors generally trade large blocks of fixed income securities via voice with broker-dealers.  

                                                 

527 See supra note 169. 
528  An analysis in the Rule 606 Adopting Release 83 FR 58338 (Jan 2019), studied orders 

submitted from customer accounts of 120 randomly selected NMS stocks listed on NYSE 
during the sample period between December 5, 2016 and December 9, 2016, consisting 
of 40 large-cap stocks, 40 mid-cap stocks, and 40 small-cap stocks.  The analysis found 
that among the orders received from the institutional accounts, about 69% of total shares 
and close to 39% of total number of orders in the sample are not held orders, whereas 
among the orders received from the individual accounts, about 19% of total shares and 
about 12% of total number of orders in the sample are not held orders.  See Rule 606 
Adopting Release, 83 FR 58393. 

529  See Anand, supra note 91. 



   

297 

 

Furthermore, the Commission understands that institutional investors generally use multiple 

broker-dealers for trading services.  Based on customers’ instructions, broker-dealers may 

represent institutional customer orders by posting firm quotes on many-to-many and one-to-

many platforms, or conduct RFQs on behalf of institutional customers.   

 Institutional investors may utilize third-party vendors to conduct transaction cost analysis 

and evaluate the performance of their broker-dealers based on those reports.  If an institutional 

investor uses multiple brokers-dealers, it may direct more orders to broker-dealers that have 

better performance.  This may reduce the switching costs for institutional investors related to 

changing broker-dealers and increase competition among broker-dealers to attract institutional 

orders. 

4. Broker-Dealer Services and Revenue 

A small subset of broker-dealers hold most customer accounts and control a significant 

portion of broker-dealer assets. Table 19 shows statistics on broker-dealer customers and total 

assets.  Based on FOCUS data as of Q2 2022, there were approximately 3,498 broker-dealers, 

162 of which carry their own customer accounts.  These broker-dealers reported carrying over 

240 million public customer accounts.  Of the total population of these broker-dealers, 

approximately 2,440 reported retail customer activity.530  Of the broker-dealers that reported 

retail customer activity, 144 reported carrying their own customer accounts.531  A small set of 23 

                                                 

530  See item 8080 on FOCUS Report Form X-17A-5 Schedule I for additional information 
on the number of reported public customer accounts. 

531  Retail sales activity is identified from Form BR, which categorizes retail activity broadly 
(by marking the “sales” box) or narrowly (by marking the “retail” or “institutional” boxes 
as types of sales activity).  We use the broad definition of sales as we believe that many 



   

298 

 

broker-dealers report more than 50 billion dollars in total assets and 119 report between 1 billion 

and 50 billion in assets.  The majority of broker-dealers have less than 10 million dollars in 

assets, with 1,613 having less than 1 million dollars in assets.  However, most customer accounts 

are concentrated in the 142 large broker-dealers with 1 billion dollars or more in assets: 119 of 

them are from the category of broker-dealers with assets greater than 1 billion dollars and less 

than 50 billion dollars and 23 of them are from the category of broker-dealers with assets greater 

than 50 billion dollars.  Ninety eight broker-dealers carry non-customer accounts for other 

broker-dealers.  The majority of these, 66, are large broker-dealers with 1 billion dollars or more 

in assets.  On average, they carry accounts for over 50 other broker-dealers.   

Table 19: Number of Broker-Dealers and Customer Accounts by Asset Size 

Panel A: All Broker-Dealers 

 Size of Broker-Dealer (Total Assets) 

Variable >50bn 1bn-50bn 
500mn-

1bn 
100mn-
500mn 

10mn-
100mn 

1mn-
10mn <1mn Total 

Number of Broker-Dealers 23 119 30 136 523 1,054 1,613 3,498 

Number of Broker-Dealers 
Registered as Investment 
Advisers 

11 22 4 35 95 179 134 480 

Number of Broker-Dealers 
with Investment Adviser 
Affiliate 

19 74 17 87 274 401 445 1,317 

Number of Broker-Dealers 
Carrying Own Customer 
Accounts 

19 59 8 22 26 21 7 162 

Total Number of Public 
Customer Accounts 75,834,917 153,216,558 6,045,929 3,555,383 606,606 887,833 6,668 240,153,894 

Total Number of Omnibus 
Accounts 421,583 525 12 4 33 19 0 422,176 

Number of Broker-Dealers 
Carrying Non-Customer 
Accounts 

18 48 7 9 11 5 0 98 

                                                 

firms will just mark “sales” if they have both retail and institutional activity. However, 
we note that this may capture some broker-dealers that do not have retail activity, 
although we are unable to estimate that frequency. 



   

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Avg Number Other Broker-
Dealers Carrying 
Customer Accounts For 
Fully Disclosed Basis 

57.5 50.7 30.5 9.0 2.5 1.0    

Avg Number Other Broker-
Dealers Carrying 
Accounts for Omnibus 
Basis 

19.2 26.3 15.3 3.5 2.5   1.0   

         
Panel B: Retail Broker-Dealers 

 Size of Broker-Dealer (Total Assets) 

Variable >50bn 1bn-50bn 
500mn-

1bn 
100mn-
500mn 

10mn-
100mn 

1mn-
10mn <1mn Total 

Number of Retail Broker-
Dealers 19 76 21 109 393 750 1,072 2,440 

Number of Broker-Dealers 
Registered as Investment 
Advisers 

11 21 4 34 92 171 128 461 

Number of Broker-Dealers 
with Investment Adviser 
Affiliate 

17 56 12 76 228 331 350 1,070 

Number of Broker-Dealers 
Carrying Own Customer 
Accounts 

18 51 7 20 22 19 7 144 

Total Number of Public 
Customer Accounts 75,829,888 142,899,902 6,012,125 2,641,879 606,447 880,021 6,668 228,876,930 

Total Number of Omnibus 
Accounts 421,583 524 12 1 33 15 0 422,168 

Number of Broker-Dealers 
Carrying Non-Customer 
Accounts 

17 44 7 8 8 5 0 89 

Avg Number Other Broker-
Dealers Carrying 
Customer Accounts For 
Fully Disclosed Basis 

60.9 55.4 30.5 8.0 2.0 1.0    

Avg Number Other Broker-
Dealers Carrying 
Accounts for Omnibus 
Basis 

19.2 28.5 15.3 2.0 2.5   1.0   



   

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This table summarizes the number broker-dealers (Panel A) and retail broker-dealers (Panel B), their investment adviser status, 
their customer account carrying status, and the number of customer and omnibus accounts they carry broken out into groups 
based on their total assets.  The number of Broker-dealers comprises the broker-dealers that had a valid FOCUS Report for Q2 
2022 and a valid Form Custody and Form BD for Q2 2022.  Total Assets are estimated by Total Assets (allowable and non-
allowable) from Part II/IIA of the FOCUS filings (Form X-17A-5 Part II/IIA) from Q4 2021 and correspond to balance sheet 
total assets for the broker-dealer. The numbers of public and omnibus accounts are from FOCUS Schedule I from Q4 2021.  
Broker-dealer registration as an investment adviser is from Form Custody from Q2 2022 and includes broker-dealers that are 
registered as an investment adviser with the Commission or with a state.  Broker-dealers carrying customer accounts and non-
customer accounts is identified from Form Custody from Q2 2022.  Average number of other broker-dealer carrying accounts 
on a fully disclosed or omnibus basis is the average number of other broker-dealers for which a broker-dealer carrying non-
customer accounts holds accounts for and it is determined from Form Custody from Q2 2022. Retail brokers are identified 
based on retail sales activity from Form BR in Q2 2022, which categorizes retail activity broadly (by marking the “sales” box) 
or narrowly (by marking the “retail” or “institutional” boxes as types of sales activity). We use the broad definition of sales as 
we believe that many firms will just mark “sales” if they have both retail and institutional activity. However, we note that this 
may capture some broker-dealers that do not have retail activity, although we are unable to estimate how often it does so. 
 

A small number of broker-dealers with more than 1 billion dollars in revenue account for 

the majority of broker-dealer assets, revenue, and expenses. Table 20 shows statistics on total 

assets, total revenues, total expenses, and net income based on broker-dealer asset size.  The top 

23 brokers, each with assets over $50 billion, have more than 3.8 trillion dollars in assets out of a 

total of 5.4 trillion dollars across all broker-dealers.  The top 142 brokers account for the 

majority of revenue, earning over 71 billion dollars in Q2 2022 out of total of 97 billion dollars 

for all broker-dealers.  Similarly, the top 142 broker-dealers accounted for the majority of 

expenses and net income.   

  

 
Table 20: Assets, Revenue and Expenses of Broker-Dealers by Asset Size 

  Size of Broker-Dealer (Total Assets) 

Variable Statistic >50bn 1bn-50bn 500mn-1bn 
100mn-
500mn 

10mn-
100mn 

1mn-
10mn <1mn 

Total Number of Broker-
Dealers 23 119 30 136 523 1,054 1,613 

Total Assets 
($1,000s) 

Mean $168,631,851 $12,226,934 $737,161 $207,753 $34,340 $3,580 $299 

Median $85,750,282 $6,628,584 $737,598 $181,812 $25,645 $2,757 $207 

Total $3,878,532,5
70 $1,455,005,108 $22,114,818 $28,254,392 $17,959,877 $3,773,694 $481,530301 

 

Total 
Revenue 
($1,000s) 

Mean $1,495,923 $315,344 $84,500 $76,247 $17,310 $2,622 $378 

Median $841,321 $81,517 $25,232 $30,703 $7,638 $1,396 $99 

Total $34,406,232 $37,525,938 $2,535,011 $10,369,565 $9,036,076 $2,695,264 $508,546 

Total 
Expenses 
($1,000s) 

Mean $1,263,904 $283,825 $75,088 $66,749 $15,760 $2,349 $293 

Median $973,919 $67,638 $22,577 $25,153 $6,213 $1,064 $78 

Total $29,069,788 $33,775,125 $2,252,648 $9,077,875 $8,242,340 $2,473,435 $470,898 

Net Income 
($1,000s) 

Mean $219,406 $30,564 $12,941 $9,243 $1,470 $206 $24 

Median $33,372 $5,377 $4,553 $3,032 $417 $29 -$6 

Total $5,046,337 $3,637,137 $388,236 $1,257,046 $769,031 $217,453 $37,856 

This table estimates average, median and total values for broker-dealer assets, total revenue, total expenses, and net income 
broken out into groups based on their total assets.  Number of Broker-dealers is based on the broker-dealers that had a valid 
FOCUS Report for Q2 2022. Statistics for Total Assets (allowable and non-allowable), Total Revenue, Total Expenses, and 
Net Income (after federal income taxes) are computed from the corresponding items in Part II and Part IIA of the FOCUS 
filings (Form X-17A-5 Part II/IIA) from Q2 2022.  

 

 From the perspective of the number of individual customer accounts, the broker-dealer 

market appears to be somewhat concentrated, with the top four brokers handling about 106 

million accounts, equal to 44% of the industry, while the top eight firms have about 159 million 

accounts, or 66% of the industry. From the perspective of total assets, the level of concentration 

is slighter lower, with the top four brokerages having a total of around $2.1 trillion, equal to 39% 

of all assets held by broker-dealers, and the top eight firms about $2.8 trillion, or 52% of total 

industry assets. The broker-dealer industry looks less concentrated from the perspective of 

revenue, with the top four firms earning more than $18 billion, or 19% of the market, and the top 

eight firms earning $28 billion, or 29% of total industry revenues.  

Table 21: Broker Dealer Market Concentration – Assets, Revenues, and Customer Accounts 

  Total Assets (1,000s) Total Revenue 
(1,000s) Customer Accounts 

4-firm total $2,112,685,000 $18,039,203 106,463,445 
8-firm total $2,834,007,000 $28,402,354 158,609,487 



   

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All broker dealers $5,406,121,988 $97,076,632 240,153,894 

     
4-firm concentration 39.08% 18.58% 44.33% 
8-firm concentration 52.42% 29.26% 66.04% 

This table uses FOCUS data analyzed in the previous table to calculate the market share of broker dealers 
based on firm total assets, total revenue, and customer accounts.  The sum of the top four and eight firms 
for each of these variables is compared to the sum of all broker dealers for each of these three variables 
(assets, revenue, total accounts) that submitted a Form FOCUS PART II for Q2 2022.  Total accounts are 
from FOCUS Report Schedule I for Q4-2021.          

 

There is significant variation in the sources of broker-dealer revenue.  Table 22 reports 

sources of broker-dealer revenue along with the revenue as a percentage of the broker-dealer’s 

total revenue in Q1 2022.  A broker-dealer reports a source of revenue on its supplemental 

statement of income (SSOI) if it is more than 5% of its total revenue.  Larger broker-dealers tend 

to have more diversified sources of revenue than smaller broker-dealers, with the majority of 

broker-dealers with 1 billion or more in assets reporting earning revenue in a number of 

categories.  Smaller broker-dealers appear to earn more of their revenue from a limited number 

of sources, with some broker-dealers with under 10 million dollars in assets on average earning 

more than 50% of their revenue from one source.  Larger broker-dealers appear to earn more 

money from fees and interest, rebate, and dividend income.  Smaller broker-dealers appear to 

earn more money from fees and commissions and other revenue sources. 

Table 22: Sources of Broker-Dealer Revenue as a Percentage of Broker-Dealer Total Revenue by Asset Size 
  Size of Broker-Dealer (Total Assets) 

Revenue Source Statistic >50bn 1bn-
50bn 

500mn-
1bn 

100mn-
500mn 

10mn-
100mn 

1mn-
10mn <1mn 

Total Broker-Dealers Reporting Revenue 21 100 27 127 511 1,042 1,588 

Total Commissions 
Count 18 69 21 86 299 518 428 
Mean 10.75% 4.28% 26.47% 27.05% 30.03% 29.40% 26.48% 

Revenue from Sale of 
Investment Company 
Shares 

Count 11 33 6 54 166 305 375 

Mean 0.79% 3.53% 0.40% 6.97% 6.41% 6.39% 13.80% 



   

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Total Revenue From Sale of 
Insurance Based 
Products 

Count 9 34 5 44 145 278 320 

Mean 0.22% 3.08% 7.65% 17.10% 24.81% 22.93% 30.67% 

Total Net Gains or Losses 
on Principal Trading 

Count 18 80 19 66 201 224 86 
Mean 4.40% 7.81% 16.42% 3.76% 20.16% 29.47% 50.26% 

Capital Gains (Losses on 
Firm Investments) 

Count 8 42 11 43 123 189 141 
Mean -3.10% -3.41% 14.38% -7.26% -4.97% 19.70% 5.34% 

Total 
Interest/Rebate/Dividen
d Income 

Count 21 90 22 109 370 604 520 

Mean 43.20% 31.27% 14.99% 5.42% 4.54% 2.68% 14.05% 

Total Revenue From 
Underwritings and 
Selling Group 
Participation 

Count 17 65 12 62 187 272 231 

Mean 9.49% 10.67% 14.94% 18.03% 37.33% 39.07% 46.40% 

Total Fees Earned 
Count 19 82 24 114 434 812 897 
Mean 32.01% 37.00% 42.37% 58.92% 52.46% 56.79% 69.35% 

Other Revenue 
Count 17 75 18 85 307 513 469 
Mean 3.37% 1.20% 2.88% 8.96% 7.47% 16.93% 30.82% 

 
This table estimates the number of broker-dealers reporting different sources of revenue and the average percentage of the 
reported revenue source as a percentage of broker-dealer total revenue for Q2 2022 broken out into groups based on the 
broker-dealer’s total assets. The different sources of revenue and total revenue are reported by each broker-dealer during Q2 
2022 in their FINRA Supplemental Statement of Income Form (Form SSOI).  Form SSOI does not require a broker-dealer to 
report a revenue or expense section source if the revenue or expenses for that section is less than the greater of $5,000 or 5% 
of the broker-dealer’s total revenue or total expenses, as applicable. Total Assets are estimated by Total Assets (allowable and 
non-allowable) from Part II of the FOCUS filings (Form X-17A-5 Part II) from Q2 2022 and correspond to balance sheet total 
assets for the broker-dealer. 

 

 Retail brokers compete for customers by providing a range of services that assist their 

clients in transacting in securities including stocks, bonds, mutual funds, ETFs, options, futures, 

and crypto asset securities.  Retail broker services can broadly be divided into “discount brokers” 

and “full-service” brokers.  Discount brokers typically provide commission-free trading for 

online purchases of stocks and ETFs, but often charge fees for purchases of other securities, such 

as mutual funds, options, and futures.  Some discount brokers’ affiliates manage proprietary 

mutual funds and ETFs, which earn them management fees paid by the investors that purchase 

these funds.  Compared to discount brokers, “full-service” brokers charge higher commissions 

that may include compensations for other services, such as investment research and personalized 

financial guidance. 



   

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 Some brokers seek to differentiate themselves from other broker-dealers by providing 

increased access to crypto asset securities futures, forex, or fractional share trading.  Brokers also 

distinguish themselves by the accessibility and functionality of their trading platform, which can 

be geared towards less experienced or more sophisticated investors.  Discount retail brokers can 

also differentiate themselves by providing more extensive customer service as well as tools for 

research and education on financial markets.  Full-service brokers compete by developing a 

personalized broker-customer relationship and providing guidance based on the detailed 

knowledge of the customer's financial goals.  

Broker-dealers may incur costs532 or earn rebates in seeking to fill their customers’ 

orders.  These costs and rebates may be passed on to customers in whole or in part.  Some of 

these costs are indirect: an illiquid or unlisted security may require the broker to search for 

liquidity either by attempting multiple routings to find a counterparty, or by contacting broker-

dealers that may formally (in association with an ATS that specializes in unlisted securities) or 

informally make markets in unlisted or hard to trade securities.  For some unlisted securities, 

there may be no market maker expected to continually provide two-sided quotes. 

C. Economic Effects and Effects on Efficiency, Competition, and Capital 
Formation 

 The Commission preliminarily believes that the proposed requirements with respect to 

introducing brokers could result in better execution quality for retail customer orders to the 

                                                 

532  Some exchanges pay rebates to orders that either provide or remove liquidity from their 
limit order books.  Some trading venues charge fees to one or both counterparties to the 
trade.   



   

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extent that the proposal leads to changes in broker-dealers’ order handling practices.   

Furthermore, the proposal would enable the Commission to exercise additional enforcement 

capabilities533 that the Commission believes would enhance investor protection and improve 

specific deterrence.534  The Commission also believes that the documentation requirement with 

respect to conflicted transactions could help enhance regulatory oversight, as well as promote 

broker-dealer compliance, and thus, improve investor protection to the extent that the 

documented information includes information or data that is not currently documented nor 

available through public or regulatory data sources.  However, the Commission lacks detailed 

data on broker-dealers’ current order handling practices and documentation practices that would 

allow it to predict the extent of changes as a result of this proposal.535  The Commission 

                                                 

533  This full complement of enforcement capabilities is not available to the Commission to 
enforce FINRA rules. 

534 See also infra section V.C.1.  
535  Considering broker-dealers are diverse in business models and practices, the Commission 

lacks quantifiable data that summarizes how order handling data are currently 
documented, which might serve as a baseline in assessing the effects of the proposed rule.  
While CAT includes routing data for NMS securities, no similar database exists for fixed 
income or other assets covered by the proposed rules.  Although the Commission could 
discuss current routing practices through an analysis of CAT data, it would not capture 
the information set that a broker-dealer evaluated in making its routing decisions, such as 
what pricing information it had when it made the routing choice, what venues were 
considered for the order, or why those venues were considered for the order.  The 
Commission also has no information regarding the broker-dealer’s assessment as to how 
the specific customer and order characteristics affected its decision to handle a customer 
order in a certain way.  Based on its experience, the Commission believes that some 
larger broker-dealers already maintain documentation on their transactions that exceeds 
what would be required under the proposed rules, but the Commission does not know the 
extent to which other broker-dealers also maintain such documentation.  Consequently, 
some broker-dealers would incur fewer costs (and their compliance would result in fewer 
benefits) than others.   



   

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therefore cannot ascertain the extent to which these benefits would be realized, as discussed 

below.   

 The Commission preliminarily believes that the proposal would result in costs associated 

with reviewing, updating, and establishing policies and procedures, and to the extent that the 

proposal leads to changes in broker-dealers’ order handling practices, could result in costs 

associated with implementing changes to order handling practices according to the updated 

policies and procedures.  The proposed requirements for broker-dealers that engage in conflicted 

transactions could result in further changes to order handling practices, but the extent of those 

changes is unknown.  Due to the diversity of broker-dealer business models and operations and 

the lack of quantifiable data on how practices vary across broker-dealers, the Commission cannot 

reasonably estimate how many of these broker-dealers would choose to de-conflict536 to avoid 

the costs associated with the proposed requirements that apply solely to conflicted transactions.  

 The Commission preliminarily believes that the proposal could promote competition in 

the market for trading services (e.g., exchanges, ATSs, non-ATS trading venues) and also in the 

market for market access.  However, the Commission believes that the proposal could have 

mixed effects on competition in the market for broker-dealer services.  While it could promote 

competition among broker-dealers, especially on the basis of execution quality, it could also 

result in higher barriers to entry and potential exit of small broker-dealers.     

                                                 

536  To de-conflict, a broker-dealer might need to deal with the treatment of exchange rebates, 
payment for order flow, or the nature of its executing brokers’ business (i.e., principal 
versus agency capacity), among other factors.   



   

307 

 

 The Commission assesses the economic effects of the proposed amendments in NMS 

stocks relative to a regulatory baseline in NMS stocks that includes the implementation of the 

MDI Rules.537  Furthermore, the Commission’s analysis reflects the Commission’s assessment of 

the anticipated economic effects, including potentially countervailing or confounding economic 

effects from the MDI Rules in NMS stocks.538  However, given that the MDI Rules have not yet 

been implemented, they have not affected market practice and therefore data that would be 

required for a comprehensive quantitative analysis of the economic effects in NMS stocks that 

includes the effects of the MDI Rules is not available.  It is possible that the economic effects in 

NMS stocks relative to the baseline could be different once the MDI Rules are implemented. 

1. Benefits  

The Commission preliminarily believes the proposal, which incorporates and goes 

beyond the existing best execution regulatory regime set forth by FINRA and MSRB, could 

promote investor protection (e.g., better execution quality for retail customer orders) by 

facilitating regulatory oversight and enforcement.539  The Commission believes that benefits 

could result from, among other things, the requirements with respect to introducing brokers, the 

                                                 

537  See supra section V.B.3.a).d. 
538  See id. for a discussion of the Commission’s anticipated economic effects of the MDI 

Rules as stated in the MDI Adopting Release. 
539  See the discussion of enforcement mechanisms in supra section V.B.1.a).  In enforcement 

situations limited to violations of proposed Regulation Best Execution, the Commission 
would gain the ability to i) obtain civil money penalties against defendants in injunctive 
actions; ii) order respondents to cease-and-desist and obtain related relief and sanctions;  
and iii) in situations limited to violations of proposed Regulation Best Execution 
involving broker-dealers and associated persons that would not potentially be subject to 
MSRB best execution rules, obtain relief available under Sections 15(b)(4) and (6). 



   

308 

 

documentation requirements for conflicted transactions, and additional enforcement capabilities 

of the Commission.  

The Commission preliminarily believes that the proposal would enhance investor 

protection and improve retail customer order execution quality to the extent that the proposal 

improves broker-dealers’ order handling practices.  Specifically, broker-dealers could improve 

their customer order handling practices, resulting from documentation, updates and reviews of 

both existing and the best execution policies and procedures that would be required under the 

proposal including the reductions in conflicts of interest when handling retail customer orders.  

The Commission also believes the proposal would enhance investor protection by enabling the 

Commission to exercise additional enforcement capabilities and improving specific deterrence 

through the ability to bring injunctive actions for violations of this rule, issue cease-and-desist 

proceedings for allegations of violations of this rule, and, among other things, order remedial 

actions and sanctions against a broader group of registered persons pursuant to Exchange Act 

Section 15(b)(4) for willful violations of this rule.  Furthermore, improvements in investor 

protection could result from increased documentation requirements for conflicted transactions, 

particularly in fixed income and thinly traded non-NMS stock equity securities.  The extent of 

this improvement depends on whether the documented information include information or data 

that is neither currently documented nor available through public or regulatory data sources.  The 

proposed documentation requirement would help facilitate the Commission’s and SRO’s 

enforcement and examinations, as well as promote broker-dealer compliance, and thus, result in 

better investor protection. 

The Commission preliminarily believes the proposal could lead to changes in order 

handling practices, and in turn, improve the execution quality of retail customer orders, through 



   

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four mechanisms.  First, the proposal would require that introducing brokers that route their 

orders to executing brokers compare that broker’s execution quality to what might have been 

received from competing executing brokers.540  The Commission believes that some broker-

dealers that currently rely on executing brokers already compare their executing broker’s 

execution quality to the execution quality of competing executing brokers, so these broker-

dealers are unlikely to be affected by this element of the proposal.  Introducing brokers that do 

not currently implement rigorous comparison of executing brokers are expected to adjust their 

routing practices in response to this newly required analysis, or justify in their policies and 

procedures how they fulfill their best execution duties in light of these analyses.  Because 

FINRA’s and MSRB’s current policies and procedures requirements do not require this level of 

detail, the Commission cannot ascertain how many brokers already conduct such a comparison 

with alternative executing brokers and how many would need to make adjustments.  However, 

any such adjustments could improve the execution quality that retail customers receive for their 

orders. 

                                                 

540  While FINRA Rule 5310.09(c) allows an introducing broker, instead of conducting its 
own regular and rigorous review, to review the methodology and results of its executing 
broker’s regular and rigorous review of its execution quality on a quarterly basis, it does 
not specifically require the introducing broker to compare the execution quality of its 
executing broker to what it would have received from other executing brokers.  See supra 
section V.B.2.a) for a discussion on introducing broker best execution review 
requirements.  See also FINRA Rule 5310.09(c), Regular and Rigorous Review of 
Execution Quality. 



   

310 

 

Second, the Commission preliminarily believes that the proposal’s heightened standards 

for conflicted transactions could lead to improved prices for retail customers.541  Under the 

proposal, broker-dealers that handle retail customer orders and that choose to accept PFOF, to 

participate in transactions on a principal basis, or to route to affiliated broker-dealers that execute 

orders would be subject to heightened standards.  In response to this proposed requirement, the 

Commission believes that some broker-dealers that route to executing broker dealers that engage 

in conflicted transactions could seek to remove such conflicts, for example by no longer 

accepting payment for order flow or selecting executing brokers that do not execute on a 

principal basis.542  The Commission also believes that executing brokers (e.g., wholesalers) in 

NMS stocks and options could adjust their order handling practices under the proposal in 

anticipation of increased execution quality analysis by retail broker-dealers, from whom they 

receive order flow.  These executing brokers in NMS stocks and options that routinely pay for 

retail order flow and/or engage with it on a principal basis could adjust their order handling 

practices to access additional venues to seek midpoint liquidity, additional price improvement, or 

offer more price improvement to the orders routed by those retail broker-dealers.543  Although 

the Commission cannot quantify the degree of reduction in conflicted transactions that would 

occur under the proposal because it cannot predict how individual broker-dealers would adjust 

                                                 

541  See supra section IV.C about the discussion for the requirements involving conflicted 
transactions for retail orders and supra sections V.C.2.a and V.C.2.b.i describing the 
conflicts of interest in retail order handling. 

542  See infra section V.C.2 for the discussion about costs of broker-dealer efforts to de-
conflict versus comply with requirements of conflicted transactions. 

543  See infra section V.C.2.b for the discussion of wholesaler costs with respect to conflicted 
transactions. 



   

311 

 

their business models to comply with the proposal, the Commission preliminarily believes that 

any resulting reduction in conflicted transactions could improve the prices retail customers 

realize for their transactions.  That said, the Commission acknowledges that some retail 

customers could pay more for their transactions when in reducing its conflicted transactions, a 

broker-dealer changes order handling practices to route to destinations, which may not always 

provide the same price improvement that was previously realized for conflicted transactions.  

Third, the Commission preliminarily believes the proposal could result in better 

execution quality for retail customer orders to the extent that the proposal leads to changes in 

broker-dealers’ order handling practices.  Compared to the FINRA and MSRB rules, the 

Commission believes that the proposal would require greater specificity in the policies and 

procedures with respect to best execution.  Upon reviewing its existing policies and procedures, a 

broker-dealer could be required to update its policies and procedures to comply with the 

proposed requirements.  To the extent that updated policies and procedures would require 

corresponding changes in order handling practices, the broker-dealer would adjust its order 

handling practices for retail customer orders.  The Commission acknowledges that many broker-

dealers currently may have order handling practices that are consistent with the requirements 

under the proposed Rule 1101(a).544  In this case, the Commission does not expect the order 

handling practices of these broker-dealers to change.545  On the other hand, many broker-dealers 

                                                 

544  See infra section IX for proposed Rule 1101(a). 
545  As previously discussed in supra section IV.B, the factors that must be included in a 

broker-dealer’s policies and procedures under proposed Rule 1101(a) are generally 



   

312 

 

could be required to adjust order handling practices, including conducting more detailed reviews 

of their practices, under the proposal.  However, the Commission lacks detailed information on 

broker-dealers’ current policies and procedures with respect to best execution standards and 

order handling practices to determine how many broker-dealers would be required to change 

their order handling practices under the proposal.546 

Fourth, the Commission preliminarily believes that the proposal could help ensure the 

effectiveness of broker-dealers’ best execution policies and procedures, and thus, result in better 

execution quality for retail customer orders to the extent that the requirements under the 

proposed Rule 1102 enhances broker-dealers’ current review process with respect to order 

handling practices.  The Commission acknowledges that many broker-dealers currently may 

conduct reviews that are consistent with the requirements under the proposed Rule 1102, which 

includes a specific requirement to review order handling practices.  In this case, the Commission 

does not expect the order handling practices of these broker-dealers to change, and there would 

thus be no change in execution quality for their retail customer orders. 

The Commission does not believe that the order handling practices or execution quality 

of institutional customer orders would be significantly impacted by the proposal.  The 

Commission understands that institutional customers often utilize multiple broker-dealers in the 

handling of their orders, which lowers the costs of switching brokers if they exhibit poor 

                                                 

consistent with the factors that FINRA and the MSRB have identified as relevant to a 
broker-dealer’s best execution determinations. 

546  See supra note 535 for the discussion about data availability on broker-dealers’ current 
order handling practices. 



   

313 

 

execution quality.  Furthermore, in general, the Commission believes that there is less conflict in 

institutional customer order handling because institutional customers have better access 

(compared to retail customers) to data, which they utilize to monitor and analyze the execution 

quality that various broker-dealers offer.547  The Commission believes that (compared to retail 

brokers) institutional monitoring and lower switching costs encourage broker-dealers to provide 

increased execution quality in order to compete to attract institutional orders.  Thus, the 

Commission does not expect that broker-dealers would make significant adjustments to their 

order handling practices for institutional customer orders under the proposal. 

a) NMS Stocks and Options 

The Commission preliminarily believes the proposed documentation requirement with 

respect to conflicted transactions could result in benefits in the NMS stock and options markets.  

However, a significant amount of information that would help reconstruct market conditions 

(e.g., NBBO, size at NBBO, trade prices, volume, order level information in CAT) around the 

time of conflicted transactions is currently available through public and regulatory data sources 

(e.g., SIP, CAT, OPRA), so those benefits may be small.  To the extent that the documented 

information includes information that is not currently documented nor available through public 

or regulatory data sources , the proposed documentation requirement would help promote broker-

dealer compliance and facilitate enforcement and examination, and thus, result in better investor 

protection.  Furthermore, the Commission believes that any additional documentation could 

                                                 

547  The Commission understands that institutional customers also utilize third-party vendors 
to conduct transaction cost analysis and evaluate the performance of their broker-dealers 
based on those reports.  See also supra section V.B.3.e) for a discussion about 
institutional customer order handling practices. 



   

314 

 

enhance internal review process (e.g., a review by the best execution committee).  Documented 

information could inform broker-dealers in adjusting order handling procedures with respect to 

conflicted transactions, which would result in better execution quality. 

The Commission preliminarily believes that retail customer execution prices in NMS 

stocks and options could improve to the extent that there is a trade-off between the amount of 

PFOF a retail broker receives and the price improvement, which wholesalers provide to its 

customers’ orders.548  Under the proposal, retail broker-dealers accepting PFOF would be subject 

to the proposed Rule 1101(b), which would require a broker-dealer to establish additional 

policies and procedures and retain certain documentation with respect to conflicted 

transactions.549  The proposed Rule 1101(b) would also require them to document any 

arrangement, whether written or oral, concerning PFOF, including the parties to the arrangement, 

all qualitative and quantitative terms concerning the arrangement, and the date and terms of any 

changes to the arrangement.  Additionally, broker-dealers that accept PFOF would not qualify as 

introducing brokers under the proposed Rule 1101(d), which otherwise would permit these 

broker-dealers to rely on their executing broker’s compliance with the proposed Rules 1101(a), 

(b), and (c).550  Some broker-dealers, particularly those with business models that do not rely 

                                                 

548  See supra section V.B.3.a).b. 
549  See supra section IV.C. 
550  Under proposed Rule 1101(d), principal trades by an executing broker with the 

introducing broker’s customer to fill fractional share orders in NMS stocks would be 
considered to be handled on an agency basis, and thus, allow it to rely on its executing 
broker’s compliance with the proposed Rules 1101(a), (b), and (c).  See supra section 
IV.E. for a discussion on proposed Rule 1101(d) and supra section V.B.3.a).i.d for 
additional discussion on fractional share orders in NMS stocks.   



   

315 

 

extensively on payment for retail order flow, could elect to pass any PFOF on to customers 

rather than complying with provisions of the proposal that apply only to broker-dealers that do 

not qualify for the relief provided to introducing brokers.551   

The requirement for a broker-dealer to engage in additional due diligence if it engages in 

a conflicted transaction for or with a retail customer order could improve execution quality to the 

extent the requirement promotes competition between broker-dealers to provide best execution to 

retail broker-dealers that continue to accept PFOF.  Because the proposal would require these 

retail broker-dealers to document their compliance with the best execution standard for 

conflicted transactions, including all efforts to enforce their best execution policies and 

procedures for conflicted transactions and the basis and information relied on for their 

determinations that such conflicted transactions would comply with the best execution standard, 

broker-dealers that pay for order flow could be incentivized to both improve the execution prices 

of orders routed to them for execution and to provide more information to broker-dealers routing 

to them, allowing those broker-dealers to improve their customers’ execution prices and more 

easily comply with the provisions of the proposal that require more extensive documentation of 

their best execution standards.   

To the extent broker-dealers that receive PFOF change their order handling practices to 

comply with the heightened standards in the proposal, these changes are likely to reduce the 

                                                 

551  As explained in supra note 183, when all payment for order flow for a customer order 
from a particular market is passed through to the customer and the broker-dealer retains 
no part of the payment for order flow associated with that customer order, the broker-
dealer would not be engaging in a conflicted transaction under proposed Rule 1101(b) 
with respect to that customer order.  See also infra section V.C.2.a for the discussion 
about the costs of broker-dealer efforts to de-conflict versus comply with requirements of 
conflicted transactions. 



   

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profitability of their business model because the orders they are routing may be more likely to be 

executed on venues that charge for providing liquidity, or do not provide compensation for order 

flow, or that provide compensation that is less than what these broker-dealers could realize by 

internalizing order flow, or routing elsewhere under existing procedures.  Faced with potentially 

lower revenues from changing order handling procedures, broker-dealers that pay to receive 

order flow could choose to make few or no changes to their routing practices and could instead 

focus on maintaining arrangements with specific broker-dealers552 (from whom they are already 

receiving orders or could determine that their current PFOF arrangement meets the requirements 

under the proposal) to meet their obligations under the proposal without significant changes.  

Some broker-dealers that make payments for order flow could compete on the basis of providing 

service and information to their broker-dealer customers that help those broker-dealers satisfy 

their own requirements under the proposal, such as providing additional information on routing 

practices and data on how they provide the best execution possible.  Competition between these 

broker-dealers could foster innovation that improves prices received by retail customer orders 

executed under PFOF agreements. 

                                                 

552  See infra section V.C.2.a for the discussion of how broker-dealers who route to other 
broker-dealers for execution may choose to comply with the proposal.  The Commission 
recognizes that it is possible under the proposal that these broker dealers would reduce 
their payments for order flow because broker-dealers who route orders to them may 
choose to stop accepting PFOF in order to meet the definition of “introducing broker” in 
proposed Rule 1101(d).  However, the Commission preliminarily believes this would not 
increase the profitability of broker-dealers that currently pay to receive order flow 
because presumably their payments to secure order flow are less than the profits they earn 
to execute that order flow often in a principal capacity. 



   

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 With respect to listed options, the Commission preliminarily believes that retail order 

execution quality could improve to the extent that the proposal results in broker-dealers adjusting 

their customer order handling practices consistent with the heightened standards required of 

conflicted transactions.553  Some broker-dealers that handle retail options orders and engage in 

conflicted transactions, such as executing orders on a principal basis or routing to affiliates, may 

adjust their routing practices to access additional venues or consider additional opportunities for 

price improvement.  This could be driven both by the requirements of proposed Rule 1101(b) to 

consider additional opportunities for price improvement and in anticipation of increased 

execution quality analysis by other broker-dealers, for whom they route orders.  For example, 

these broker-dealers may adjust their routing practices to further consider the possibilities of 

exposing a smaller customer order of 5 contracts or less for price improvement opportunities in 

auctions or look for liquidity within the NBBO spread instead of routing the customer order to a 

venue that would allow a market maker to internalize 100% of a given customer order with 5 

contracts or less on the limit order book at the best displayed prices without competition from 

other liquidity providers.554  Additionally, broker-dealers may route more customer orders to 

price improvement auctions that are more competitive rather than ones that provide the broker-

dealer a better chance at internalizing a larger share of the customers’ orders.  Furthermore, with 

regards to non-marketable limit orders, broker-dealers may consider routing more orders to 

                                                 

553  See supra section IV.C about the discussion for the requirements involving conflicted 
transactions for retail orders and supra Sections V.C.2.a and V.C.2.b.i describing the 
conflicts of interest in retail order handling. 

554  See supra section V.B.3.a).ii for discussion of the handling of retail orders in the options 
markets. 



   

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exchanges that have higher likelihood of executions in the form of fill rates and average shorter 

time to execution rather than to the exchanges that pay the highest liquidity rebates. 

b) Fixed Income Securities 

 The Commission preliminarily believes that the proposed documentation requirement 

with respect to conflicted transactions could facilitate regulatory oversight and enforcement and 

promote broker-dealer compliance with best execution standards, promoting investor protection 

in the fixed income securities markets.  For introducing brokers that utilize trading services of 

executing brokers, the requirement to review and compare execution quality of various executing 

brokers could result in better execution quality for retail customer trades to the extent that 

brokers choose to change their executing brokers to those that offer better execution quality.  In 

general, the proposal would improve execution quality to the extent that the proposal results in 

enhancements to broker-dealers’ order handling procedures.  The extent to which customer order 

execution quality would improve depends on how many and to what extent broker-dealers would 

adjust their order handling procedures as a result of this proposal.  However, the Commission 

cannot ascertain the extent to which this benefit would be realized because the Commission lacks 

data on how many broker-dealers would change order handling procedures in response to the 

proposal.   

 For very illiquid fixed income securities, execution quality improvement resulting from 

changes in order handling procedures with respect to conflicted transactions could be limited.  

Because a broker-dealer transacting in illiquid fixed income securities will only have a few 

potential counterparties, exposing retail orders to a greater number of trading venues (e.g., 

through RFQs) may not result in more responses nor more competitive responses.  On the other 

end of the spectrum, the Commission expects little impact on the execution quality of on-the-run 



   

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U.S. Treasury securities because transaction costs for such securities are already low.  The 

impact is most likely to materialize in fixed income securities that have moderate liquidity, as 

discussed further below.  

 The Commission preliminarily believes that the documentation requirement for 

conflicted transactions under the proposal could facilitate regulatory oversight and promote 

broker-dealer compliance with best execution standards, promoting investor protection in the 

fixed income securities markets.555  To the extent that broker-dealers do not currently document 

efforts to obtain the most favorable price in conflicted transactions, these broker-dealers would 

be required to document such information.  Compared to the markets for equities and listed 

options where quotes and trades are widely disseminated, in most fixed income markets only 

transactions are reported and disseminated publicly.  The extent to which the proposed 

documentation requirement would help facilitate regulatory oversight depends on the types of 

documented information.  To the extent that the documented information includes information or 

data that is not currently documented nor available through public or regulatory data sources, 

such as the markets checked, internal and external quotes, and other factors (e.g., trading 

protocols, prices, immediacy, trade size) considered for the basis of best execution, the proposed 

documentation requirement would help facilitate regulators’ enforcement and examination of a 

broker-dealer for compliance, and thus, result in better investor protection.  Furthermore, the 

Commission believes that documentation could enhance internal review process (e.g., a review 

                                                 

555  FINRA members are currently required to conduct regular and rigorous review of 
execution quality under FINRA Rule 5310.09.  However, the Commission does not know 
the types of information that broker-dealers document for the purpose of regular and 
rigorous review of execution quality under FINRA Rule 5310 and MSRB Rule G-18.  



   

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by best the execution committee).  Documented information could inform the broker-dealer in 

adjusting order handling procedures with respect to conflicted transactions, which would result 

in better execution quality.  

 The Commission preliminarily believes that the execution quality of retail customer 

trades in fixed income securities effected by brokers that qualified for relief under the 

FINRA/MSRB rules by relying on their executing brokers for trading services could improve.  

Under the proposal, introducing brokers,556 as defined in proposed Rule 1101(d), and carrying 

brokers that currently avail themselves of the relief under the FINRA/MSRB rules and hence rely 

on their executing brokers for retail customer trading services, would be required to review and 

compare the execution quality of their executing brokers with the execution quality they might 

have obtained from other executing brokers and adjust their routing practices accordingly.557  To 

the extent that some of these brokers change their executing brokers for trading services to those 

that offer better execution quality, retail customer trades of the brokers would receive better 

execution quality.558  Furthermore, the requirement to review and compare execution quality of 

                                                 

556  These brokers are non-carrying brokers that qualified for relief under the FINRA/MSRB 
rules. 

557  Carrying brokers that qualified for relief under the FINRA/MSRB rules would not have 
relief from the requirements of the proposal unless these brokers restructure their 
business to become non-carrying brokers.  Under the proposed rule 1101(c) with respect 
to regular review of execution quality, these carrying brokers would be required to review 
and compare the execution quality of their executing brokers with the execution quality 
they might have obtained from other executing brokers, and adjust their order handling 
and routing practices accordingly. 

558  The Commission acknowledges that some brokers could already be reviewing and 
comparing the execution quality, of which various executing brokers offer, in the 
selection of their executing brokers.321 

 

executing brokers could promote competition among executing brokers, which could result in 

better execution quality for retail customer trades.559 

The Commission preliminarily believes that the proposed requirements with respect to 

conflicted transactions could result in better execution quality for internalized trades in fixed 

income securities.   To the extent that broker-dealers make changes to order handling procedures 

(upon reviewing and comparing execution quality across competing markets) and connect to 

additional trading venues to expose retail customer orders (e.g., via RFQs and BWICs) more 

broadly across multiple trading venues for the purpose of internalization, the execution quality of 

internalized trades could improve.  Sending RFQ messages more broadly across multiple trading 

venues may result in better execution quality for internalized trades if a broader exposure of 

customer order results in more competitive prices for the purpose of internalization (i.e., price-

matching using more competitive price).  For example, exposing a customer order via RFQs on 

multiple trading venues could result in more competitive responses to be used as the reference 

price to match or improve for the purpose of internalization.  However, to the extent that broker-

dealers continue to engage in last-look practices in RFQs for the purpose of internalization, 

conducting RFQs on more trading venues may not necessarily result in more responses nor more 

competitive responses as discussed below.           

To the extent that a broker-dealer determines, upon reviewing data, that the use of last-

look in RFQs impedes attracting competitive responses, the broker-dealer could discontinue last-

look practices or limit the use of last-look to meaningfully improve price in an occasion when 

                                                 

559  Executing brokers would compete on, among other things, fees, markups/markdowns, 
and the quality of trading services. 



   

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RFQ responses are not reflective of the market.  For example, a broker-dealer handling a retail 

customer order may participate in an RFQ by blind bidding/offering and internalize the order 

only if the broker-dealer is the best bid/offer in the RFQ, or otherwise give up the order to 

another responder with the best bid/offer.  Such RFQ practice could attract more competitive 

responses thereby improving the execution quality of internalized trades via RFQs.560  However, 

the Commission believes that this benefit is not likely to be realized.  Broker-dealers would 

continue to use last-look in conducting RFQs for the purpose of internalization so long as such 

internalization practice continues to provide profit incentive for those broker-dealers.    

In order to justify the continued use of last-look in fixed income securities trading, 

broker-dealers could provide meaningful price improvement by exercising last-look in RFQs for 

the purpose of internalization, which would result in better execution quality.  To the extent that 

a broker-dealer’s review or assessment reveals that the use of last-look in RFQs impedes 

attracting competitive responses, the broker-dealer could respond by providing price 

improvements to the best response bids/offers to compensate for receiving less competitive 

bids/offers in RFQs as compared to, for instance, in a blind auction as described above.      

Broker-dealers’ assessment of last-look practices in fixed income securities trading may 

not affect execution quality for internalized trades via RFQs.  Unless a broker-dealer’s review or 

assessment shows a negative impact of last-look practices on the execution quality of 

internalized trades, the Commission does not expect the broker-dealer to alter nor discontinue 

                                                 

560  See infra section V.C.2.b for the discussion about how the proposal might adversely 
impact market liquidity.  The Commission preliminarily believes that this benefit in the 
execution quality improvement for retail customer trades may be reduced to the extent 
that eliminating last-look practices in RFQ for the purpose of internalization adversely 
affects the principal trading activities of inventory carrying broker-dealers. 



   

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last-look practices in RFQs for the purpose of internalization.  If the broker-dealer makes no 

changes, the rule would produce no improvement in the execution quality for internalized trades 

via RFQs.  Specifically, in exercising last-look, a broker-dealer that currently applies trade desk 

spreads (in the form of markdown/markup) to external bids/offers but not to internal bids/offers, 

which results in more favorable comparisons for the internal bids/offers, to win RFQs, may 

continue to apply such practice so long as the execution quality of external trades would be 

worse than that of internalized trades. 

The Commission preliminarily believes that the proposed requirements with respect to 

conflicted transactions could result in better execution quality for riskless principal trades in 

fixed income securities.  To the extent that broker-dealers make changes to order handling 

procedures (upon reviewing and comparing execution quality across competing markets) and 

connect to additional trading venues in order to search or expose retail customer orders more 

broadly across multiple trading venues, the execution quality of riskless principal trades for retail 

customers could improve.  Broker-dealers could increase the use of RFQs across multiple trading 

venues to expose retail customer orders in order to obtain competitive prices.  Furthermore, as 

another way to expose retail customer orders more broadly, broker-dealers could represent retail 

customer orders on limit order systems across multiple trading venues.  For example, in case of a 

retail customer sell order, instead of conducting an RFQ on the bid side of the market, a broker-

dealer could represent the customer order by placing a limit order on the offer side of the market 

for certain fixed income securities (e.g., liquid on-the-run Treasury securities, liquid corporate 

debt securities) should the broker-dealer determine that the characteristics of the customer order 

are consistent with this type of order handling (e.g., the customer is not demanding immediacy of 

execution).  This would lower transaction costs of the retail customer because this customer 



   

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would not pay the bid ask spread if the order is executed at the offer price (compared to 

executing at the bid price obtained via an RFQ). 

In response to the proposed requirements with respect to conflicted transactions, retail 

broker-dealers could stop executing retail customer fixed income securities orders on a riskless 

principal basis.  To the extent that it is more cost effective for broker-dealers to handle retail 

customer orders on an agency basis rather than a riskless principal basis under the proposal, 

broker-dealers could change business practices to handle retail customer orders on agency basis 

and not incur the costs associated with the requirements under conflicted transactions (e.g., 

trading venue subscription fees and implementation costs associated with changing order 

handling procedures).561  In such case, execution quality may not change.  In particular, a broker-

dealer, whose primary business is retail self-directed trading conducted on riskless principal 

basis, could change its business practices to handle retail self-directed trading on agency basis to 

the extent that conducting its self-directed trading business on an agency basis would be less 

costly compared to doing so on a riskless principal basis. 

c) Non-NMS Stock Equity Securities 

There are three possible channels through which benefits of the proposal to the non-NMS 

stock equities market may derive: 1) requirements with respect to conflicted transactions; 2) the 

regular review of execution quality of executing brokers used by introducing brokers; and 3) 

                                                 

561  See infra section V.C.2.a) for discussions about trading venue subscription fees and costs 
associated with making changes to order handling procedures. 



   

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some broker-dealers implementing policies and procedures to comply with this proposal, which 

may offer improved execution quality to transactions effected by these broker-dealers.562  

The Commission preliminarily believes that the documentation requirement with respect 

to conflicted transactions could help facilitate regulatory oversight and enforcement, as well as 

promote broker-dealer compliance, and thus, enhance investor protection in the non-NMS stock 

equity securities market.  To the extent that the documented information includes additional 

information beyond what broker-dealers currently record, and which may not be currently 

available through public or regulatory data sources (e.g., CAT), such as non-firm quotes on 

trading venues and factors (e.g., immediacy, trade size) considered for the basis of best 

execution, the proposed documentation requirement would help facilitate Commission and SRO 

enforcement and examinations, and thus, result in better investor protection.  Similarly, the 

Commission believes that documentation could enhance the internal review process (e.g., a 

review by best execution committee).  Documented information could inform broker-dealers in 

adjusting order handling procedures with respect to conflicted transactions, which could result in 

better execution quality. 

The proposal would require additional policies and procedures, beyond FINRA Rule 

5310 and related FINRA notices563 that currently address non-NMS stock equities transactions, 

                                                 

562  See section V.C.1 introduction for more explanation of the general benefit to execution 
quality that retail customers could experience.  In the non-NMS stock equity securities 
market, the Commission believes a majority of transactions would be subject to the 
Conflicts of Interest provisions in proposed Rule 1101(b); however, there may be some 
broker-dealers who could improve execution quality while implementing policies and 
procedures as explained in section V.C.1. 

563  See supra section II.C for details on FINRA rules and notices with respect to the concept 
of “best execution.” 



   

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when engaging in transactions that are executed in a principal capacity, routed to an affiliate for 

execution, or involve PFOF.  Conflicted transactions are ubiquitous in the non-NMS stock 

equities market.  These enhanced policies and procedures may induce broker-dealers to more 

carefully consider and change routing behavior in handling customer orders.  While this proposal 

does not mandate changes, the changes could arise as broker-dealers are required to maintain 

policies and procedures that dictate the handling of conflicted transactions.  In some cases, this 

could induce broker-dealers to reduce or eliminate conflicted transactions they participate in due 

to heightened costs of procedures, such as the documentation requirement.  While in other cases, 

there could be no such inducement of broker-dealers to change order routing behavior.  Trading 

in non-NMS stock equity securities is heavily concentrated in two platforms; however, there are 

other sources of liquidity beyond those two.  This proposal could induce broker-dealers to 

connect to additional liquidity sources due to the requirements of conflicted transactions of this 

proposal.  To the extent that broker-dealers’ enhanced policies and procedures determine that 

they should connect to additional liquidity sources for conflicted transactions, customers’ 

transaction costs could be lowered through better prices found on the additional sources.  

Additionally, to the extent that broker-dealers are either no longer routing to wholesalers or 

internalizing orders based on policies and procedures that resulted in different routing decisions, 

customer orders could experience price improvement opportunities, as their orders would be 

exposed to external competition.  

Introducing brokers, as defined in proposed Rule 1101(d), would be required to conduct 

regular reviews of executing brokers they use for their retail customer transactions. This review, 



   

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which differs from the quarterly review564 required by FINRA Rule 5310 for all brokers, could 

cause introducing brokers to seek out additional executing brokers to develop business 

relationships with.  These additional options, from which introducing brokers could choose to 

route their customer orders, could promote competition among executing brokers in the non-

NMS stock equities market.  This increased competition could result in better execution quality 

to the introducing brokers’ retail customers in the form of lower transaction costs and increased 

fill rates for illiquid securities.  

d) Crypto Asset Securities565 

As mentioned above in Section V.B.3.c, the Commission lacks data on broker-dealer 

routing behavior, the frequency of crypto asset securities trading in both non-conflicted and 

conflicted transactions, and many details of trading protocols and crypto asset securities trading 

platforms.  Also, as noted in Section V.B.3.c, this market features many vertically integrated 

                                                 

564  When transacting in municipal securities, broker-dealers are subject to MSRB Rule G-18.  
The rule requires an annual review of policies and procedures, which could take into 
account execution quality review.  The rule in this proposal is substantively different 
from FINRA Rule 5310 or MSRB Rule G-18. 

565  For purposes of measuring the benefits and costs of the proposed rule on a broker-
dealer’s duty of best execution in the crypto market, this analysis assumes that market 
participants are compliant with existing applicable Commission, FINRA, and MSRB 
rules, including those directly addressing the duty of best execution for the handling and 
execution of customer orders in securities and government securities.  See supra section 
III.A.3.  To the extent that some entities engaged in broker-dealer activities with regard to 
crypto asset securities are not FINRA or Commission registered entities, they may incur 
additional costs to comply with existing registration obligations that are distinct from the 
costs associated with the proposed rule and are not discussed in this analysis.  Similarly, 
any benefits from coming into compliance with existing registration obligations are also 
not discussed in this analysis.  See id. 



   

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trading platforms, which makes analogous comparison to other asset markets less exact.  To the 

extent that broker-dealers operate in a fashion similar to other asset markets,566 the Commission 

preliminarily believes the proposal could drive benefits in the crypto asset securities market 

through three possible channels: 1) the requirements with respect to conflicted transactions; 2) 

the regular review of execution quality of executing brokers used by introducing brokers567; and 

3) some broker-dealers implementing policies and procedures to comply with this proposal, 

which could offer improved execution quality to all transactions conducted by these broker-

dealers.  

The Commission preliminarily believes that the documentation requirement with respect 

to conflicted transactions could help facilitate regulatory oversight and enforcement, as well as 

promote broker-dealer compliance, and thus, enhance investor protection in the crypto asset 

securities market.  To the extent that documented information includes information or data that is 

not currently documented nor available through public or regulatory data sources, the proposed 

documentation requirement would help facilitate enforcement and examination, and thus, result 

in better investor protection.  Furthermore, the Commission believes that documentation could 

enhance internal review process (e.g., a review by the best execution committee).  Documented 

                                                 

566  The Commission preliminarily believes the closest market comparison may be the non-
NMS stock equity securities market; though, no exact comparison to any other asset 
market is likely with crypto asset securities. 

567  The Commission understands the crypto asset securities market has several large, 
vertically integrated platforms.  The Commission lacks the data to determine whether 
entities analogous to introducing brokers are prevalent in this market.  However, the 
discussed benefits are those which the Commission believes could accrue in cases where 
such market structure exists. 



   

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information could inform broker-dealers in adjusting order handling procedures with respect to 

conflicted transactions, which would result in better execution quality. 

The proposal would also require written policies and procedures beyond those required 

under FINRA Rule 5310,568 when engaging in transactions that are executed in a principal 

capacity, routed to an affiliate for execution, or involve PFOF.  While this proposal does not 

mandate changes, the enhanced policies and procedures required by this proposal may induce 

brokers to more carefully consider and change routing behavior in handling customer orders.  

Specifically, as broker-dealers are directed to write and maintain policies and procedures that 

dictate the handling of currently conflicted transactions, they may review their existing routing 

behavior.  In some cases, this could induce broker-dealers to reduce or eliminate conflicted 

transactions, in which they participate due to heightened costs of procedures, such as the 

documentation requirement. To the extent that broker-dealers with enhanced policies and 

procedures determine that they should connect to additional liquidity sources for conflicted 

transactions, investors’ transaction costs could be lowered through better prices being found on 

the additional sources.  Additionally, to the extent that broker-dealers are either no longer routing 

to wholesalers or internalizing based on policies and procedures that resulted in different routing 

decisions, customer orders could experience price improvement opportunities, as their orders 

would be exposed to external competition.  

                                                 

568  See supra section II.C for details on FINRA rules and notices surrounding the concept of 
“best execution.” 



   

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Introducing brokers,569 as defined in the proposed Rule 1101(d), would be required to 

conduct regular review of executing brokers they use to for their customer transactions. This 

review, which differs from the quarterly review570 required by FINRA Rule 5310 for all brokers, 

could cause introducing brokers to seek out additional executing brokers with whom to develop 

business relationships.  These additional options, from which introducing brokers could choose 

to route their customer orders, could promote competition among executing brokers in the crypto 

asset securities market.  This increased competition could result in better execution quality to the 

introducing brokers’ retail customers in the form of lower transaction costs and increased fill 

rates for illiquid securities.  

2. Costs 

In order to comply with the proposal, broker-dealers would collectively incur costs to: 

update their policies and procedures; review and update those policies and procedures annually; 

conduct and document regular reviews of best execution compliance; and possibly make 

operational changes in response to those regular reviews.  Assuming all broker-dealers will need 

to perform each of these activities and do not do so already, and do not have policies and 

procedures in place that would be consistent with the proposed rules, the Commission estimates 

                                                 

569  As noted in the introduction of this section, the Commission lacks data on broker-dealer 
activities in this market.  In this instance, the Commission does not have data on the 
prevalence of introducing brokers in the crypto asset securities market. This discussion 
applies to the extent these entities operate in this market. 

570  When transacting in municipal securities, broker-dealers are compelled by MSRB Rule 
G-18.  The rule requires an annual review of policies and procedures, which could take 
into account execution quality review.  The rule in this proposal is substantively different 
from FINRA Rule 5310 or MSRB Rule G-18. 



   

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one-time compliance costs of up to $165.4 million and annual costs of $128.9 million.  To the 

extent that broker-dealers already have policies and procedures and practices that are consistent 

with the proposed rules, aggregate implementation costs would be less than these estimates, and 

based on the Commission’s experience, the Commission preliminarily believes these estimates 

overstate costs broker-dealers would bear in implementing the proposed rules.571     

The proposal would entail other costs as well, as discussed below.  Where possible, the 

Commission has attempted to estimate these costs.  Other costs are discussed qualitatively.  The 

Commission believes it is likely these costs would be passed to broker-dealer customers, and 

would ultimately be borne by customers. 

a) Compliance Costs for Broker-Dealers 

i. Carrying Broker-Dealers 

Under the proposal, broker-dealers would fall into three groups: 1) those that qualified for 

relief from the FINRA Regular and Rigorous Review of Execution Quality under FINRA Rule 

                                                 

571  The one-time costs average $47,298 per broker-dealer; ongoing costs average $36,843 
per broker-dealer annually.  Again, these estimates assume that all broker-dealers will 
need to implement new or updated policies and procedures or practices to be consistent 
with the proposed rules.  Based on its experience, the Commission preliminarily believes 
that some broker-dealers may already have policies and procedures and other practices 
that are consistent with proposed Rule 1101.  If, for example, all 3,273 of the broker-
dealers that the Commission estimates would choose to not engage in conflicted 
transactions have policies and procedures and other practices consistent with proposed 
Rule 1101, the aggregate total cost of the proposal to all broker-dealers would be $38.8 
million in one-time costs and $48.1 million in annual costs.  Because not all broker-
dealers are likely to already have policies and procedures and other practices that are 
consistent with proposed Rule 1101, aggregate implementation costs would be higher 
than these estimates.  Accordingly, it is likely that actual costs would fall between these 
estimates and those cited above. 



   

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5310.09(c) from primary analysis requirements under FINRA/MSRB rules previously and would 

meet the introducing broker requirements to qualify for the proposed relief under proposed Rule 

1101(d);572 2) those that did not qualify for relief under FINRA Rule 5310.09(c) and would not 

qualify for the proposed relief under proposed Rule 1101(d); and 3) those that qualified for relief 

under FINRA Rule 5310.09(c) previously but would not qualify for the proposed relief under 

proposed Rule 1101(d).  The third group, which may include as many as 144573 broker-dealers 

that carry customer accounts, would be required under the proposed rule to comply with the 

policies and procedures and regular review provisions of proposed Rules 1101(a), (b), and (c) 

because these broker-dealers would not qualify for the introducing broker exemption (because 

they carry customer accounts).  Under the proposal, a broker-dealer that qualified for relief under 

FINRA Rule 5310.09(c) that does not meet the definition of introducing broker under proposed 

Rule 1101(d) would be required to incur costs to set up their own best execution policies and 

procedures, and it would likely no longer be able to rely on an executing broker for its analysis 

of execution quality, unless the broker-dealer were to revise their business model to no longer 

carry customer accounts.  The Commission’s cost estimates below assume that all broker-dealers 

will implement this review under the proposal.  Based on the Commission’s experience, the 

Commission preliminarily believes that many broker-dealers in the first two groups already 

conduct reviews of execution quality consistent with the requirements of the proposal.  

                                                 

572  See supra section II.C for the discussion about FINRA Rule 5310.09(c) and supra Section 
IV.E for the discussion about introducing broker requirements under proposed Rule 
1101(d). 

573  Based on April-June 2022 FOCUS data. 



   

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Consequently, the Commission believes its cost estimates for compliance overestimate costs 

broker-dealers will collectively bear to implement the proposal.  

ii. Conflicted Broker-Dealers 

 Conflicted broker-dealers may comply with the proposed requirements in a number of 

ways.  First, they may choose to engage in more rigorous analysis of the execution quality their 

orders receive than is required of unconflicted broker-dealers, comparing the execution quality of 

multiple possible broker-dealers that they could route order flow to for execution, as well as 

execution quality available on other venues where liquidity is reasonably available, and regularly 

update routing practices based on these analyses.  Based on the Commission’s experience, the 

Commission preliminarily believes that some broker-dealers already engage in these practices.  

However, particularly smaller broker-dealers who continue574 to accept PFOF from an executing 

broker-dealer may have previously relied on the best execution obligations of broker-dealers they 

route to, and under the proposal, would no longer qualify for the relief from such analyses 

previously provided under FINRA/MSRB rules.  For these broker-dealers, performing such 

analyses might require engaging external consultants to provide such analyses if the broker-

dealer’s staff does not possess the necessary expertise or if the broker-dealer’s staffing is not 

adequate to support the additional duties required, and might also require engaging external 

consultants to obtain analyses incorporating the necessary data (such as information on 

alternative trading system liquidity) to which they may not currently have access.  The 

                                                 

574  Resolving conflicts is discussed below. 



   

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Commission’s cost estimates below assumes that smaller broker-dealers (those carrying less than 

$100MM in total assets) will incur costs to engage external parties for this review. 

The Commission preliminarily believes that due to the prevalence of exchange rebates, 

many of the 2,440 retail broker-dealers575 are likely to qualify as conflicted under the proposal.  

The Commission is able to preliminarily estimate an upper bound on potential implementation 

costs from these broker-dealers by assuming that all 2,440 retail broker-dealers would remain 

conflicted after implementation of the proposal,576 but the Commission preliminarily believes the 

implementation costs for many broker-dealers are likely to be lower than this estimate because 

some conflicted broker-dealers receive payments from their conflicted order flow that are less 

than the implementation costs they would incur under the proposed rule; consequently, the 

Commission preliminarily believes that some broker-dealers will choose to de-conflict to avoid 

incurring these costs.  For purposes of its analysis, the Commission assumes that broker-dealers 

with less than $100MM in total assets will comply with the proposal by removing their 

conflicts.577  The Commission preliminarily believes that some broker-dealers may continue to 

                                                 

575  Based on Q2 2022 FOCUS data. 
576  If all 2,440 broker-dealers were to implement the more rigorous requirements required 

for broker-dealers engaging in conflicted transactions, these broker-dealers would 
collectively incur $155.3MM in implementation costs averaging $63,637 per broker-
dealer.  The Commission also assumes each would incur $9,000 per year in costs to 
update order-handling procedures in response to its annual review of execution quality, 
for ongoing annual costs of $22.0 MM. 

577  If a broker-dealer has revenue from conflicted transactions that over time sufficiently 
exceeds the $24,935 in additional implementation costs the Commission estimates 
conflicted broker-dealers will incur and the $9,000 annual cost to update order-handling 
procedures, the broker-dealer is likely to choose to continue to engage in conflicted 
transactions since its revenue from such activities exceeds the additional implementation 



   

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use one or more clearing broker-dealers that have previously paid to receive their order flow, and 

in such cases the primary cost to the broker-dealer would be the lost PFOF revenue.  However, if 

a broker-dealer needed to change the broker-dealer it routed to, or engage the services of another 

intermediary to handle its order flow in order to remove conflicts, the broker-dealer would likely 

incur switching costs such as staff time allocated to researching and negotiating with alternative 

providers of services.578 

The Commission preliminarily believes that each broker-dealer that would be required 

under the proposed rules to comply with provisions of the proposal applicable to conflicted 

broker-dealers would consider its options under the proposed rules strategically.  For some firms, 

the costs of staffing the activities required for compliance would exceed their expected profits 

from conflicted transactions.  The Commission expects these firms would choose to alter their 

business models to reduce conflicts so compliance changes necessary for conflicted transactions 

are not required under the proposed rules.  It is possible that a consolidation of business would 

result: some broker-dealers may exit the market, while others would invest further and compete 

to serve the customers of exiting broker-dealers.  Some broker-dealers may reduce conflicts 

identified under the proposed rules and compete for customer order flow on the basis of their 

less-conflicted status.  To the extent that exiting broker-dealers were able to offer lower-costs 

                                                 

and ongoing costs necessary to comply while engaging in conflicted transactions.  
Because the majority of PFOF revenues accrue to a small number of broker-dealers, the 
Commission preliminarily believes that smaller broker-dealers are unlikely to receive 
significant PFOF revenue that would justify the additional implementation costs.  For 
some of these broker-dealers, passing the PFOF they receive on to their customers may 
suffice to de-conflict.  See note 183, supra. 

578  See infra note 581 and text for discussion of related costs the broker-dealer would likely 
incur to operationalize changing a routing destination. 



   

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than broker-dealers that either reduce conflicts or comply with provisions of the proposal 

required of conflicted broker-dealers, direct costs such as commissions and fees for these firms’ 

investor customers may increase. 

iii. All broker-dealers 

Broker-dealers would incur costs to update policies and procedures to reflect the 

proposal.  They would incur other costs to regularly review the execution quality of venues or 

other broker-dealers to which they route customer orders.  To the extent that broker-dealers 

already have policies and procedures that comply with the proposal, aggregate implementation 

costs would be less than this estimate, and based on the Commission’s experience, the 

Commission preliminarily believes these estimates overstate costs broker-dealers would bear in 

implementing the proposal.  Implementation costs are summarized in Table 23 below.579 

 

Table 23: Total Implementation Costs 

 

   Per registrant ($)  Industry-wide ($) 

Required Policies and Procedures   Internal Labor External   
Internal 

Labor External  Total 

         
         

BDs excluding conflicted retail (3273)         
Update policies and procedures  One time 6,462 32,240  21,150,126 105,521,520 126,671,646 

Annual review and update of P&P  Annual 2,154 8,800  7,050,042 28,802,400 35,852,442 

Conduct and document review of execution quality  Annual 7,642 6,080  25,012,266 19,899,840 44,912,106 

         
Conflicted BDs (225)         
Update policies and procedures  One time 55,701 7,936  12,532,725 1,785,600 14,318,325 

Annual review and update of P&P  Annual 6,421   1,444,725  1,444,725 

                                                 

579  See infra Section VI.7 for detailed discussion of these estimates. 



   

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Conduct and document review of execution quality  Annual 20,840   4,689,000  4,689,000 

         
Annual Report          

         
Unconflicted BDs (3273)         
Update procedures for reviewing best ex policies 
and procedures  One time 1,795 4,960  5,875,035 16,234,080 22,109,115 

Conduct and document regular reviews  Annual 4,062 7,920  13,294,926 25,922,160 39,217,086 

         
Conflicted BDs (225)         
Update procedures for reviewing best ex policies 
and procedures  One time 8,952 1,488  2,014,200 334,800 2,349,000 

Conduct and document regular reviews  Annual 12,278   2,762,550  2,762,550 

         
         

Total Implementation Costs      41,572,086 123,876,000 165,448,086 

Total Annual Costs      54,253,509 74,624,400 128,877,909 

         

Costs in this table are constructed from estimates in Section VI.D. In its economic analysis, the Commission assumes that the 225 
retail broker-dealers with over $100MM in total assets are large and will continue to engage in conflicted transactions if the 
proposed rules are adopted, and follows the Section VI.D estimates for large broker-dealers. The remaining 3273 broker-dealers 
are assumed to be unconflicted for purposes of the proposed rules, and this analysis follows the Section VI.D estimates for small 
broker-dealers. Section VI.D assumes that smaller broker-dealers are less likely to engage in conflicted transactions, but 
acknowledges some costs associated with conflicted transactions. Furthermore, Section VI.D cost estimates assume broker-
dealers will outsource many compliance tasks and thus relies more upon external costs. To the extent that these broker-dealers 
elect to perform these tasks with internal personnel, their implementation costs are likely to be over-stated in this analysis.  
Consequently, this analysis is likely to over-estimate compliance costs for unconflicted broker-dealers.   

Where internal burden hours appear in Section VI.D, the Commission employed hourly rates to monetize these costs.  These 
hourly rates are based on SIFMA's Management & Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead, and adjusted with a factor of 1.27 for inflation based on the 27% change in the Consumer Price Index 
from December 2013 to September 2022. The Commission employed the following hourly rates, with the description employed 
in Section VI.D in parenthesis: Attorney (legal counsel) $483 per hour; Compliance Attorney (compliance counsel) $424 per 
hour; General Counsel (general counsel) $693 per hour; CCO (CCO) $616 per hour; Compliance Manager (compliance manager) 
$359 per hour; Paralegal (legal personnel) $253 per hour; Compliance Manager (compliance personnel) $359 per hour; 
Operational Specialist (business-line personnel) $159 per hour. 

 



   

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The previous table discusses the costs broker-dealers would incur to comply with the 

proposal.580  In the case of conflicted broker-dealers that would be newly required to evaluate 

execution quality from multiple sources in evaluating execution quality, it is possible they would 

periodically need to change their routing practices to reflect changes they observe in their data 

analysis.  The Commission preliminarily estimates that each conflicted broker-dealer that 

changes its routing practices will incur costs of approximately $9,000.581  The Commission 

cannot estimate the number of broker-dealers that would need to make this change periodically, 

but the Commission preliminarily estimates that the changes will be no more than $2 million582 

annually in aggregate. 

                                                 

580  See infra section VI.D. 
581  The Transaction Fee Pilot required re-programming of SORs as well. For that pilot, the 

Commission estimated that the costs of a one-time adjustment to the order routing 
systems of a broker-dealer would $9,000 per broker-dealer.  The Commission 
preliminarily believes that this estimate remains a reasonable estimate of costs associated 
with changes that broker-dealers would incur from having to update their routing 
systems.  See Securities Exchange Act Release No. 84875 (Dec. 19, 2018), 84 FR 5202 
(Feb. 20, 2019) (Transaction Fee Pilot for NMS Stocks). 

582  225 conflicted broker-dealers x $9,000 per order-handling change = $2.025MM annually.   
The Commission assumes that order-handling changes would be annual because the 
proposal requires the annual review of the best execution policies and procedures, 
including order handling practices.  Based on the Commission’s experience, the 
Commission preliminarily believes that many broker-dealers, including many that the 
Commission believes will be unconflicted if the proposal is adopted and implemented, 
already change order-handling practices regularly for both best-execution and other 
operational reasons, such as reducing costs.  Consequently, the Commission preliminarily 
believes that this estimate exceeds the annual costs that broker-dealers would bear under 
the proposal. 



   

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iv. Additional Compliance Costs for NMS Stocks and Options 

For NMS stocks, a broker-dealer engaging in conflicted transactions would currently be 

required to subscribe to SIP data under current SRO best execution rules.  To consider a broader 

range of markets, such broker-dealers might add connections to one or more ATSs, subscribe to 

more detailed data or consider connecting to “ping” destinations (automated systems run by OTC 

liquidity providers that may elect to internalize any order routed to their system).583  In making 

this choice, some broker-dealers may compare their current routing practices to a hypothetical 

competitor that does the bare minimum and consider their practices compliant with the proposal 

even if all competitors currently do more than this hypothetical minimum. 584    To the extent 

broker-dealers believe that their current routing practices are in compliance and do not make 

changes to routing practices, both the benefits and the costs of the proposed rules would be less 

than they would be otherwise.  

                                                 

583  The Commission preliminarily believes that larger broker-dealers that are likely to 
continue engaging in conflicted transaction if the proposed rules are adopted are likely to 
already connect to a broader range of venues than would be represented by SIP data.  The 
Commission cannot predict how many broker-dealers that elect to engage in conflicted 
transactions would increase the range of venues to which they connect and what costs 
they would incur to do so because broker-dealers are diverse in business models and 
practices and each broker-dealer would need to evaluate its own operational procedures 
to make such a determination. 

584  Based on staff discussion with market participants, the Commission preliminarily 
believes that broker-dealers are often not certain what their competitors’ routing practices 
are.  Such information is proprietary and generally not publicly available. 



   

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v. Additional Compliance Costs Associated with Fixed Income Securities 

     With respect to fixed income securities trading, broker-dealers that engage in 

conflicted transactions could add subscription to one or more trading venues (e.g., ATSs, RFQ 

platforms, single dealer platforms) to the extent that the benefit (i.e., improvement in execution 

quality) from adding subscription to trading venue outweighs the costs (e.g., venue subscription 

fees).585  The Commission expects that a broker-dealer would subscribe to additional trading 

venues to take liquidity (as opposed to provide liquidity by posting quotes or responding to 

RFQs) in executing retail customer orders on riskless principal basis or to discover prices for the 

purpose of internalization.  The Commission understands that subscription fees for liquidity 

takers are not significant.  Furthermore, the broker-dealer would choose to connect to a trading 

venue via low cost means, for example, web-based graphical user interface (GUI) rather than via 

more costly application programming interface (API), which may include the costs associated 

with connectivity and systems reconfiguration (e.g., reconfiguring to adjust API), to the extent 

that the broker-dealer does not expect to maintain constant connection to execute a large number 

of customer orders on the venue.  To the extent that making changes to business practices to 

handle customer orders on an agency basis in fixed income securities trading is less costly than 

incurring costs to comply with the requirements with respect to conflicted transactions, broker-

dealers may choose to handle retail customer orders on an agency basis rather than a riskless 

                                                 

585  In their Form ATS submissions, 15 of 33 ATSs state they have no access, connectivity 
and/or subscription fees.  The Commission preliminarily believes that most ATSs charge 
fees primarily based on transactions, and subscribers are responsible for any costs related 
to providing their connectivity.  To the extent an ATS does charge subscription fees, 
broker-dealers are likely to consider those fees in making a determination of whether the 
liquidity on such an ATS is reasonably available.341 

 

principal basis.  In particular, a broker-dealer whose primary business is retail self-directed 

trading conducted on a riskless principal basis could change its business practices to convert its 

self-directed trading business to handling orders on an agency basis.  The Commission 

preliminarily believes that the costs associated with such a conversion could include the costs 

related to changing risk management practices for intraday capital commitment, compliance 

systems, recordkeeping practices for orders and transactions, and accounting practices.  

However, the Commission is uncertain about these costs associated with the business practice 

changes needed to convert a self-directed trading business from a riskless principal to agency 

based model and requests comments on the costs.  

vi. Additional Compliance Costs for non-NMS Stock Equity Securities 

In the case of non-NMS stock equities, liquidity on ATSs beyond those that specialize in 

non-NMS stock equities may be rare.  For a broker-dealer that currently participates in the non-

NMS stock market, adding additional markets may mean subscribing to additional ATSs, or 

possibly, contacting other broker-dealers that act as liquidity providers of last resort through 

direct messages thus seeking additional sources of liquidity manually.  To the extent that broker-

dealers are able to bear the costs of seeking this additional liquidity (through ATS subscriptions 

or manual negotiation) while maintaining a profitable trading service, broker-dealers in the non-

NMS stock equities market could pursue these actions and pass on the costs to customers.  In the 

case of very illiquid non-NMS stock equities, broker-dealers may be left with either no apparent 

options to add additional markets, or with markets which are prohibitively expensive to consider 

as additional liquidity sources (such as contacting other broker-dealers or block holders of the 

security to inquire about their interest in being a counterparty).  In such cases, there may not be 



   

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additional implementation costs for conflicted transactions because alternative markets may not 

be available. 

vii. Additional Compliance Costs Associated with Crypto Asset Securities 

Broker-dealers trading crypto assets that are securities may incur costs to comply with the 

proposed rule.586  Because the Commission lacks data and other information on existing broker-

dealers and their practices in the crypto asset securities market, it is difficult to precisely 

determine the costs of compliance for such broker-dealers.  Generally, the Commission expects 

the costs of compliance to be most similar to costs associated with trading non-NMS stocks.  To 

the extent that the current market practices of market participants that would need to comply 

with the proposed rule differ significantly from the practices required under the proposed rule, 

the costs for compliance with the proposal may be large; this may be the case, for example, for 

market participants whose practices are not currently consistent with FINRA Rule 5310.  On the 

other hand, market participants with existing best execution policies and procedures, such as 

those that operate across other asset classes (e.g., NMS securities), may bear incremental lower 

costs of compliance.   

For crypto asset securities that are traded on multiple platforms, conflicted broker-dealers 

may need to connect to additional platforms to comply with the proposal.  In the case of crypto 

asset securities that are not traded on multiple platforms, broker-dealers would incur costs to 

directly contact liquidity providers of last resort, such as broker-dealers that might agree to trade 

                                                 

586  Affected parties that effect transactions in the crypto market may include some market 
participants that may not be currently registered as a broker-dealer but should be under 
existing regulations.  As noted above, this analysis does not account for costs of such 
market participants to register as broker-dealers or otherwise come into compliance with 
existing applicable regulation. 



   

343 

 

the asset if contacted directly.  Because transacting manually in this manner involves the time of 

a professional trader, the cost to make these additional inquiries required by the proposal might 

be uneconomical, particularly in the case of small trades. 

b) Other Costs 

As discussed previously, currently many retail orders in NMS securities are executed 

without paying commissions.587  The Commission preliminarily believes that the proportion of 

retail order flow being executed under PFOF agreements may decrease, although the 

Commission is uncertain of the magnitude of this reduction.588  It is possible that reductions in 

the proportion of retail order flow being executed under such agreements could cause the 

prevalence of retail commissions to increase because revenues from these agreements may have 

previously offset retail broker dealer costs that would otherwise be covered by commissions 

collected from retail investors.  This effect may be mitigated if broker-dealers elect to pass 

exchange rebates to their customers.  The Commission preliminarily believes that it is unlikely 

that the proposal would significantly increase the prevalence of retail commissions because the 

market to provide retail broker-dealer services is competitive and many of the broker-dealers that 

the Commission believes will remove their conflicts receive relatively small payments for their 

order flow.589   

                                                 

587  See supra Section V.B.3.a 
588  See supra Section V.C.1. 
589  In the case of larger broker-dealers that derive significant revenue from PFOF, the 

Commission preliminarily believes that they will continue to do so and incur the 
additional compliance costs discussed previously in Table 23. 



   

344 

 

The Commission further believes that the costs of the rule could advantage larger broker-

dealers and may increase barriers to entry and disadvantage smaller broker-dealers, potentially 

resulting in some of them exiting the market.  To the extent that smaller broker-dealers are more 

likely to provide specialized services and provide innovation, there may be less competition to 

provide specialized services and less innovation if the proposal is adopted.  Investors whose 

broker-dealers exit the market would face search costs to find alternative broker-dealers that 

offer the same services; those services may be offered at inferior prices by remaining 

competitors.  Some services may no longer be offered by any competitors if a specialized broker-

dealer exits the market, although the Commission preliminarily believes that if there is sufficient 

demand for such a service, a broker-dealer may make it available to customers when demand is 

sufficient, as may be the case after one or more broker-dealers exit the market. 

While the Commission cannot predict how many retail broker dealers will terminate 

PFOF arrangements, the Commission preliminarily believes that under the proposal, retail 

broker-dealers are likely to reduce their use of PFOF agreements for both NMS stocks and listed 

options because engaging in such agreements would cause the broker dealer to incur heightened 

best execution obligations under the proposal and satisfying those obligations may cause broker-

dealers to incur costs in excess of their PFOF revenue.590  Since most broker dealers that receive 

                                                 

590  The Commission lacks data on many broker-dealers’ PFOF revenue, but acknowledges 
that some broker-dealers will realize an indirect cost from forgone PFOF revenue.  In the 
case where a broker-dealer receives PFOF from another broker-dealer or trading venue, 
this will constitute a transfer from one registrant to another, and will not increase industry 
costs in aggregate.  In cases where a broker-dealer passes PFOF on to its customers to 
avoid conflicts, this payment may reduce investor trading costs and increase industry 
costs in aggregate. 



   

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PFOF receive relatively small payments for routing their order flow,591 smaller broker-dealers in 

particular may consider curtailing this practice to avoid incurring the additional compliance 

costs.  Furthermore, broker-dealers that currently pay to receive order flow may adjust their 

business models592 to rely less on these arrangements.  The Commission preliminarily believes 

this is likely to reduce the share of retail customer order flow that is internalized because some 

broker-dealers that currently receive PFOF are likely to stop receiving it to become de-

conflicted, and some broker-dealers that pay PFOF will internalize fewer of the orders they 

receive to comply with the proposal.  If this occurs, broker-dealers that reduce their reliance on 

PFOF arrangements would also be likely to see commensurate decreases in their revenue.  This 

increase in costs to execute customer orders may be passed on to retail investors as additional 

fees to trade, or in the form of commissions. 

Similarly, the Commission preliminarily believes that firms that currently pay to receive 

retail order flow would likely receive less of such directed order flow.  While this may be a cost 

savings to those firms, it is likely to represent a reduction in what was previously a profitable 

business operation, and the lost profit opportunities are not likely to offset any cost savings.  It is 

                                                 

591  Many broker-dealers receive PFOF, but the majority of PFOF is received by a small 
group of broker-dealers.  Consequently, many broker-dealers receive relatively small 
PFOF payments, although for some broker-dealers these small payments may contribute 
significantly to profits, depending on other revenue sources.  Regardless of this relative 
magnitude, the costs to comply with the proposal’s heightened standards may be 
prohibitive for broker-dealers that receive relatively modest PFOF revenue, and their 
compliance costs may exceed the revenue the broker-dealer receives for engaging in 
conflicted transactions.  See supra Section V.B.3 and Section V.C.2.a)ii.. 

592  If broker-dealers choose to pass exchange rebates on to their customers, they may incur 
additional costs associated with updating systems to account for these payments.   



   

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possible such firms may choose to compete on other venues (ATSs and exchanges) to participate 

in this order flow, but the Commission preliminarily believes that profits from such a venture are 

unlikely to be comparable to the profits of internalization because, on other venues, other broker-

dealers would be able to compete with these broker-dealers to provide liquidity to these orders 

which should reduce the cost of that liquidity to investors.593  If these firms reduce the capital 

they currently allocate to providing liquidity, spreads could increase particularly in the short-

term because fewer market participants would be competing to provide liquidity.  However, the 

Commission preliminarily believes that the market to provide liquidity to retail orders is 

competitive and other competitors are likely to increase their capital provision over time to 

satisfy demand.594 

In addition to costs discussed previously, broker-dealers that engage in conflicted 

transactions would face heightened standards under the proposal.  These standards would require 

them to obtain and assess information beyond what would be required of a broker-dealer that is 

not conflicted, including price, volume, and execution quality, in identifying a broader range of 

markets beyond those identified as material potential liquidity sources.  The Commission 

preliminarily believes that this requirement may be interpreted very differently by different 

broker-dealers, and may prove challenging in markets for some asset classes where the number 

of potential markets is limited and broker-dealers may effectively be checking all reasonably 

available prices in current practice.   

                                                 

593  See supra Section V.C.1. 
594  See infra Section V.D.3. 



   

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i. Additional Other Costs in NMS Stocks and Options 

In equities, the Commission preliminarily believes that firms that internalize retail order 

flow provide liquidity to a wide range of securities, including those that are very thinly traded.  

In fact, fulfillment of these more difficult to fill orders may be part of a service bundle that 

internalizers provide to broker-dealers that route them their order flow.  Generally, thinly traded 

securities are more risky for liquidity providers because quotation data are relatively sparse 

compared to more heavily traded securities, such quotations are more likely to be stale, and there 

may be no market makers that have a duty to maintain two-sided quotes in these securities.595  It 

is possible that execution prices may be less favorable for retail investors under the proposal if 

liquidity providers that previously paid for order flow and fulfilled these difficult to execute 

orders under such arrangements dedicate less capital to making markets in these securities.  It is 

possible that execution times for these securities may be significantly delayed as broker-dealers 

would need to search for liquidity to fill these orders, and this delay is an additional factor that a 

broker-dealer would need to consider in the order’s execution quality.  It is also possible that 

execution prices for these transactions may be less favorable than they might be under a PFOF 

arrangement because the price improvement statistics on these orders are currently included in 

                                                 

595  See, for example, Menkveld, Albert J. and Wang, Ting, How do designated market 
makers create value for small-caps?, 16 Journal of Financial Markets 571 (2013), 
available at https://www.sciencedirect.com/science/article/pii/S1386418112000535#aep-
abstract-id6; Craig, Louis, Kim, Abby, and Won Woo, Seung, Pre-trade Information in 
the Municipal Bond Market, (SEC Working Paper, July 2018), available at dera_wp_pre-
trade_information_in_the_municipal_bond_market.pdf 
(sec.gov)https://www.sec.gov/files/dera_wp_pre-
trade_information_in_the_municipal_bond_market.pdf and Craig et al, supra note 471. 

https://www.sciencedirect.com/science/article/pii/S1386418112000535#aep-abstract-id6
https://www.sciencedirect.com/science/article/pii/S1386418112000535#aep-abstract-id6
https://www.sec.gov/files/dera_wp_pre-trade_information_in_the_municipal_bond_market.pdf
https://www.sec.gov/files/dera_wp_pre-trade_information_in_the_municipal_bond_market.pdf
https://www.sec.gov/files/dera_wp_pre-trade_information_in_the_municipal_bond_market.pdf
https://www.sec.gov/files/dera_wp_pre-trade_information_in_the_municipal_bond_market.pdf


   

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the criteria retail broker dealers evaluate in choosing executing broker dealers.596  However, the 

Commission preliminarily believes that the market to provide liquidity to retail orders, including 

orders in less liquid securities is competitive.  If the proportion of such orders entering the 

market beyond internalizers increases, it is likely other broker-dealers that provide liquidity to 

asset markets would increase liquidity provision to this segment of the equities market.  The 

costs realized by investors transacting in these securities may increase, however, because broker-

dealers are unlikely to provide additional liquidity unless they can cover their costs and earn 

appropriate risk-adjusted returns.597 

In addition to the costs discussed above, the Commission preliminarily believes that in 

the market for listed options, the NBBO spreads set by resting best displayed liquidity could be 

wider and the depths at the best market prices could be thinner because of the increasing order 

flow segmentation under the proposal.  Specifically, liquidity providers could deploy less capital 

to provide the resting displayed liquidity in the limit order books in favor of price improvement 

auctions or price improving inside the NBBO.  Because the proposed rules could result in 

potentially more efficient price improvement auctions and/or potentially more retail orders being 

routed to the auctions for price improvement opportunities, order flow routed there could become 

less impactful and more profitable. At the same time, the orders filled by the lit quotes would 

                                                 

596  Broker-dealers that pay to receive order flow may be providing better execution to 
difficult to fill orders because the execution in such orders is an element upon which their 
clients evaluate them.  Consequently, outside of PFOF arrangements, such orders might 
receive inferior execution quality to what they would receive under such an arrangement. 

597  Securities for which it is more difficult to find trading counterparties often are 
characterized by infrequent trades, less frequent quotations and lower market 
capitalization.  These factors are likely to increase the adverse selection risk liquidity 
providers face when providing liquidity to the market for these securities. 



   

349 

 

become more impactful and impose relatively more adverse selection risk on the liquidity 

providers who provide resting displayed liquidity, in part due to the increased level of order 

segmentation.  Less capital from liquidity suppliers would make the liquidity in order books 

thinner and potentially widen the NBBO.  Wider NBBO spread and thinner depth would 

inevitably lead to worse execution quality to the orders that are not exposed to price 

improvement opportunities.  To the extent that the proposal would make a subset of retail 

customers better off by improving the prices those customers receive, it would correspondingly 

adversely affect other customers by harming prices and liquidity in displayed quotes. 

ii. Additional Other Costs in Fixed Income Securities 

With respect to fixed income securities trading, the Commission preliminarily believes 

that the proposal could adversely affect liquidity.  To the extent that broker-dealers no longer 

practice last-look in conducting RFQs for the purpose of internalization, these broker-dealers 

could earn less profits from principal trading that relies on broker-dealers’ capacity to commit 

capital for carrying inventory.  A reduction in capital commitment for fixed income securities 

intermediation could result in lower liquidity, particularly for those trades that rely on broker-

dealers’ capacity to provide immediacy by trading on a principal basis (by taking fixed income 

securities into inventory).  This would result in an increase in pre-arranged trades between a 

buyer and a seller (so that the broker-dealer can quickly offset its position in the opposite 

direction), which take a longer time to execute, increasing transaction costs of market 

participants.                       

To the extent that broker-dealers handling retail customer orders choose to conduct RFQs 

to fulfill the proposed requirements with respect to conflicted transactions, this could result in an 

increase of RFQs to a degree that RFQ messages would overwhelm market participants (e.g., 



   

350 

 

broker-dealers responding to RFQs).  This could increase the number of RFQs with no or few 

responses resulting in less competitive prices and worse execution quality for retail customer 

trades.  However, the Commission preliminarily believes that this effect would be mitigated as 

more market participants adopt automation in the process for responding to RFQ messages to be 

responsive to RFQs, and thus, attract more order flow. 

3. Efficiency, Competition, and Capital Formation 

The Commission has considered the effects of the proposed amendments on efficiency, 

competition, and capital formation, and discussed these effects below.  

a) Competition 

i. Market for Trading Services 

The Commission preliminarily believes that the proposal would improve competition 

among trading venues.  The proposal requires that broker-dealers consider a wider range of 

trading venues.  In the equity and option markets, the Commission also preliminarily believes 

that the proposal would reduce the proportion of retail order flow that is internalized.  The 

Commission preliminarily believes that this would increase competitive opportunities for 

exchanges and other trading venues because more broker-dealers will consider exchanges and 

ATSs as potential execution venues.  In the fixed income securities markets, the proposal could 

promote competition among trading venues to the extent that broker-dealers expose retail 

customer orders broadly across multiple trading venues for the purpose of executing riskless 

principal trades and for the purpose of internalization. 

In the market for NMS stock and options trading services, the Commission preliminarily 

believes that competition would increase. To the extent that the proposal’s requirement that 

broker-dealers incorporate material sources of liquidity into their order handling practices causes 



   

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broker-dealers to consider additional execution venues such as additional exchanges or ATSs for 

their orders, competition between trading venues may increase.  Other factors that may 

encourage broker-dealers to more frequently use exchanges and ATSs for trading include the 

heightened standards for conflicted transactions and the heightened standards for transactions 

where a PFOF arrangement is in place. 

By considering more sources of liquidity and the heightened standards for broker-dealers 

in conflicted transactions, it allows for venues such as exchanges and ATSs to compete for order 

flow that may have been internalized by wholesalers before the effects of this rule.  The 

requirement to consider price improvement from midpoint liquidity before internalizing a retail 

trade could increase competition by resulting in more trading venues competing to offer 

programs that offer midpoint liquidity to retail orders.  There will be increased demand for the 

services of trading service venues. Given this increased demand, the venues will compete to 

acquire as much of it as possible.  Given this increased demand, it is possible that the fees venues 

charge may rise, particularly if large venues capture most of the increased order flow.  

The Commission preliminarily believes that the proposal would increase competition 

between broker-dealers to provide liquidity to retail orders by requiring broker-dealers that route 

to executing brokers to consider a wider range of executing venues.  Currently, most retail order 

flow for which the customer has not specified an execution venue is routed first to an 

internalizer.  Under the proposal, broker-dealers would need to consider a wider range of trading 

venues and programs (such as retail liquidity programs598) before routing customer orders. 

                                                 

598  See supra Section V.B.3a).i. 



   

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The Commission preliminarily believes that the proposal would have limited impact on 

the market to provide liquidity to unlisted stocks and thinly traded NMS stocks.  As the proposal 

requires brokers to check material sources of liquidity, there will be little change if these sources 

of liquidity are few to begin with.   

The Commission preliminarily believes that the proposal would promote price 

competition and competition in price improvement mechanisms for listed options.  Under current 

practice, in order to attract order flow from wholesalers, the exchanges that provide the price 

improvement auction mechanisms often establish asymmetric fee schedules charging the 

competing liquidity providers higher fees than the wholesaler for participating in the auction.  

This limits the ability of competing liquidity providers to provide more favorable pricing to 

compete with the wholesaler in those auctions, resulting in less than fully efficient price 

improvement offered to the customer.  Under the proposal, when considering a price 

improvement auction, the wholesaler would be required to consider a broad range of price 

improvement auctions across the exchanges and evaluate the execution quality that may be 

received from these auctions and how that might be impacted by auction features such as 

asymmetric fee schedules after controlling for all the other factors such as the allocation model.  

Therefore, the option exchanges would have incentives to level the playing field by reducing the 

existing auction transaction fee gap to enhance competition in those auctions to attract the retail 

order flow.  

Currently, there is no mid-point liquidity protocol available across the limit order books 

operated by the exchanges for listed options, but the Commission is aware that there is at least 

one option exchange which provides a protocol allowing market participants to provide liquidity 

on the limit order book within the NBBO prices to interact with incoming marketable orders and 



   

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provide price improvement against NBBO at the same time.  The Commission preliminarily 

believes that, under this proposal, more exchanges would have incentives to develop protocols 

which would facilitate liquidity provision within the prevailing NBBO spread because broker-

dealers would be required to have policies and procedures that specifically address opportunities 

for price improvement and other order exposure opportunities.  Thus, the wholesaler would need 

to check or reasonably estimate whether there could be substantial midpoint or within-NBBO 

liquidity available on the limit order books operated by other exchanges. Some exchanges may 

even consider establishing protocols to allow customer order flow executed at the midpoint of 

NBBO prices, which would further increase opportunities for retail orders to receive price 

improvements. 

ii. Market for Broker-Dealer Services 

 The Commission preliminarily believes that the proposal could have mixed effects on 

competition in the market for broker-dealer services.  Changes in order handling practices that 

could occur as part of the rule could promote competition between broker-dealers to attract 

customers.  However, the costs of the rule could advantage larger broker-dealers and may 

increase barriers to entry and disadvantage smaller broker-dealers, potentially resulting in some 

of them exiting the market. 

 While modifying their policies and procedures, broker-dealers could change their order 

handling practices and also the services they utilize from other broker-dealers while handling 

customer orders.  These changes in order handling practices could promote competition among 

broker-dealers, especially on the basis of execution quality, to attract customers.  It could also 



   

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promote competition among broker-dealers offering services to other broker-dealers to attract 

new clients.599 

The Commission preliminarily believes that the proposal may increase barriers to entry 

and disadvantage smaller broker-dealers because of the increased compliance costs and resulting 

economies of scale that would result under the proposal.  Furthermore, the proposal could result 

in consolidation among smaller broker-dealers or these broker-dealers being absorbed (via 

merger) by larger broker-dealers to take advantage of the economies of scale.  Such a change to 

the competitive landscape could also reduce competition in the market for trading services.  In 

the case of broker-dealers that meet the definition of introducing broker under FINRA rules but 

do not do so under the proposal, compliance costs may be high.600  Some of these broker-dealers 

may adjust their business models to no longer compete as introducing brokers, and new entrants 

may be discouraged due to elevated costs of complying with the proposal. 

Additionally, the proposed rules for conflicted transactions for retail orders and on 

introducing brokers accepting PFOF may reduce the PFOF retail brokers receive in the equity 

and options markets.  To the extent that these firms do experience a major reduction in their 

PFOF revenue, they may face pressure to develop other lines of revenue, including the addition 

of commissions and/or fees for trading and advisory services, although broker dealers that have 

heavily promoted their commission-free business model would be more reticent to add 

commissions and/or fees, despite the loss of PFOF.     

                                                 

599  See infra Section V.B.3.a.i for discussion about competition about market for market 
access. 

600  See supra Section V.C.2. 



   

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To the extent that some retail brokers do resume charging commissions, they may be 

constrained by competitive pressures in the commission rates they can charge.  Larger retail 

brokers that do not accept equity PFOF could continue to provide commission-free trading.  

This, in turn, would put competitive pressure on the extent to which retail broker-dealers could 

charge commissions and still retain customers.  If the ability of smaller retail brokers to charge 

commissions is constrained by competition, it could increase the competitive advantage of larger 

retail brokers, which could raise the barriers to entry for new brokers and cause some smaller 

retail brokers to exit the market.    

The Commission is unable to quantify the likelihood that one or more smaller brokers 

would cease operating.  Even if one or more small brokers were to exit, while the Commission 

acknowledges that services to niche markets more likely served by smaller broker-dealers might 

decline, the Commission does not believe this would significantly impact competition in the 

larger market for generalized broker services because the market is served by multiple large 

competitors.  Additionally, the market would likely still be served by many small competitors.  

Consequently, if a smaller retail broker were to exit the market, demand is likely to be swiftly 

met by existing competitors.  The Commission recognizes that small brokers may have unique 

business models that are not currently offered by competitors, but the Commission believes a 

competitor could create similar business models previously offered by exiting firms if demand 

were adequate. Moreover, if the services generated by these business models are not provided by 

existing competitors, it seems likely new entrants would provide them if demand were sufficient. 

iii. Market for Market Access 

The Commission preliminarily believes that the proposal would increase competition in 

the market for market access.  A number of aspects of the proposal could result in more broker-



   

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dealers utilizing the services of a routing or executing broker or engaging in more extensive 

comparisons of the services and execution quality of different routing or executing brokers.  This 

would increase competition among broker-dealers offering order routing and execution services 

to other broker-dealers in order to attract new customers.  

 The introducing broker requirements under Rule 1101(d) would enhance competition the 

market for market access in two ways.  The requirement for introducing brokers to regularly 

compare the execution quality of their executing broker to that of other executing brokers would 

promote competition between executing brokers.  Broker-dealers that carry customer accounts 

that currently route their order flow to an executing broker to handle in an principal capacity 

would not be eligible for the introducing broker relief under Rule 1101(d) and would have to 

develop policies and procedures for handling customer orders.  If they utilized a routing broker 

as part of developing these policies they would need to compare different routing brokers and 

develop the criteria for selecting a routing broker as part of their policies and procedures. They 

would have to also compare their routing broker to the other routing brokers as part of their 

regular review of their policies and procedures.  This could enhance competition among routing 

brokers in order to attract these broker-dealers as clients. 

 The heightened standards for broker-dealers handling retail orders engaging in conflicted 

transactions may also promote competition in the market for market access.  The additional 

requirements for broker-dealers handling retail orders engaging in conflicted transactions may 

lead to some retail brokers that currently route orders to wholesalers to instead utilize the 

services of a routing broker to handle their orders.601  There could be increased competition 

                                                 

601  See supra Section V.C.1.a  



   

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among routing brokers to provide these conflict-free routing services to retail brokers.  

Additionally, the heightened standards for broker-dealers that accept PFOF may foster 

competition between broker-dealers to provide best-execution services to retail broker-dealers 

that continue to accept PFOF.  Because the proposal would require these retail broker-dealers to 

document their compliance with the best execution standard for conflicted transactions, including 

all efforts to enforce their best execution policies and procedures for conflicted transactions and 

the basis and information relied on for their determinations that such conflicted transactions 

would comply with the best execution standard, this could increase competition among broker-

dealers that pay for order flow to provide adequate information to broker-dealers routing to them, 

allowing those broker-dealers to improve their customers’ execution quality.  Without such 

assistance from broker-dealers that pay for order flow, the broker-dealers that provide order flow 

may be faced with the need to perform significant data analysis on multiple executing broker-

dealers if they intend to continue receiving PFOF.  For some broker-dealers, the expense of 

conducting such analysis is likely to exceed the revenue they receive for directing their order 

flow to executing broker-dealers that pay to receive their order flow.  These broker-dealers may 

choose to stop receiving PFOF or pass all PFOF they receive through to their customers in order 

to avoid these expenses.  Consequently, broker-dealers that pay for order flow are likely to be 

incentivized to assist their customer broker-dealers in complying with the rule to avoid losing 

their order flow.  It is also possible that broker-dealers that currently receive PFOF may simply 

maintain their routing practices and stop accepting PFOF to reduce their compliance burden 

under the proposal. 

 With respect to fixed income securities trading, the proposed requirements with respect to 

introducing brokers and regular review of execution quality could promote competition in the 



   

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market for market access (i.e., amongst executing brokers).  Brokers that outsource execution 

services for fixed income securities would conduct regular reviews and compare execution 

quality in the selection of their executing brokers, which would promote competition and 

innovation in the fixed income market for market access.  Executing brokers would compete on 

fees, efficiency in order handling procedures, and efficiency in the selection of trading venues or 

counterparties, which in turn, would result in better execution quality for retail customer trades. 

b) Efficiency 

The Commission preliminarily believes the proposal would improve price efficiency in 

asset markets because broker-dealers will need to consider a wider range of markets and 

execution methodologies when routing customer orders.  By facilitating competition between a 

larger pool of liquidity providers, more liquidity providers may be incentivized to compete to 

provide liquidity.  This would provide a wider range of quotes and facilitate price efficiency to 

the extent that the expanded liquidity pool provides more informative quotes. 

While the Commission preliminarily believes the proposal could improve retail order 

execution prices,602 the Commission recognizes that it could take longer for conflicted orders to 

be executed because broker-dealers might need to consider additional venues before routing an 

order, and they may need to perform more routings before the order is fulfilled.  It is possible 

that market prices could move unfavorably during this time.   

c) Capital Formation  

The Commission preliminarily believes that the proposal may improve capital formation 

by incentivizing broker-dealers to allocate additional capital to the provision of liquidity.  The 

                                                 

602  See supra Section V.C.1. 



   

359 

 

proposal’s requirement that broker-dealers consider additional pricing information and execution 

venues before routing customer orders and heightened standards for best execution for conflicted 

transactions may result in more order flow being routed to venues with competitive quotations.  

If such quotations are more likely to result in executions, particularly with retail order flow that 

usually carries lower adverse selection costs to broker-dealers,603 broker-dealers would have 

greater incentives to provide such quotations.   

The Commission also recognizes that liquidity provision in thinly traded and unlisted 

securities may decrease.  Currently, broker-dealers with business models that specialize in 

internalizing retail order flow may be providing liquidity in very thinly traded securities as part 

of a bundle of services that they provide to their customers.  If the internalization of retail orders 

decreases as the Commission preliminarily believes it might, broker-dealers may be faced with 

difficult liquidity searches when their customers wish to trade thinly traded or unlisted securities.  

It is possible that an increase in retail demand for liquidity in these securities may be met with an 

increase in liquidity supply from firms that are more willing under the proposal to make markets 

in these securities than they were when a greater proportion of retail flow was internalized.  To 

the extent that broker-dealers’ willingness to make markets in these securities decreases overall, 

this may increase trading costs for these securities and make it more difficult for companies to go 

public before they are eligible to be listed on registered exchanges. 

                                                 

603  See, e.g., Barber, Brad M., and Terrance Odean, Trading is hazardous to your wealth: 
The common stock investment performance of individual investors?, 55 J. FIN. 773 
(2000). 



   

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D. Reasonable Alternatives 

1. SEC Adopts FINRA Rule 5310 and MSRB Rule G-18 Best Execution 
Rules 

As an alternative, the Commission could adopt existing FINRA Rule 5310 and MSRB 

Rule G-18  rules and associated guidance.  This alternative would have lower costs and benefits 

compared to the proposal, because changes604 in order handling practices would be unlikely to 

occur under this alternative compared to the proposal.  Under this alternative, improvements to 

investor protection might be less than those from the proposed rules.  

This alternative would not include the enhanced requirements within proposed Rule 

1101(b) related to transactions with broker-dealer subject to specified conflicts of interest, which 

represent the majority of retail transactions in the equity, options, and fixed income markets.605  

Proposed Rule 1101(b) would require a broker-dealer engaging in conflicted transactions to 

address additional considerations in its best execution policies and procedures, and to document 

its compliance with the best execution standard for such transactions.  To the extent that the 

proposal would have resulted in improved execution quality for the retail orders by reducing the 

inefficiencies606 present in existing conflicted transactions, this alternative would result in less 

improvement in retail investor execution quality compared to the proposal. 

                                                 

604  See supra Sections V.C.1, V.C.2, and V.C.3 for the Commission’s projections on the 
effect of  broker-dealers’ order handling practices. 

605  See supra Section IV.C.1 and Section IV.C.2 
606  The inefficiencies associated with existing conflicts of interest include, but are not 

limited to, the trade-off between payment for order flow and price improvement for 
equities (See supra Section V.B.3.a.iii.) and the less than fully competitive price 
improvement auction mechanisms for options (See supra Section V.B.3.a.II.b.).361 

 

 Under this alternative, broker-dealers would still qualify for relief under FINRA Rule 

5310.09(c), instead of having to meet the introducing broker requirements to qualify for the 

propose relief under proposed Rule 1101(d).  Broker-dealers that meet the requirements of 

FINRA’s relief but would not have met the requirements of proposed Rule 1101(d) would 

experience lower compliance costs under this alternative because they would not have to develop 

or update their own policies or procedures or adjust their business model to de-conflict from their 

executing broker.607  The costs of the proposal could advantage larger broker-dealers, increase 

barriers to entry for new broker-dealers, and disadvantage smaller broker-dealers, which could 

potentially result in some of them existing the market.608  The lower compliance costs under this 

alternative would increase competition among broker-dealers compared to the proposal by 

lowering barriers to entry for new broker dealers and decreasing the likelihood that smaller 

broker-dealers would exit the market.609  

2. Require Order Execution Quality Disclosure for Other Asset Classes 

 Standardized information on the execution quality available at different market centers 

and for different executing brokers could aid broker-dealers in their best execution reviews.  

However, only market centers executing trades in NMS stocks are required to report 

standardized execution quality statistics under Rule 605.610  This alternative would require 

                                                 

607  See supra Section V.C.1. 
608  See supra Section V.C.3.a).ii for a discussion of the effects of the proposal on 

competition between broker-dealers. 
609  See id.  
610  The Commission also is proposing to amend the order execution quality disclosures 

required by Rule 605.  See Securities Exchange Act Release No. 96494 (Dec. 14, 2022). 



   

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execution quality disclosures from market centers and large broker-dealers in the options and 

fixed income markets.  In addition to execution quality data at the individual security-level, 

similar to Rule 605 data, the execution quality disclosures would include aggregated 

standardized summary reports of key execution quality statistics, which would allow smaller and 

less sophisticated investors to analyze and make comparisons between their own broker-dealers 

and other broker-dealers.  Compared to the proposal, these disclosures may better allow investors 

to evaluate execution quality for their orders within their broker-dealer’s overall executions in a 

given security and facilitate broker-to-broker comparison of order execution beyond equities 

markets.  Although the proposed rule would require each broker-dealer to establish policies and 

procedures with greater specificity, this does not necessarily mean that the order handling 

practices reach the same level of efficiency across the broker-dealers.  It is possible that some 

broker-dealers would handle the customer orders less efficiently than others.  Under the 

alternative, broker-dealers, which engage in less efficient order handling practices may recognize 

the inadequacy when comparing their own execution quality statistics with those disclosed by the 

more efficient broker-dealers, and improve the order handling practices accordingly to attract 

order flow.  Therefore, increased transparency may reduce differences in execution quality 

within specific security-time intervals, particularly in the corporate and municipal bond markets.  

Broker-dealers may be able to incorporate these execution quality statistics into their best 

execution policies and procedures, which could improve their ability to identify market centers 

that offer better execution quality, resulting in potentially greater improvements in order 

                                                 

The Commission encourages commenters to review that proposal to determine whether it 
might affect their comments on this proposing release. 



   

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handling compared to proposal.  This alternative may increase competition among broker-dealers 

and trading centers in asset classes other than NMS stocks compared to the proposal by 

promoting competition based more on the basis of publicly available execution quality and less 

on other inducements to attract more customers/order flow.   

 However, developing these execution quality disclosures may cause market centers and 

large broker-dealers in the options and fixed income markets to incur higher startup costs relative 

to the proposal as market centers would need to develop systems to produce and post such 

reports.  To the extent that certain market centers already have systems or infrastructures in place 

to produce execution quality metrics, they would incur costs to modify the current systems 

and/or the format of the reports in order to comply with the standards set forth in the execution 

quality disclosure requirements.  Additionally, execution quality disclosures for the options and 

fixed income markets may be complex and difficult to produce for a number of reasons.  First, 

the number of individual securities in the options and fixed income markets is significantly larger 

than in the equity markets.  The corporate bond market has approximately 58,000 outstanding 

issues, more than fourteen times the number of NMS listed equities.611  This number is small in 

comparison to the municipal bond market which has approximately one million outstanding 

issues.612  Individual equities can have hundreds of individual outstanding options contract 

identifiers.  Second, fixed income and options securities have defined maturities, which might be 

shorter than a disclosure interval (i.e., a contract with a week expiration relative to a monthly 

                                                 

611  See O’Hara and Zhou, supra note 469. 
612  See Muni Facts, Municipal Securities Rulemaking Board, available at 

https://www.msrb.org/News-and-Events/Muni-Facts. 



   

364 

 

reporting period).  This security-level inconsistency may present complications in evaluating 

time series changes in execution quality.  Finally, a broad lack of pre-trade information in fixed 

income markets make execution quality statistics such as effective-quoted spread ratios difficult, 

if not impossible, to calculate for many securities. 

3. Utilize FINRA and MSRB Approach to Introducing Broker 

The Commission could alternatively propose to remove the requirements for introducing 

and executing brokers related to PFOF, carrying firm status, and affiliation.  This definition 

would more closely align with FINRA and MSRB approach to introducing brokers.  FINRA 

Rule 5310.09(c) applies to a member that routes its order flow to another member that has agreed 

to handle that order flow as agent for the customer (e.g., a clearing firm or other executing 

broker-dealer), whereas the proposal would additionally require the firm not to be a carrying 

firm, accept PFOF from an executing broker, or route customer orders to an affiliated executing 

broker.  Under this alternative, it is likely that most brokers that qualify under FINRA Rule 

5310(c) would qualify as introducing brokers under proposed Rule 1101(d).  By categorizing 

more broker-dealers as “introducing brokers,” the overall compliance cost carried by the market 

would be lower as compared to the proposed rule.  This alternative would likely cause fewer 

small broker-dealers, which currently qualify for relief under FINRA Rule 5310.09(c) and 

MSRB Rule G-18.08(b) and wish to remain conflicted or still carry customer accounts, to change 

business models to comply with the alternative rule.613  

The brokers who benefit under this alternative are those who currently qualify for relief 

under FINRA Rule 5310.09(c) and MSRB Rule G-18.08(b) but fail at least one of the following 

                                                 

613  See supra Section V.C.1. 



   

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criteria include in proposed Rule 1101(d): (i) does not carry customer accounts and does not hold 

customer funds or securities, (ii) has entered into an arrangement with an unaffiliated broker or 

dealer that has agreed to handle and execute on an agency basis the introducing broker’s 

customer orders (“executing broker”), and (iii) has not accepted any monetary payment, service, 

property, or other benefit that results in remuneration, compensation, or consideration from the 

executing broker in return for the routing of the introducing broker’s customer orders to the 

executing broker.  Thus, many current broker-dealers that qualify for relief under the FINRA and 

MSRB rules, and to some extent their executing brokers, would have lower costs of compliance 

since there would be no need for those broker-dealers to change their business models.  Also, this 

alternative may lower barriers to entry for some potential introducing brokers.  However, under 

this alternative, the benefits of the proposal would also be diminished.  With more broker-dealers 

meeting the proposal’s definition of introducing broker, the benefits compared to the proposal 

would be lower.  Specifically under this alternative, the Commission preliminarily believes that 

instead of changing their business models to stop being conflicted, introducing brokers and their 

executing brokers would be more likely to engage in conflicted transactions, and more 

introducing brokers would receive PFOF.  Therefore, the execution quality benefits would be 

lower since the incentive created by the PFOF would persist, potentially leading to less efficient 

order routing which may benefit broker-dealers at the expense of retail customers. 

4. Ban or Restrict Off-Exchange PFOF 

Rather than requiring heightened best execution standards for transactions involving 

PFOF, alternatively the Commission could ban or restrict off-exchange PFOF in the equity and 

options markets.  Under this alternative, registered exchanges would still be allowed to pay 

rebates.   



   

366 

 

Compared to the proposal, this alternative may further reduce conflicts of interest within 

and improve order handling practices by retail broker-dealers.  A 2016 study sponsored by CFA 

Institute examined changes in equity market execution quality following the Financial Services 

Authority (FSA) 2012 guidance banning PFOF in the United Kingdom.614  The study describes 

internalization under PFOF as a scenario that can increase the probability of conflicted equity 

and options transactions, particularly for retail investors, in the United Kingdom.  The study 

finds that over the time period from 2010 to 2014, the proportion of retail-sized trades executing 

at the best quoted price increased from around 65% to more than 90%.  The authors claim these 

findings suggest that the integrity of the order book improved.  

Alternatively, rather than an outright ban on PFOF, the Commission could impose 

specific restrictions on PFOF that could allow retail broker-dealers to pass through payments to 

end customers in cases where it would permit best execution.  For example, a retail broker-dealer 

may consider two order execution venues with different executable prices: the first venue has a 

more favorable price, and the second venue provides PFOF to the retail broker-dealer.  If the 

difference in price between the two venues is smaller than the PFOF for the order in question, the 

retail-broker could return to the customer the portion of PFOF, which is greater than the venue 

price difference. 

A ban or restriction on PFOF would increase the likelihood of higher commissions for 

retail investors or an increase in the cost of other services offered by retail broker-dealers 

                                                 

614  See Sviatoslav Rosov, Payment for Order Flow in the United Kingdom: Internalisation 
[sic], Retail Trading, Trade-Through Protection, and Implications for Market Structure, 
CFA Institute (2016), available at https://www.cfainstitute.org/en/advocacy/policy-
positions/payment-for-order-flow-in-the-united-kingdom. 

https://www.cfainstitute.org/en/advocacy/policy-positions/payment-for-order-flow-in-the-united-kingdom
https://www.cfainstitute.org/en/advocacy/policy-positions/payment-for-order-flow-in-the-united-kingdom


   

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compared to the proposal.  It may also further reduce competition between broker-dealers 

compared to the proposal.  Larger broker-dealers with more diversified business models may be 

more likely to expand their market share and smaller broker-dealers who are more dependent on 

PFOF revenue streams may be more likely to exit the market.  

 

5. Require Broker-Dealers to Utilize Best Execution Committees 

The Commission considered requiring each broker-dealer to maintain a best execution 

committee to regularly review the broker-dealer’s best execution policies, procedures and the 

results of its efforts to secure best execution for its customers.  

 Requiring such a committee and defining its membership might improve execution 

quality by ensuring sufficient expertise is recruited to establish and monitor the broker-dealer’s 

best execution efforts.  Furthermore, requiring such a committee might increase executive 

attention to best execution, potentially improving execution quality for the broker-dealer’s 

customers. 

 Requiring such a committee and defining its membership would entail certain costs in 

addition to those resulting from the proposed rules.  First, if the Commission were to define the 

membership of the committee, it is likely that individual broker-dealers’ organizational structures 

would vary in ways that would make a defined membership structure a poor fit because of, for 

instance, a single employee performing multiple roles, or individual roles handled by groups 

rather than a single individual.  In addition, broker-dealers are diverse in their business plans and 

operations and a role that might be considered critical at one broker-dealer (such as managing 

fixed income executing brokers in thinly traded bonds) might be inapplicable at another broker-

dealer that does not trade in these instruments.   



   

368 

 

If the Commission were to require the committee and not define its membership, broker-

dealers might assign to the committee less senior staff or staff whose roles are not germane to 

achieving best execution for customer orders, significantly limiting the benefits of establishing 

such a committee.  Furthermore, based on the its experience, the Commission believes that 

broker-dealers, particularly large broker-dealers that are more likely to continue to engage in 

conflicted transactions if the proposed rules are adopted, may have such a committee already 

established, further limiting the potential benefits of such a provision. 

6. Require Order-by-Order Documentation for Conflicted or All 
Transactions 

 

The Commission considered requiring each broker-dealer to document on an order-by-

order basis, for conflicted or all transactions, the data that it considered as it handled the order.  

Such a requirement might offer two benefits beyond the benefits of the proposed rules.  First, it 

might improve the quality of the broker-dealer’s regular review of its execution practices 

compared to the proposed rules.  Because the broker-dealer would analyze orders on a case-by-

case basis, it might identify routing practices that could be changed to improve customer order 

execution quality.  Second, it might improve regulators’ ability to oversee the broker-dealer’s 

efforts to provide best execution to its customers relative to the proposed rules as such records 

would be available to regulators during examinations of the broker-dealer or upon request.   

 The Commission preliminarily believes that such a requirement would offer greater 

potential benefits for conflicted transactions because broker-dealers engaging in such 

transactions have greater incentives to route orders in a manner that might not result in the best 

execution for customers. 



   

369 

 

 Based on its experience, the Commission believes that some broker-dealers, particularly 

the largest broker-dealers that are likely to continue to engage in conflicted transactions if the 

proposed rules are adopted, already maintain this type of documentation for both internal review 

and operational purposes.  Nevertheless, the requirement would be costly.  Broker-dealers that do 

not already retain this data likely have chosen not to do so because the data are not operationally 

valuable to them for business purposes, and they believe that they are satisfying their best-

execution obligations based on other data that they have available.  For these broker-dealers, the 

requirement could impose considerable costs.  They would need to alter information technology 

systems to capture this data, including contemporaneous pricing data and routing records, some 

of which (such as prices offered in response to a RFQ and much information related to fixed 

income and digital crypto assets) is not incorporated into other regulatory data sources such as 

CAT and thus might be stored on systems not integrated with other order routing systems, or 

systems that capture regulatory data.  Processing this data might be computationally demanding, 

particularly for options, that have very high quotation traffic.  Furthermore, creating and 

maintaining software to produce this documentation would require significant effort by highly 

skilled programmers, which would further increase the costs associated with such a requirement.  

As discussed previously,615 the Commission preliminarily believes that broker-dealers that elect 

to refrain from conflicted transactions if the proposed rules are adopted are more likely to be 

smaller broker-dealers and these costs, many of which are fixed, are more likely to result in the 

broker-dealer changing its business model or exiting the market, while the aggregate benefits to 

                                                 

615  See Section V.C.2.ii, supra. 



   

370 

 

investors of such a requirement for smaller broker-dealers is likely to be smaller than for larger 

broker-dealers that handle more customer orders. 

7.  Staggered Compliance Dates 

The Commission considered an alternative approach where smaller broker-dealers would 

be given more time to comply with the proposed rules.  Having longer to comply might ease 

implementation for smaller broker-dealers that are less likely to have specialized staff to conduct 

tasks required for compliance.  However, the later compliance date for smaller broker-dealers 

would also delay the realization of the proposed rules’ benefits for investors.   

The Commission preliminarily believes that the cost savings of the alternative could be 

small.  Specifically, under the proposed rules, smaller broker-dealers would likely qualify as 

introducing brokers and would likely de-conflict rather than continue to engage in conflicted 

transactions and incur the additional costs associated with the rule requirements that introducing 

brokers are exempt from under Rule 1101(d).616  Consequently, the Commission preliminarily 

believes smaller broker-dealers would have fewer requirements to implement under the proposal, 

mitigating the burden of implementation relative to larger broker-dealers.  In addition, the 

Commission believes that smaller broker-dealers would likely engage external parties for review 

of proposed policies and procedures and for assistance in conducting annual reviews; this 

reliance on external resources for implementation activities would likely mitigate the burden of 

                                                 

616  See supra section V.C.2.a for discussion of carrying and conflicted broker-dealer costs. 



   

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implementation on current staff.617  These mitigations would limit the potential cost savings of 

delaying implementation for smaller broker-dealers. 

E. Request for Comments  

The Commission is sensitive to the potential economic effects, including costs and 

benefits, of the proposed rule.  The Commission has identified certain costs and benefits 

associated with the proposal and requests comment on all aspects of its preliminary economic 

analysis, including with respect to the specific questions below.  The Commission encourages 

commenters to identify, discuss, analyze, and supply relevant data, information, or statistics 

regarding any such costs or benefits. In addition to our general request for comments on the 

economic analysis associated with the proposed rules and proposed amendments, we request 

specific comment on certain aspects of the proposal: 

159. What are commenters’ views of the Commission’s economic rationale for the 

proposed rule? 

160. What are commenters’ views of the Commission’s characterization of the relevant 

baseline, against which it considered the effects of the proposal?  

161. What are commenters’ views of the Commission’s characterization of the current 

legal and regulatory framework?  

162. What are commenters’ views of the Commission’s characterization of the 

conflicts of interest in order handling and a need for heightened best execution 

requirements with respect to conflicted transactions? 

                                                 

617  See supra section V.C.2.a).ii for the discussion about the cost associated with small 
broker-dealers utilizing external sources.  



   

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163. What are commenters’ views of the Commission’s characterization of the 

conflicts of interest in order handling with respect to PFOF?  

164. What are commenters’ views of the Commission’s characterization of the 

conflicts of interest in order handling with respect to principal trading? 

165. What are commenters’ views of the Commission’s characterization of order 

handling and execution? 

166. What are commenters’ views of the Commission’s characterization of retail 

customer order handling and execution for NMS stocks? 

167. What are commenters’ views of the Commission’s characterization of retail 

customer order handling and execution for listed options?  Do commenters believe that 

the majority of retail orders are routed to the wholesalers in exchange of payment for 

order flow by the retail brokers?  Do commenters believe whether there is a trade-off 

between price improvement received for those retail orders and payment for order flow? 

168. What are commenters’ views of the Commission’s characterization of retail 

customer order handling and execution for fixed income securities?  The Commission 

requests information on the number of trading venues (e.g., ATSs, RFQ platforms, 

broker’s broker platforms, single platforms), to which broker-dealers currently maintain 

access, for the purpose of executing and exposing retail customer orders.  The 

Commission requests information with respect to how broadly broker-dealers expose 

retail customer orders.  The Commission requests information with respect to how many 

executing brokers, to which broker-dealers outsource their fixed income securities trading 

services.  The Commission requests information on what broker-dealers currently 

document (e.g., efforts to apply its best execution policies and procedures for conflicted 



   

373 

 

transactions, the basis and information relied on for its determinations that such 

conflicted transactions would comply with the best execution standard, identifying the 

markets checked, internal quotes, external quotes, limit orders on trading venues) with 

respect to retail customer orders. 

169. The Commission requests comments on retail customer order handling and 

execution for non-NMS stock equity securities.  Please provide any relevant details and 

data on retail customer order handling and execution of non-NMS stock equity securities 

for assessing the effects of the proposal. 

170. What are commenters’ views of the Commission’s characterization of retail 

customer order handling and execution for crypto asset securities?  

171. What are commenters’ views of the Commission’s characterization of best 

execution review process? 

172. What are commenters’ views of the Commission’s characterization of execution 

quality review? 

173. What are commenters’ views of the Commission’s characterization of best 

execution committees? 

174. What are commenters’ views of the Commission’s characterization of the 

competition in the market for broker-dealer services? 

175. What are commenters’ views of the Commission’s characterization of the 

competition in the market for NMS stock trading services? 

176. What are commenters’ views of the Commission’s characterization of the 

competition in the market for listed options trading services?  Do commenters believe 



   

374 

 

that the current features of price improvement auctions are favoring the wholesalers that 

bring the order flow and therefore not competitive?  

177. What are commenters’ views of the Commission’s characterization of the 

competition in the market for fixed income securities trading services? 

178. What are commenters’ views of the Commission’s characterization of the 

competition in the market for corporate debt securities trading services? 

179. What are commenters’ views of the Commission’s characterization of the 

competition in the market for municipal securities trading services? 

180. What are commenters’ views of the Commission’s characterization of the 

competition in the market for U.S. Treasury securities trading services? 

181. What are commenters’ views of the Commission’s characterization of the 

competition in the market for market access?  

182. What are commenters’ views of the Commission’s assessment of the benefits of 

the proposal? 

183. To what extent do commenters believe that broker-dealers will make changes to 

their order handling procedures due to regulatory risk?  What kind of changes might they 

make?  Does the proposal adequately reflect the costs they would bear?  Please provide 

estimates of the costs if possible. 

184. To what extent do commenters believe conflicted broker-dealers will add 

additional routing destinations to expose orders to venues beyond those identified as 

material potential liquidity sources for non-conflicted transactions? 

185. Are there some markets, in which finding venues beyond those identified as 

material potential liquidity sources for non-conflicted transactions difficult?  Please 



   

375 

 

explain.  To what extent will seeking such additional sources of liquidity be cost 

efficient? 

186. What are commenters’ views on the Commission’s discussion of ATS 

connectivity charges? 

187. What are commenters’ views of the Commission’s assessment of the effects 

stemming from changes in order handling procedures? 

188. What are commenters’ views on the extent to which investor execution quality 

will change under the proposal?  Please explain. 

189. To what extent will carrying broker-dealers face additional challenges and bear 

additional costs to comply with the proposal beyond those already discussed in the 

Economic Analysis?  Will the additional restrictions on carrying broker-dealers improve 

investor execution quality? 

190. To what extent do broker-dealers that would be categorized as “conflicted” under 

the proposal already comply with the heightened standards described by the proposal?  

Will these broker-dealers face additional challenges and bear additional costs complying 

with the proposal beyond those already discussed in the Economic Analysis?  Please 

explain. 

191. Do commenters agree with the Commission’s preliminary belief that broker-

dealers that receive relatively small payments for order flow or other incentives that 

would categorize them as conflicted, may choose to stop receiving those incentives to 

comply with the proposal?  Does the Economic Analysis adequately reflect the cost of the 

proposal to these broker-dealers?  Is the Commission’s assumption that broker-dealers 



   

376 

 

with less than $100MM in total assets are likely to de-conflict to avoid the heightened 

standards associated with conflicted transactions reasonable?   

192. Are some broker-dealers likely to pass exchange rebates through to customers in 

order to avoid being conflicted under the proposal?  Are there other ways for broker-

dealers to deal with these rebates that would be less costly to implement?  What costs 

would broker-dealers bear to pass exchange rebates through to their customers? 

193. When a broker-dealer makes changes to its order routing in response to execution 

quality analysis, what costs does it incur? Are the Commission’s estimates of these costs 

reasonable? 

194. Do commenters believe that broker-dealers that currently pay to receive order 

flow may assist their broker-dealer clients in complying with the proposal by providing 

additional information on their policies and procedures to provide best execution?  What 

information would they need to provide and how proprietary is this information? 

195. Do commenters believe that broker-dealers that currently pay to receive order 

flow are significant contributors to the market for liquidity provision in thinly traded 

securities?  Would the proposal disrupt liquidity provision to securities that are thinly 

traded?  In which types of securities would these effects be most pronounced? 

196. Do commenters believe that the proposal is likely to increase the prevalence of 

commissions in retail trading?  In which asset classes would such changes be most likely? 

197. What are commenters’ views of the Commission’s assessment of the effects 

stemming from changes in order handling procedures for NMS stocks? 

198. What are commenters’ views of the Commission’s assessment of the effects 

stemming from changes in order handling procedures for listed options?  Do commenters 



   

377 

 

believe that more retail orders would be routed to price improvement auctions for 

execution?  Do commenters believe that more retail orders would be routed to the 

exchanges that offer price improvement order types on the limit order books? 

199. What are commenters’ views of the Commission’s assessment of the effects 

stemming from changes in order handling procedures for on-the-run U.S. Treasury 

securities? 

200. What are commenters’ views of the Commission’s assessment of the effects 

stemming from changes in order handling procedures for fixed income securities 

(excluding on-the-run U.S. Treasury securities)? 

201. With respect to fixed income securities trading, do commenters believe that the 

proposal (e.g., the documentation requirement with respect to conflicted transactions) 

would enhance internal review (e.g., internal review by best execution committee) of 

execution quality? 

202. With respect to fixed income securities trading, do commenters believe that the 

proposal would improve the execution quality of retail customer trades by executing 

brokers?  Please explain. 

203. The Commission requests comments on the effects stemming from changes in 

order handling procedures for non-NMS stock equity securities. 

204. What are commenters’ views of the Commission’s description of the non-NMS 

stock equity market?  Please highlight any omitted or misunderstood elements on this 

market. 

205. Do commenters agree with the Commission’s characterization of internalization 

in the non-NMS stock equities market? 



   

378 

 

206. Do commenters agree with the assertion that the non-NMS stock equity market 

can offer a high degree of transparency in liquid securities?  Please list any sources of 

pre-trade and post-trade information used when transacting in this market. 

207. What are commenters’ views on the necessity to connect to any given ATS when  

transacting in non-NMS stock equities?  Please explain the rationale for connecting to an 

additional ATS in this market.  If there are other non-ATS sources of liquidity, please 

describe them. 

208. Do commenters believe the effects of the proposed rule on the non-NMS equity 

securities market will cause any brokers (introducing or otherwise) to reduce 

participation in or to exit this market?  Please describe the rationale for any response. 

209. Do commenters believe the requirements of this rule will have effects on the 

liquidity in the market for non-NMS stock equities?  Please explain. 

210. Do commenters believe that execution quality can be accurately measured in the 

non-NMS equity securities market?  If so, please describe methods currently used to 

achieve execution quality analysis. 

211. What are commenters’ views of the Commission’s assessment of the effects 

stemming from changes in order handling procedures for crypto asset securities? 

212. The Commission requests more information regarding the proportion of crypto 

asset security trading that is facilitated by introducing brokers. 

213. The Commission requests more information regarding the level and variation of 

payment for order flow (i.e., transaction rebates) rates in crypto asset security markets.  

214. The Commission requests more information regarding the frequency of affiliated 

ATS routing in crypto asset security markets.  



   

379 

 

215. The Commission requests more information regarding the frequency of principal 

trading in crypto asset security markets.  

216. What are commenters’ views of the Commission’s assessment of the costs of the 

proposal?  Please provide as many quantitative estimates to support your position on 

costs as possible. 

217. Does the Economic Analysis account for all compliance costs?  If not, what other 

compliance costs would market participants incur?  Please provide as many quantitative 

estimates to support your position on costs as possible. 

218. With respect to fixed income securities trading, do commenters believe that 

broker-dealers would alter business practices to execute self-directed trades of retail 

customer on an agency basis rather than riskless principal basis to avoid being subject to 

the proposed requirements for conflicted transactions?  If so, please provide quantitative 

cost estimates for converting retail self-directed trading business from riskless principal 

based to agency based. 

219. The Commission requests comments on the costs associated with subscribing to a 

fixed income ATS (e.g., subscription fees, connectivity fees, API).  Please provide 

quantitative cost estimates if possible. 

220. What are commenters’ views of the Commission’s assessment of the effects of the 

proposal on efficiency, competition and capital formation?  

221. What are commenters’ views of the Commission’s assessment of the proposal’s 

effects on competition?  

222. What are commenters’ views of the Commission’s assessment of the proposal’s 

effects on the competition in the market for trading services?  



   

380 

 

223. What are commenters’ views of the Commission’s assessment of the proposal’s 

effects on the competition in the market for trading services for NMS stocks?  

224. What are commenters’ views of the Commission’s assessment of the proposal’s 

effects on the competition in the market for trading services for listed options?  In 

particular, would the proposed rule result in the exchanges improving the level of 

competition and efficiency of the price improvement auction mechanisms by offering 

more symmetric fee schedule and allocation model?  Would the proposed rule result in 

certain options exchanges starting to introduce order types to allow liquidity provision at 

the midpoint of the NBBO spread? 

225. What are commenters’ views of the Commission’s assessment of the proposal’s 

effects on the competition in the market for trading services for fixed income securities?  

226. The Commission requests comments on the proposal’s effects on the competition 

in the market for trading services for non-NMS stock equity securities. 

227. What are commenters’ views of the Commission’s assessment of the proposal’s 

effects on the competition in the market for trading services for crypto asset securities? 

228. What are commenters’ views of the Commission’s assessment of the proposal’s 

effects on competition in the market for broker-dealer services?  

229. What are commenters’ views of the Commission’s assessment of the proposal’s 

effects on the competition in the market for broker-dealer services for NMS stocks?  

230. What are commenters’ views of the Commission’s assessment of the proposal’s 

effects on the competition in the market for broker-dealer services for listed options?381 

 

231. What are commenters’ views of the Commission’s assessment of the proposal’s 

effects on the competition in the market for broker-dealer services for fixed income 

securities? 

232. The Commission requests comments on the proposal’s effects on the competition 

in the market for broker-dealer services for non-NMS stock equity securities. 

233. What are commenters’ views of the Commission’s assessment of the proposal’s 

effects on the competition in the market for broker-dealer services for crypto asset 

securities? 

234. What are commenters’ views of the Commission’s assessment of the proposal’s 

effects on the competition in the market for market access?  

235. What are commenters’ views of the Commission’s assessment of the proposal’s 

effects on the competition in the market for market access for NMS stocks?  

236. What are commenters’ views of the Commission’s assessment of the proposal’s 

effects on the competition in the market for market access for listed options?  

237. What are commenters’ views of the Commission’s assessment of the proposal’s 

effects on the competition in the market for market access for fixed income securities?  

238. The Commission requests comments on the proposal’s effects on the competition 

in the market for market access for non-NMS stock equity securities. 

239. What are commenters’ views of the Commission’s assessment on the competition 

in the market for market access for crypto asset securities? 

240. What are commenters’ views on the likelihood of broker-dealers reducing their 

participation in or leaving certain markets due to compliance costs of the proposal?  



   

382 

 

Which markets would be most affected?  Are there particular groups of investors that 

may be underserved by these markets if the proposal is adopted? 

241. What are commenters’ views of the economic effects on the market structure or 

order handling practices in the markets for securities based swaps, asset-backed 

securities, and repurchase and reverse repurchase agreements?  

242. What are commenters’ views of the Commission’s assessment of the effects of the 

proposal on efficiency?  

243. What are commenters’ views of the Commission’s assessment of the effects of the 

proposal on capital formation?  

244. What are commenters’ views of the Commission’s assessment of the effects of an 

alternative to adopt FINRA Rule 5310 and MSRB Rule G-18 best execution rules?  

245. What are commenters’ views of the Commission’s assessment of the effects of an 

alternative to require order execution quality disclosure for other asset classes?  

246. What are commenters’ views of the Commission’s assessment of the effects of an 

alternative to utilize FINRA’s and MSRB’s definition of introducing brokers?  

247. What are commenters’ views of the Commission’s assessment of the effects of an 

alternative to ban or restrict off-exchange PFOF?  

248. Are there any additional reasonable alternatives that the Commission should 

consider?  If so, please discuss that alternative and provide the benefits and costs of that 

alternative relative to the baseline and to the proposal. 

VI. Paperwork Reduction Act 



   

383 

 

Certain provisions of proposed Rules 1101 and 1102, as well as proposed Rule 17a-

4(b)(17), contain “collection of information requirements” within the meaning of the Paperwork 

Reduction Act of 1995 (“PRA”).618  The Commission is submitting these collections of 

information to the Office of Management and Budget (“OMB”) for review in accordance with 44 

U.S.C. 3507(d) and 5 CFR 1320.11.  The titles for these collections of information are:  (1) 

“Regulation Best Execution”; and (2) Rule 17a-4—Records to be Preserved by Certain Exchange 

Members, Brokers and Dealers (OMB control number 3235-0279).619  An agency may not 

conduct or sponsor, and a person is not required to respond to, a collection of information unless 

the agency displays a currently valid control number. 

A. Summary of Collection of Information 

Proposed Rules 1101 and 1102, as well as proposed Rule 17a-4(b)(17), would include a 

collection of information within the meaning of the PRA for broker-dealers, as described below 

in this section VI.A.  Further, the proposed Rule 17a-4(b)(17) would impose new record 

retention obligations on broker-dealers subject to Regulation Best Execution. 

1. Required Policies and Procedures and Related Obligations 

As detailed above,620 proposed Rule 1101 would require that a broker-dealer that engages 

in any transaction for or with a customer or a customer of another broker-dealer establish, 

maintain, and enforce written policies and procedures reasonably designed to comply with the 

proposed best execution standard.  These policies and procedures would be required to address:  

                                                 

618  44 U.S.C. 3501 et seq. 
619  See 17 CFR 240.17a-4.  The proposed amendment to Rule 17a-4(b)(17) would amend the 

existing PRA for Rule 17a-4. 
620  See supra sections IV.B – IV.E. 



   

384 

 

(1) how a broker-dealer will comply with the best execution standard; (2) how the broker-dealer 

will determine the best market and make routing or execution decisions for customer orders; (3) 

additional considerations applicable to conflicted transactions with retail customers; and (4) to 

the extent applicable, the obligations of introducing brokers that meet the definition in proposed 

Rule 1101(d).   

In particular, these policies and procedures must address how the broker-dealer will 

comply with the best execution standard, including by obtaining and assessing reasonably 

accessible information, including information about price, volume, and execution quality, 

concerning the markets trading the relevant securities; identifying markets that may be 

reasonably likely to provide the most favorable prices for customer orders; and incorporating 

these material potential liquidity sources into the broker-dealer’s order handling practices and 

ensuring that the broker-dealer can efficiently access each such material potential liquidity 

source.621  The policies and procedures must also address how the broker-dealer will determine 

the best market and make routing or execution decisions for customer orders, including by:  (1) 

assessing reasonably accessible and timely information with respect to the best displayed prices, 

opportunities for price improvement, including midpoint executions, and order exposure 

opportunities that may result in the most favorable price; (2) assessing the attributes of customer 

orders and considering the trading characteristics of the security, the size of the order, the 

likelihood of execution, the accessibility of the market, and any customer instructions in 

selecting the market most likely to provide the most favorable price; and (3) in determining the 

                                                 

621  See proposed Rule 1101(a)(1). 



   

385 

 

number and sequencing of markets to be assessed, reasonably balancing the likelihood of 

obtaining a better price with the risk that delay could result in a worse price.622   

For conflicted transactions, as described in more detail above,623 proposed Rule 1101(b) 

would require written policies and procedures to address additional considerations.624  The 

broker-dealer’s policies and procedures would need to additionally address:  (1) how the broker-

dealer will obtain and assess information beyond that required by proposed Rule 1101(a)(1)(i), 

including additional information about price, volume, and execution quality, in identifying a 

broader range of markets beyond those identified as material potential liquidity sources and (2) 

how the broker-dealer will evaluate a broader range of markets, beyond those identified as 

material potential liquidity sources, that might provide the most favorable price for customer 

orders, including a broader range of order exposure opportunities and markets that may be 

smaller or less accessible than those identified as material potential liquidity sources.  The 

broker-dealer must additionally document, in accordance with written procedures, its compliance 

with the best execution standard for conflicted transactions, including all efforts taken to enforce 

the policies and procedures required by proposed Rule 1102(b) for conflicted transactions, and 

the basis and information relied on for its determination that such conflicted transactions would 

comply with the best execution standard.  The broker-dealer would also have to document any 

arrangement, whether written or oral, concerning payment for order flow, including the parties to 

                                                 

622  See proposed Rule 1101(a)(2). 
623  See supra section IV.C.  
624  See proposed Rule 1101(b). 



   

386 

 

the arrangement, all qualitative and quantitative terms concerning the arrangement, and the date 

and terms of any changes to the arrangement. 

A broker-dealer would also have to, no less frequently than quarterly, review the 

execution quality of its transactions for or with customers or customers of another broker-dealer 

and how such execution quality compares with the execution quality the broker-dealer might 

have obtained from other markets, revise its best execution policies and procedures, including its 

order handling practices, accordingly, and document the results of this review.625 

To the extent that it has an arrangement with an executing broker for the handling of is 

customer orders, an introducing broker, as defined in proposed Rule 1101(d), would not have to 

comply with all of the requirements of proposed Rule 1101.  Instead, as described above,626 

proposed Rule 1101(d) would provide that an introducing broker that routes customer orders to 

an executing broker would not need to separately comply with proposed Rules 1101(a), (b), and 

(c), so long as the introducing broker establishes, maintains, and enforces policies and 

procedures that require the introducing broker to regularly review the execution quality obtained 

from its executing broker, compare that execution quality with the execution quality it might 

have obtained from other executing brokers, and revise its order handling practices, accordingly.  

An introducing broker would additionally be required to document the results of its review. 

Finally, any broker-dealer subject to proposed Rule 1101 would be required under 

proposed Rule 17a-4(b)(17) to preserve the records made under proposed Rule 1101.627  

                                                 

625  See proposed Rule 1101(c). 
626  See supra section IV.E.  
627  Any written policies and procedures developed pursuant to proposed Rule 1101 would be 

required to be preserved pursuant to existing Rule 17a-4(e)(7). 



   

387 

 

Accordingly, a broker-dealer would be required to preserve those records for a period of not less 

than three years, the first two years in an easily accessible place.   

2. Annual Report  

As detailed above,628 proposed Rule 1102 would require that a broker-dealer that effects 

any transaction for or with a customer or a customer of another broker-dealer, no less frequently 

than annually, review and assess the design and overall effectiveness of its best execution 

policies and procedures, including its order handling practices.  The broker-dealer must prepare a 

written report detailing the results of such review and assessment, including a description of all 

deficiencies found and any plan to address deficiencies, and the report must be presented to the 

broker-dealer’s board of directors (or equivalent governing body).  The broker-dealer would be 

required to preserve a copy of each such report, and the documentation for each such review and 

assessment, pursuant to proposed Rule 17a-4(b)(17).629 

B. Proposed Use of Information  

Generally, the collections of information required under proposed Rules 1101 and 1102, 

as described below in this section VI.B, would enable a broker-dealer to comply with its 

obligations under proposed Regulation Best Execution, allow the broker-dealer to identify any 

inadequacies and make any revisions to its policies and procedures, including order handling 

practices, as appropriate to ensure the broker-dealer’s continued effective compliance with the 

                                                 

628  See supra section IV.F. 
629  Any written procedures developed pursuant to proposed Rule 1102 would be required to 

be preserved pursuant to existing Rule 17a-4(e)(7). 



   

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best execution standard, and create documentation that the Commission and SROs could use for 

purposes of examinations and investigations. 

Records retained in accordance with proposed Rule 17a-4(b)(17) would assist a broker-

dealer in supervising and assessing internal compliance with Regulation Best Execution and 

assist the Commission and SROs in connection with examinations and investigations. 

1. Required Policies and Procedures and Related Obligations 

The collection of information pursuant to proposed Rule 1101 would require written 

documentation of a broker-dealer’s policies and procedures reasonably designed to comply with 

the best execution standard in proposed Rule 1100.  Generally, these policies and procedures 

would provide a documented process for handling customer orders that a broker-dealer would 

use to ensure its ongoing compliance with the best execution standard.  In addition, these written 

policies and procedures would assist the Commission and SROs in conducting examinations and 

investigations for compliance with the proposed rules, including the proposed best execution 

standard.  Any ongoing collections of information pursuant to proposed Rule 1101, including a 

conflicted broker-dealer’s documentation of its best execution determinations and its payment 

for order flow arrangements in accordance with written procedures, a broker-dealer’s 

documentation of the results of its execution quality reviews, and an introducing broker’s 

documentation of its executing broker execution quality reviews, would assist the broker-dealer 

in its ongoing efforts to transact for or with customers consistent with its best execution policies 

and procedures, and in turn ensure compliance with the best execution standard.  Ongoing 

collections of information would also assist the Commission and SROs in examinations and 

investigations by ensuring that appropriate documentation is available to determine whether a 



   

389 

 

broker-dealer is adhering to its best execution policies and procedures and otherwise in 

compliance with all applicable requirements of proposed Regulation Best Execution. 

2. Annual Report 

The collection of information pursuant to proposed Rule 1102 would also provide 

appropriate documentation of a broker-dealer’s continued efforts to comply with the best 

execution standard and would help to ensure that the broker-dealer’s best execution policies and 

procedures remain effective.  In particular, the requirement of proposed Rule 1102 to document 

the results of a broker-dealer’s annual review of its best execution policies and procedures would 

enable the broker-dealer, including its governing body, to identify any inadequacies and make 

any changes to the broker-dealer’s best execution policies and procedures, including its order 

handling practices, as appropriate in order to further its compliance with the proposed rules.  The 

collection of information pursuant to proposed Rule 1102 would also create documentation of 

such compliance that the Commission and SROs could use for purposes of investigations and 

examinations.   

C. Respondents 

The respondents to proposed Rules 1101, 1102, and 17a-4(b)(17) would be broker-

dealers that engage in securities transactions for or with a customer, or a customer of another 

broker-dealer.  Based on FOCUS Report data,630 the Commission estimates that, as of June 30, 

                                                 

630  FOCUS Reports, or “Financial and Operational Combined Uniform Single” Reports, are 
monthly, quarterly, and annual reports that broker-dealers are generally required to file 
with the Commission and/or SROs pursuant to Exchange Act Rule 17a-5.  See 17 CFR 
240.17a-5. 



   

390 

 

2022, there were 3,498 broker-dealers.631  The Commission preliminarily believes that nearly all 

of these broker-dealers would engage in customer transactions and be subject to these rules.  

Accordingly, for purposes of the PRA, the Commission estimates 3,498 respondents.  The 

Commission requests comment on the accuracy of these estimated figures. 

D. Total Initial and Annual Reporting and Recordkeeping Burdens 

1. Required Policies and Procedures and Related Obligations 

a) Initial Costs and Burdens 

The Commission preliminarily believes that broker-dealers generally already have 

policies and procedures in place to achieve compliance with the best execution rules of FINRA 

and the MSRB, as applicable, although these policies and procedures differ based on each 

broker-dealer’s business model.  For purposes of the PRA, the Commission must consider the 

burden on respondents to bring their best execution policies and procedures into compliance with 

the proposed rule, which in certain cases would impose additional and more specific obligations.  

The extent to which a respondent would be burdened by the proposed collection of information 

under the proposed rule would depend on the best execution policies and procedures that have 

already been established by a respondent as well as the respondent’s business model.  To the 

extent broker-dealers’ existing best execution policies and procedures already substantially 

address the requirements of proposed Rule 1101, these broker-dealers likely would only require 

limited updates to their policies and procedures to meet the additional obligations specified in the 

proposed rule.  To initially comply with this obligation, the Commission preliminarily believes 

that broker-dealers would employ a combination of in-house and outside legal and compliance 

                                                 

631  The data are obtained from FOCUS Reports, Part II filed for the second quarter of 2022.  



   

391 

 

counsel to update existing policies and procedures.  The Commission assumes that, for purposes 

of this analysis, the associated costs and burdens would differ between small and large broker-

dealers, as large broker-dealers generally offer more products and services and are more likely to 

engage in conflicted transactions, and therefore would need to develop a more extensive set of 

policies and procedures.  Based on FOCUS Report data, the Commission estimates that, as of 

June 30, 2022, approximately 761 broker-dealers are small entities under the Regulatory 

Flexibility Act.632  Therefore, the Commission estimates that 2,737 broker-dealers would qualify 

as large broker-dealers for purposes of this analysis.633   

Although the exact nature and extent of the policies and procedures that a broker-dealer 

would be required to establish likely would vary depending upon the business model of the 

broker-dealer,634 the Commission broadly estimates that a large broker-dealer, which the 

Commission assumes is more likely to need to satisfy the heightened requirements applicable to 

conflicted transactions, would incur a one-time average internal burden of 85 hours for in-house 

legal and in-house compliance counsel to update existing policies and procedures to comply with 

proposed Rule 1101.635  The Commission additionally estimates a one-time burden of 12 hours 

                                                 

632  See infra note 691 (describing the definition of the term “small entity”). 
633  This calculation was made as follows: (3,498 total broker-dealers) – (761 small broker-

dealers) = 2,737 large broker-dealers. 
634  For purposes of the PRA, the burden to establish policies and procedures means those a 

respondent is required to establish pursuant to proposed Rules 1101(a), (b), and (d). 
635  This estimate would be broken down as follows: 67 hours for in-house legal counsel + 18 

hours for in-house compliance counsel to update existing policies and procedures = 85 
burden hours. 



   

392 

 

for a general counsel at a large broker-dealer and 12 hours for a Chief Compliance Officer to 

review and approve the updated policies and procedures, for a total of 109 burden hours.636  In 

addition, the Commission estimates a cost of approximately $7,936 for outside counsel to review 

the updated policies and procedures on behalf of a large broker-dealer.637  The Commission 

therefore estimates the aggregate burden for large broker-dealers to be 298,333 burden hours,638 

and the aggregate cost for large broker-dealers to be approximately $21.72 million.639 

In contrast, the Commission preliminarily believes small broker-dealers would primarily 

rely on outside counsel to update existing policies and procedures, as small broker-dealers 

generally have fewer in-house legal and compliance personnel.  Moreover, the Commission 

believes small broker-dealers would be less likely to engage in conflicted transactions subject to 

the additional procedural obligations of proposed Rule 1101(b), and would be more likely to 

qualify as introducing brokers and be exempt from complying with proposed Rule 1101(a), (b), 

and (c), and therefore would need to develop a less extensive set of policies and procedures.  

                                                 

636  This estimate is based on the following calculation: (85 hours of review for in-house legal 
and in-house compliance counsel) + (12 hours of review for general counsel) + (12 hours 
of review for Chief Compliance Officer) = 109 burden hours. 

637  The Commission’s estimates of the relevant wage rates for outside legal services of 
$496/hour take into account staff experience, a variety of sources including general 
information websites, and adjustments for inflation.  This cost estimate is therefore based 
on the following calculation: (16 hours of review) x ($496/hour for outside counsel 
services) = $7,936 in outside counsel costs. 

638  This estimate is based on the following calculation: (109 burden hours of review per large 
broker-dealer) x (2,737 large broker-dealers) = 298,333 aggregate burden hours. 

639  This estimate is based on the following calculation: ($7,936 for outside counsel costs per 
large broker-dealer) x (2,737 large broker-dealers) = $21.72 million in outside counsel 
costs. 



   

393 

 

Accordingly, the Commission estimates that only 65 hours of outside legal counsel services 

would be required to update such small broker-dealers’ policies and procedures, for a total one-

time cost of approximately $32,240 per small broker-dealer,640 and an aggregate cost of 

approximately $24.53 million for all small broker-dealers.641  The Commission additionally 

estimates in-house compliance personnel would require 18 hours to review and approve the 

updated policies and procedures, for an aggregate burden of 13,698 hours.642 

 The Commission preliminarily believes that broker-dealers would utilize their existing 

recordkeeping systems to preserve any documents necessary to comply with proposed Rule 17a-

4(b)(17).  Accordingly, the Commission estimates that broker-dealers will incur no new initial 

burdens or costs to retain the records made pursuant to proposed Rule 17a-4(b)(17).  

Nevertheless, the Commission requests comment on this assumption and whether the 

requirements of proposed Rule 17a-4(b)(17) would pose additional initial burdens or costs on 

broker-dealers. 

                                                 

640  This cost estimate is based on the following calculation: (65 hours of review) x 
($496/hour for outside counsel services) = $32,240 in outside counsel costs. 

641  This cost estimate is based on the following calculation: ($32,240 for outside attorney 
costs per small broker-dealer) x (761 small broker-dealers) = $24.53 million in outside 
counsel costs. 

642  This estimate is based on the following calculation: (18 burden hours) x (761 small 
broker-dealers) = 13,698 aggregate burden hours. 



   

394 

 

The Commission therefore estimates the total initial aggregate burden to be 312,031 

hours,643 and the total initial aggregate cost to be approximately $46.25 million.644 

b) Ongoing Costs and Burdens 

On an ongoing basis, a respondent would have to maintain and review its best execution 

policies and procedures to ensure their effectiveness as well as to address any deficiencies found 

and to accommodate the addition of, among other things, new products or services, new business 

lines, or new markets or trading characteristics for a particular security.  Proposed Rule 1101(c) 

would also require a broker-dealer to, no less frequently than quarterly, review the execution 

quality of its transactions for or with customers or customers of another broker-dealer, and how 

such execution quality compares with the execution quality the broker-dealer might have 

obtained from other markets, and to revise is best execution policies and procedures accordingly.  

Broker-dealers would also have to document the results of this review.  Additionally, proposed 

Rule 1101(b) would require broker-dealers that engage in conflicted transactions to document, in 

accordance with written procedures, their compliance with the best execution standard for 

conflicted transactions, including all efforts to enforce their best execution policies and 

procedures for conflicted transactions and the basis and information relied on for their 

determinations that such conflicted transactions would comply with the best execution standard, 

as well as to document their payment for order flow arrangements.  Moreover, in lieu of the 

                                                 

643  This estimate is based on the following calculation: (298,333 aggregate burden hours for 
large broker-dealers) + (13,698 aggregate burden hours for small broker-dealers) = 
312,031 total aggregate burden hours. 

644  This estimate is based on the following calculation: ($21.72 million in aggregate costs for 
large broker-dealers) + ($24.53 million in aggregate costs for small broker-dealers) = 
$46.25 million total aggregate costs. 



   

395 

 

requirements of proposed Rules 1101(a), (b), and (c), proposed Rule 1101(d) would require an 

introducing broker relying on that rule to establish, maintain, and enforce policies and 

procedures that require the introducing broker to regularly review the execution quality obtained 

from its executing broker, compare it with the execution quality it might have obtained from 

other executing brokers, and revise its order handling practices, accordingly.  The introducing 

broker would have to document the results of this review. 

Once a broker-dealer has established written policies and procedures reasonably designed 

to achieve best execution, the Commission estimates that large broker-dealers would each 

annually incur an internal burden of 25 hours to review and update existing policies and 

procedures:645  9 hours for legal personnel, 8 hours for compliance personnel, and 8 hours for 

business-line personnel.  The Commission further estimates that large broker-dealers would each 

annually incur an internal burden of 100 hours to conduct and document their reviews of 

execution quality pursuant to proposed Rule 1101(c) and document their efforts to obtain best 

execution for any conflicted transactions and their payment for order flow arrangements pursuant 

to proposed Rule 1101(b):  10 hours for legal personnel, 20 hours for compliance personnel, and 

70 hours for business-line personnel.  The Commission therefore estimates an ongoing, 

aggregate burden for large broker-dealers of approximately 342,125 hours.646  Because the 

Commission assumes that large broker-dealers would rely on internal personnel, rather than 

outside counsel, to update their policies and procedures on an ongoing basis, to conduct and 

                                                 

645  See supra note 634. 
646  This estimate is based on the following calculation: (125 burden hours per large broker-

dealer) x (2,737 large broker-dealers) = 342,125 aggregate ongoing burden hours. 



   

396 

 

document their execution quality reviews, and to document their efforts to obtain best execution 

for conflicted transactions, the Commission estimates large broker-dealers would not incur 

additional ongoing costs.  

The Commission assumes for purposes of this analysis that small broker-dealers would 

mostly rely on outside legal counsel and outside compliance consultants for review and update of 

their policies and procedures.647  The Commission preliminarily estimates that outside legal 

counsel would require approximately 11 hours per year to update policies and procedures, for an 

annual cost of approximately $5,456 for each small broker-dealer.648  The estimated aggregate, 

annual ongoing cost for outside legal counsel to update policies and procedures for all small 

broker-dealers would be approximately $4.15 million.649  In addition, the Commission estimates 

that small broker-dealers would require 11 hours of outside compliance services per year to 

update their policies and procedures, for an ongoing cost of approximately $3,344 per year,650 

                                                 

647  See supra note 640. 
648  This estimate is based on the following calculation: (11 hours per small broker-dealer) x 

($496/hour for outside counsel services) = $5,456 in outside counsel costs. 
649  This estimate is based on the following calculation: ($5,456 in outside counsel costs per 

small broker-dealer) x (761 small broker-dealers) = $4.15 million in aggregate, ongoing 
outside legal costs. 

650  The Commission believes that performance of this function will most likely be equally 
allocated between a senior compliance examiner and a compliance manager.  Based on 
industry sources, Commission staff preliminarily estimates that the costs for these 
positions in the securities industry are $264 and $344 per hour, respectively, for an 
average of $304 per hour.  This cost estimate is based on the following calculation: (11 
hours of review) x ($304/hour for outside compliance services) = $3,344 in outside 
compliance service costs. 



   

397 

 

and an aggregate ongoing cost of approximately $2.54 million.651  The Commission further 

estimates that small broker-dealers would require 20 hours of outside compliance services per 

year to conduct and document their reviews of execution quality and document their efforts to 

obtain best execution for conflicted transactions and payment for order flow arrangements, for an 

ongoing cost of approximately $6,080 per year,652 and an aggregate ongoing cost of 

approximately $4.63 million.653  The total aggregate, ongoing cost for small broker-dealers is 

therefore estimated at approximately $11.32 million per year.654  For purposes of this analysis, 

the Commission assumes that small broker-dealers would engage in fewer conflicted transactions 

than large broker-dealers and be more likely to comply with the regular review required by 

proposed Rule 1101(d) for introducing brokers in lieu of the regular review required by proposed 

Rule 1101(c). 

In addition to the ongoing costs described above, the Commission additionally estimates 

small broker-dealers would incur an internal burden of approximately 6 hours for an in-house 

compliance manager to review and approve the updated policies and procedures per year.  The 

                                                 

651  This estimate is based on the following calculation: ($3,344 in outside compliance costs 
per small broker-dealer) x (761 small broker-dealers) = $2.54 million in aggregate, 
ongoing outside compliance costs. 

652  This cost estimate is based on the following calculation: (20 hours of review) x 
($304/hour for outside compliance services) = $6,080 in outside compliance service 
costs. 

653  This estimate is based on the following calculation: ($6,080 in outside compliance costs 
per small broker-dealer) x (761 small broker-dealers) = $4.63 million in aggregate, 
ongoing outside compliance costs. 

654  This estimate is based on the following calculation: ($4.15 million for outside legal 
counsel costs) + ($2.54 million for outside compliance costs for policies and procedures) 
+ ($4.63 million for outside compliance costs for regular reviews and documentation) = 
$11.32 million total aggregate ongoing costs. 



   

398 

 

Commission further estimates that small broker-dealers would incur an internal burden of 

approximately 30 hours per year for in-house business-line personnel to conduct and document 

their reviews of execution quality and document their efforts to obtain best execution for 

conflicted transactions and payment for order flow arrangements.  In addition, the Commission 

estimates that small-broker dealers would incur an internal burden of approximately 8 hours per 

year for in-house compliance personnel to review the execution quality reviews and 

documentation of efforts to obtain best execution for conflicted transactions and payment for 

order flow arrangements.  The Commission estimates that the ongoing burden for business-line 

personnel, in-house compliance personnel and in-house compliance manager review for each 

small broker dealer would be 44 hours and the ongoing, aggregate burden for all small broker-

dealers would be 33,484 hours for business-line personnel, in-house compliance personnel, and 

in-house compliance manager review.655    

The Commission estimates that the approximate ongoing burden associated with the 

recordkeeping requirements of proposed Rule 17a-4(b)(17) for any records made in compliance 

with proposed Rule 1101 would be 15,968 burden hours per year.656  The Commission does not 

                                                 

655  This estimate is based on the following calculation: (6 hours in-house compliance 
manager review per small broker-dealer) + (30 hours business-line personnel review per 
small broker-dealer) + (8 hours in-house compliance personnel review per small broker-
dealer) = 44 hours per small broker dealer x (761 small broker-dealers) = 33,484 
aggregate ongoing burden hours. 

656  Because the Commission assumes broker-dealers would utilize their existing 
recordkeeping systems to preserve any records made in compliance with proposed Rule 
1101, the Commission estimates that the burdens associated with such record retention 
would be minimal.  Accordingly, the Commission estimates the aggregate ongoing 
burden based on the following calculation: (5 burden hours in-house compliance 
personnel per large broker-dealer x 2,737 large broker-dealers) + (3 burden hours in-



   

399 

 

believe that the ongoing costs associated with ensuring compliance with the retention schedule 

would change from the current costs of ensuring compliance with existing Rule 17a-4.  However, 

the Commission requests comment regarding whether there would be additional costs relating to 

ensuring compliance with record retention and retention schedules pursuant to Rule 17a-4.     

The Commission therefore estimates the total ongoing aggregate burden to be 391,577 

hours,657 and the total ongoing aggregate cost to be approximately $11.32 million per year.658 

The Commission acknowledges that policies and procedures required by proposed Rule 

1101 may vary greatly by broker-dealer, given the differences in size and the complexity of 

broker-dealer business models.  Accordingly, the need to update policies and procedures might 

also vary greatly.  The Commission requests comment regarding the accuracy of the estimated 

burden hours and costs necessary to comply with the proposal. 

2. Annual Report  

a) Initial Costs and Burdens 

Proposed Rule 1102 would require a broker-dealer to, no less frequently than annually, 

review and assess the design and overall effectiveness of its best execution policies and 

procedures, including its order handling practices.  A broker-dealer would be required to conduct 

                                                 

house compliance personnel per small broker-dealer x 761 small broker-dealers) = 15,968 
aggregate ongoing burden hours. 

657  This estimate is based on the following calculation: (342,125 aggregate ongoing burden 
hours for large broker-dealers for proposed Rule 1101) + (33,484 aggregate ongoing 
burden hours for small broker-dealers for proposed Rule 1101) + (15,968 aggregate 
ongoing burden hours for all broker-dealers for proposed Rule 17a-4(b)(17)) = 391,577 
total aggregate ongoing burden hours. 

658  This estimate is based on the following calculation: ($11.32 million per year in total 
aggregate ongoing costs for small broker-dealers) + ($0 ongoing costs for large broker-
dealers) = $11.32 million per year in total aggregate ongoing costs. 



   

400 

 

the review and assessment in accordance with written procedures, as well as document the 

review and assessment.  The broker-dealer would also have to prepare a written report detailing 

the results of such review and assessment, including a description of all deficiencies found any 

plan to address deficiencies, and the report would be required to be presented to the board of 

directors (or equivalent governing body) of the broker-dealer.  The broker-dealer would be 

required to preserve a copy of each such report and documentation for each such review and 

assessment pursuant to proposed Rule 17a-4(b)(17). 

The Commission preliminarily believes that a respondent should currently have written 

compliance procedures reasonably designed to review its business activity.  Proposed Rule 1102 

would initially require a respondent to update such written compliance procedures to document 

the method in which the respondent plans to conduct its review and assessment pursuant to 

proposed Rule 1102.   

The Commission broadly estimates that a large broker-dealer would incur a one-time 

average internal burden of 15 hours for in-house legal and in-house compliance counsel to 

update its existing compliance procedures for reviewing and assessing the design and overall 

effectiveness of its best execution policies and procedures.659  The Commission additionally 

estimates a one-time burden of 2 hours for a general counsel at a large broker-dealer and 1 hour 

for a Chief Compliance Officer to review and approve the updated compliance procedures, for a 

                                                 

659  This estimate would be broken down as follows: 10 hours for in-house legal counsel + 5 
hours for in-house compliance counsel to update existing policies and procedures = 15 
burden hours.401 

 

total of 18 burden hours per large broker-dealer.660  In addition, the Commission estimates a cost 

of approximately $1,488 for outside counsel to review the updated compliance procedures on 

behalf of a large broker-dealer.661  The Commission therefore estimates the aggregate burden for 

large broker-dealers to be 49,266 burden hours,662 and the aggregate cost for large broker-dealers 

to be approximately $4.1 million.663 

In contrast, the Commission believes small broker-dealers would primarily rely on 

outside counsel to update existing compliance procedures, as small broker-dealers generally have 

fewer in-house legal and compliance personnel.  The Commission estimates that a small broker-

dealer would require an average of 10 hours of outside legal counsel services to update the 

compliance procedures, for a total one-time cost of approximately $4,960 per small broker-

                                                 

660  This estimate is based on the following calculation: (15 hours of review for in-house legal 
and in-house compliance counsel) + (2 hours of review for general counsel) + (1 hour of 
review for Chief Compliance Officer) = 18 burden hours. 

661  The Commission’s estimates of the relevant wage rates for outside legal services of 
$496/hour take into account staff experience, a variety of sources including general 
information websites, and adjustments for inflation.”  This cost estimate is therefore 
based on the following calculation: (3 hours of review) x ($496/hour for outside counsel 
services) = $1,488 in outside counsel costs. 

662  This estimate is based on the following calculation: (18 burden hours of review per large 
broker-dealer) x (2,737 large broker-dealers) = 49,266 aggregate burden hours. 

663  This estimate is based on the following calculation: ($1,488 for outside counsel costs per 
large broker-dealer) x (2,737 large broker-dealers) = $4.1 million in outside counsel 
costs. 



   

402 

 

dealer,664 and an aggregate cost of approximately $3.77 million for all small broker-dealers.665  

The Commission additionally believes in-house compliance personnel at each small broker-

dealer would require 5 hours to review and approve the updated compliance procedures, for an 

aggregate burden of 3,805 hours.666 

The Commission preliminarily believes that both large and small broker-dealers would 

utilize their existing recordkeeping systems to preserve any documents necessary to comply with 

proposed Rule 17a-4(b)(17).  Accordingly, the Commission estimates that broker-dealers will 

incur no new initial burdens or costs to retain the records made pursuant to proposed Rule 1102.  

Nevertheless, the Commission requests comment on this assumption and whether the 

requirements of proposed Rule 17a-4(b)(17) would pose additional initial burdens or costs on 

broker-dealers. 

The Commission therefore estimates the total initial aggregate burden to be 53,071 

hours,667 and the total initial aggregate cost to be approximately $7.87 million.668 

                                                 

664  This cost estimate is based on the following calculation: (10 hours of review) x 
($496/hour for outside counsel services) = $4,960 in outside counsel costs. 

665  This cost estimate is based on the following calculation: ($4,960 for outside attorney 
costs per small broker-dealer) x (761 small broker-dealers) = $3.77 million in outside 
counsel costs. 

666  This estimate is based on the following calculation: (5 burden hours) x (761 small broker-
dealers) = 3,805 aggregate burden hours. 

667  This estimate is based on the following calculation: (49,266 aggregate burden hours for 
large broker-dealers) + (3,805 aggregate burden hours for small broker-dealers) = 53,071 
total aggregate burden hours. 

668  This estimate is based on the following calculation: ($4.1 million in aggregate costs for 
large broker-dealers) + ($3.77 million in aggregate costs for small broker-dealers) = 
$7.87 million total aggregate costs. 



   

403 

 

b) Ongoing Costs and Burdens 

Proposed Rule 1102 would require a broker-dealer to review and assess, no less 

frequently than annually, the design and overall effectiveness of its best execution policies and 

procedures, including its order handling and routing practices.  Such review and assessment 

would be required to be conducted in accordance with written procedures and would be required 

to be documented.  A broker-dealer would be required to prepare a written report detailing the 

results of such review and assessment, including a description of all deficiencies found and any 

plan to address deficiencies, and the report would have to be presented to the board of directors 

(or equivalent governing body) of the broker-dealer.  The broker-dealer would be required to 

preserve a copy of each such report and documentation for each such review and assessment 

pursuant to proposed Rule 17a-4(b)(17).     

The ongoing burden of complying with proposed Rule 1102 would include a 

respondent’s documentation of its reviews and assessments of the design and overall 

effectiveness of its best execution policies and procedures and the preparation of its written 

reports.     

The Commission estimates that large broker-dealers would each annually incur an 

internal burden of 40 hours to conduct and document its annual reviews and assessments (5 

hours for legal personnel, 15 hours for compliance personnel, and 20 hours for business-line 

personnel).  The Commission estimates that large broker-dealers would each annually incur an 

internal burden of 8 hours to prepare the annual report (4 hours for legal personnel and 4 hours 

for compliance personnel) for a total ongoing burden of 48 hours per large broker-dealer.  The 

Commission therefore estimates an ongoing, aggregate burden for large broker-dealers of 



   

404 

 

approximately 131,376 hours.669  Because the Commission assumes that large broker-dealers 

would rely on internal personnel to prepare the annual report, the Commission estimates that 

large broker-dealers would incur no ongoing costs. 

The Commission assumes for purposes of this analysis that small broker-dealers would 

mostly rely on outside legal counsel and outside compliance consultants to conduct the annual 

reviews and assessments and prepare the annual report, with final review and approval from an 

in-house compliance manager.  The Commission preliminarily estimates that outside counsel 

would require approximately 5 hours per year to conduct and document its annual reviews and 

assessments, for an annual cost of approximately $2,480 for each small broker-dealer.670  The 

estimated aggregate, annual ongoing cost for outside legal counsel to conduct and document the 

annual reviews and assessments for small broker-dealers would be approximately $1.88 

million.671  In addition, the Commission expects that small broker-dealers would require 10 

hours of outside compliance services per year to conduct and document its annual reviews and 

assessments, for an ongoing cost of approximately $3,040 per small broker-dealer per year,672 

                                                 

669  This estimate is based on the following calculation: (48 burden hours per large broker-
dealer) x (2,737 large broker-dealers) = 131,376 aggregate ongoing burden hours. 

670  This estimate is based on the following calculation: (5 hours per small broker-dealer) x 
($496/hour for outside counsel services) = $2,480 in outside counsel costs. 

671  This estimate is based on the following calculation: ($2,480 in outside counsel costs per 
small broker-dealer) x (761 small broker-dealers) = $1.88 million in aggregate, ongoing 
outside legal costs. 

672  This cost estimate is based on the following calculation: (10 hours per small broker-
dealer) x ($304/hour for outside compliance services) = $3,040 in outside compliance 
service costs. 



   

405 

 

and an aggregate ongoing cost of approximately $2.31 million.673  The Commission 

preliminarily estimates that outside counsel would require approximately 3 hours per year to 

prepare the annual report, for an annual cost of approximately $1,488 for each small broker-

dealer.674  The estimated aggregate, annual ongoing cost for outside legal counsel to prepare the 

annual report for small broker-dealers would be approximately $1.13 million.675  In addition, the 

Commission preliminarily estimates that each small broker-dealer would require 3 hours of 

outside compliance services per year to prepare the annual report, for an ongoing cost of 

approximately $912 per year,676 and an aggregate ongoing cost of approximately $694,032 for 

all small broker-dealers.677  The total aggregate, ongoing cost for small broker-dealers is 

therefore estimated at approximately $6.01 million per year.678 

                                                 

673  This estimate is based on the following calculation: ($3,040 in outside compliance costs 
per small broker-dealer) x (761 small broker-dealers) = $2.31 million in aggregate, 
ongoing outside compliance costs. 

674  This estimate is based on the following calculation: (3 hours per small broker-dealer) x 
($496/hour for outside counsel services) = $1,488 in outside counsel costs. 

675  This estimate is based on the following calculation: ($1,488 in outside counsel costs per 
small broker-dealer) x (761 small broker-dealers) = $1.13 million in aggregate, ongoing 
outside legal costs. 

676  This cost estimate is based on the following calculation: (3 hours per small broker-dealer) 
x ($304/hour for outside compliance services) = $912 in outside compliance service 
costs. 

677  This estimate is based on the following calculation: ($912 in outside compliance costs per 
small broker-dealer) x (761 small broker-dealers) = $694,032 in aggregate, ongoing 
outside compliance costs. 

678  This estimate is based on the following calculation: ($1.88 million for outside legal 
counsel costs to conduct and document the annual review and assessment) + ($2.31 
million for outside compliance costs to conduct and document the annual review and 
assessment) + ($1.13 million for outside legal counsel to prepare the annual report) + 



   

406 

 

In addition to the costs described above, the Commission additionally estimates each 

small broker-dealer would incur an internal burden of approximately 12 hours for business-line 

personnel to conduct and document the annual reviews and assessments, and 4 hours per year for 

in-house compliance personnel to review the reviews and assessments and preparation of the 

annual report.  The Commission further estimates small broker-dealers would incur an internal 

burden of approximately 2 hours for an in-house compliance manager to review and approve the 

annual report.  The ongoing, aggregate burden for small broker-dealers would be 13,698 hours 

for in-house business-line personnel, compliance personnel, and compliance manager review.679   

The Commission estimates that the approximate ongoing burden associated with the 

recordkeeping requirement of proposed Rule 17a-4(b)(17) for any records made in compliance 

with proposed Rule 1102 would be 6,235 burden hours per year.680  The Commission does not 

believe that the ongoing costs associated with ensuring compliance with the retention schedule 

would change from the current costs of ensuring compliance with existing Rule 17a-4.  However, 

                                                 

($694,032 for outside compliance costs to prepare the annual report) = $6.01 million total 
aggregate ongoing costs. 

679  This estimate is based on the following calculation: (12 hours business-line personnel 
review per small broker-dealer) + (4 hours compliance personnel review per small 
broker-dealer) + (2 hours compliance manager review per small broker-dealer) x (761 
small broker-dealers) = 13,698 aggregate ongoing burden hours. 

680  Because the Commission assumes broker-dealers would utilize their existing 
recordkeeping systems to preserve any records made in compliance with proposed Rule 
1102, the Commission estimates that the burdens associated with such record retention 
would be minimal.  Accordingly, the Commission estimates the aggregate ongoing 
burden based on the following calculation: (2 burden hours in-house compliance 
personnel per large broker-dealer x 2,737 large broker-dealers) + (1 burden hour in-house 
compliance personnel per small broker-dealer x 761 small broker-dealers) = 6,235 
aggregate ongoing burden hours. 



   

407 

 

the Commission requests comment regarding whether there would be additional costs relating to 

ensuring compliance with record retention and retention schedules pursuant to Rule 17a-4. 

The Commission therefore estimates the total ongoing aggregate burden to be 151,309 

hours,681 and the total ongoing aggregate cost to be approximately $6.01 million per year.682 

The Commission acknowledges that policies and procedures may vary greatly by broker-

dealer, given the differences in size and the complexity of broker-dealer business models. 

Accordingly, the need to update policies and procedures and conduct an annual review and 

assessment might also vary greatly.  The Commission requests comment regarding the accuracy 

of the estimated burden hours and costs necessary to comply with the proposal. 

A. Total Paperwork Burden  

Based on the foregoing, the Commission preliminarily estimates that the total initial 

aggregate burden for all broker-dealers to comply with proposed Rules 1101 and 1102, as well as 

proposed Rule 17a-4(b)(17), would be 365,102 hours,683 and the total initial aggregate cost 

                                                 

681  This estimate is based on the following calculation: (131,376 aggregate ongoing burden 
hours for large broker-dealers for proposed Rule 1102) + (13,698 aggregate ongoing 
burden hours for small broker-dealers for proposed Rule 1102) + (6,235 aggregate 
ongoing burden hours for all broker-dealers for proposed Rule 17a-4(b)(17)) = 151,309 
total aggregate ongoing burden hours. 

682  This estimate is based on the following calculation: ($6.01 million per year in total 
aggregate ongoing costs for small broker-dealers) + ($0 ongoing costs for large broker-
dealers) = $6.01 million per year in total aggregate ongoing costs. 

683  365,102 hours = 312,031 hours (Required policies and procedures) + 53,071 hours 
(Annual review). 



   

408 

 

would be approximately $54.12 million.684  The Commission preliminarily estimates that the 

total ongoing aggregate burden for all broker-dealers to comply with proposed Rules 1101 and 

1102, as well as proposed Rule 17a-4(b)(17), would be 558,854 hours per year,685 and the total 

ongoing aggregate cost would be approximately $17.33 million per year.686 

PRA Summary Table 

 

Initial 
PRA 

Burden 
Hours 

Ongoing 
Annual 
PRA 

Burden 
Hours 
(After 
First 
Year) 

Total 
PRA 

Burden 
Hours in 

First 
Year 

Initial 
PRA 
Costs 

Ongoing 
Annual 
PRA 
Costs 
(After 
First 
Year) 

Total PRA 
Costs in 

First Year 

Industry-Wide 
Burden due to 
Policies and 
Procedures 

under Proposed 
Rule 1101 

312,031 72,991 385,022 $46.25 
million 

$6.69 
million 

$52.94 
million 

Industry-Wide 
Burden due to 

Regular 
Review and 

Documentation 
under Proposed 

Rule 1101 

0 302,618 302,618 $0 $4.63 
million 

$4.63 
million 

Total 
Industry-Wide 
Burden due to 

312,031 375,609 687,640 $46.25 
million 

$11.32 
million 

$57.57 
million 

                                                 

684  $54.12 million = $46.25 million (Required policies and procedures) + $7.87 million 
(Annual review). 

685   558,854 hours = 391,577 (Required policies and procedures) + 145,074 hours (Annual 
review) + 22,203 hours (Rule 17a-4(b)(17)).  

686  $17.33 million = $11.32 million (Required policies and procedures) + $6.01 million 
(Annual review). 



   

409 

 

Proposed Rule 
1101 

Industry-Wide 
Burden due to 
Compliance 
Procedures 

under Proposed 
Rule 1102 

53,071 0 53,071 $7.87 
million $0 $7.87 

million 

Industry-Wide 
Burden due to 

Annual Review 
and 

Documentation, 
under Proposed 

Rule 1102 

0 118,612 118,612 $0 $4.19 
million 

$4.19 
million 

Industry-Wide 
Burden due to 
Annual Report 
under Proposed 

Rule 1102 

0 26,462 26,462 $0 $1.82 
million 

$1.82 
million 

Total 
Industry-Wide 
Burden due to 
Proposed Rule 

1102 

53,071 145,074 198,145 $7.87 
million 

$6.01 
million 

$13.88 
million 

Total 
Industry-Wide 
Burden due to 
Proposed Rule 

17a-4(b)(17) 

0 22,203 22,203 0 0 0 

B. Collection of Information is Mandatory 

All of the collection of information would be mandatory. 

C. Confidentiality of Responses to Collection of Information 

  The collection of information would not be required to be made public but would not be 

confidential. 

D. Retention Period for Recordkeeping Requirements 

A broker-dealer would be required to preserve a copy of its policies and procedures under 

proposed Regulation Best Execution in a manner consistent with, and for the periods specified 



   

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in, Rule 17a-4(e)(7).  A broker-dealer would be required to preserve a copy of its other records 

under proposed Regulation Best Execution in a manner consistent with, and for the periods 

specified in, the proposed amendments to Rule 17a-4(b). 

E. Request for Comment 

Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to: 

• Evaluate whether the proposed collections of information are necessary for the proper 

performance of the functions of the agency, including whether the information shall have 

practical utility;  

• Evaluate the accuracy of our estimates of the burden of the proposed collection of 

information; 

• Determine whether there are ways to enhance the quality, utility, and clarity of the 

information to be collected; and  

• Evaluate whether there are ways to minimize the burden of collection of information on 

those who are to respond, including through the use of automated collection techniques or 

other forms of information technology. 

Persons submitting comments on the collection of information requirements should direct 

them to the Office of Management and Budget, Attention:  Desk Officer for the Securities and 

Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, 

and should also send a copy of their comments to Secretary, Securities and Exchange 

Commission, 100 F Street NE, Washington, DC 20549-1090, with reference to File Number S7-

32-22.  Requests for materials submitted to OMB by the Commission with regard to this 

collection of information should be in writing, with reference to File Number S7-32-22 and be 

submitted to the Securities and Exchange Commission, Office of FOIA/PA Services, 100 F 



   

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Street NE, Washington, DC 20549-2736.  As OMB is required to make a decision concerning the 

collection of information between 30 and 60 days after publication, a comment to OMB is best 

assured of having its full effect if OMB receives it within 30 days of publication. 

VII. Consideration of Impact on the Economy  

For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996 

(“SBREFA”),687 the Commission must advise the OMB as to whether the proposed regulation 

constitutes a “major” rule.  Under SBREFA, a rule is considered “major” where, if adopted, it 

results or is likely to result in: (1) an annual effect on the economy of $100 million or more 

(either in the form of an increase or decrease); (2) a major increase in costs or prices for 

consumers or individual industries; or (3) significant adverse effect on competition, investment, 

or innovation.  If a rule is “major,” its effectiveness will generally be delayed for 60 days 

pending Congressional review.  The Commission requests comment on the potential impact of 

Regulation Best Execution on the United States economy on an annual basis, on any potential 

increases in costs or prices for consumers or individual industries, and any potential effect on 

competition, investment, or innovation.  Commenters are requested to provide empirical data and 

other factual support for their views to the extent possible. 

VIII. Initial Regulatory Flexibility Act Analysis 

                                                 

687  Public Law 104-121, Title II, 110 Stat. 857 (1996) (codified in various sections of 5 
U.S.C., 15 U.S.C., and as a note 5 U.S.C. 601). 



   

412 

 

The Regulatory Flexibility Act (“RFA”)688 requires federal agencies, in promulgating 

rules, to consider the impact of those rules on small entities.  Section 603(a)689 of the 

Administrative Procedure Act,690 as amended by the RFA, generally requires the Commission to 

undertake a regulatory flexibility analysis of all proposed rules, or proposed rule amendments, to 

determine the impact of such rulemaking on “small entities.”691  Under Section 605(b) of the 

RFA, a federal agency need not undertake a regulatory flexibility analysis of proposed rules 

where, if adopted, they would not have a significant economic impact on a substantial number of 

small entities.692 

A. Reasons for and Objectives of the Proposed Action 

As discussed above in section III.B, the Commission is proposing Regulation Best 

Execution to further the goals of the national market system and reinforce broker-dealer best 

execution obligations.     

The proposed rule would set forth the standard of best execution, and proposed Rule 

1101 would require a broker-dealer to establish, maintain, and enforce written policies and 

procedures that address specific elements that are designed to promote the best execution of 

                                                 

688  5 U.S.C. 601 et seq. 
689  5 U.S.C. 603(a). 
690  5 U.S.C. 551 et. seq. 
691  Although section 601(b) of the RFA defines the term “small entity,” the statute permits 

agencies to formulate their own definitions.  The Commission has adopted definitions for 
the term small entity for the purposes of Commission rulemaking in accordance with the 
RFA.  Those definitions, as relevant to this proposed rulemaking, are set forth in Rule 0-
10 under the Exchange Act, 17 CFR 240.0-10.  

692  See 5 U.S.C. 605(b). 



   

413 

 

customer orders, and comply with certain execution quality review and documentation 

requirements.693  More specifically, proposed Rule 1101(a)(1) would require that a broker-

dealer’s policies and procedures address how it will:  (1) obtain and assess reasonably accessible 

information concerning the markets trading the relevant securities; (2) identify markets that may 

be material potential liquidity sources; and (3) incorporate the material potential liquidity sources 

into its order handling practices and ensure efficient access to each such material potential 

liquidity source.  Proposed Rule 1101(a)(2) would require a broker-dealer’s policies and 

procedures to address how it will:  (1) assess reasonably accessible and timely information, 

including information with respect to the best displayed prices, opportunities for price 

improvement, and order exposure opportunities that may result in the most favorable price; (2) 

assess the attributes of customer orders and consider the trading characteristics of the security, 

the size of the order, the likelihood of execution, the accessibility of the market, and any 

customer instructions in selecting the market most likely to provide the most favorable price; and 

(3) reasonably balance the likelihood of obtaining a better price with the risk that delay could 

result in a worse price when determining the number and sequencing of markets to be assessed.     

Proposed Rule 1101(b) would require a broker-dealer’s policies and procedures for 

conflicted transactions to address how it will:  (1) obtain and assess information beyond that 

required by proposed Rule 1101(a)(1)(i) in identifying a broader range of markets beyond the 

material potential liquidity sources; and (2) evaluate a broader range of markets beyond the 

material potential liquidity sources.  Proposed Rule 1101(b) would also require broker-dealers 

that engage in conflicted transactions with retail customers to document in accordance with their 

                                                 

693  See supra section III.B. 



   

414 

 

written procedures their compliance with the best execution standard for conflicted transactions, 

including all efforts to enforce their best execution policies and procedures for conflicted 

transactions and the basis and information relied on for its determinations that such conflicted 

transactions would comply with the best execution standard.  Additionally, proposed Rule 

1101(b)(3) would require broker-dealers that engage in conflicted transactions to document their 

payment for order flow arrangements.   

Proposed Rule 1101(c) would require broker-dealers to no less frequently than quarterly 

review the execution quality of customer orders, and how such execution quality compares with 

the execution quality that might have been obtained from other markets, and revise their best 

execution policies and procedures, including order handling practices, accordingly.     

Proposed Rule 1101(d) would exempt an introducing broker that routes customer orders 

to an executing broker from separately complying with proposed Rules 1101(a), (b), and (c), so 

long as the introducing broker establishes, maintains, and enforces policies and procedures that 

require the introducing broker to regularly review the execution quality obtained from its 

executing broker, compare it with the execution quality it might have obtained from other 

executing brokers, and revise its order handling practices accordingly.  An introducing broker 

would additionally be required to document the results of its review.    

Proposed Rule 1102 would require each broker-dealer no less frequently than annually to 

conduct a review and assessment of the design and overall effectiveness of its best execution 

policies and procedures, and document such review and assessment in a report that would be 

provided to the broker-dealer’s governing body.   

Proposed amendments to Rule 17a-4 under the Exchange Act would specify the record 

preservation requirements for records made under proposed Regulation Best Execution.   



   

415 

 

B. Legal Basis 

Pursuant to the Exchange Act, 15 U.S.C. 78a et seq., and particularly sections 2, 3(b), 5, 

10, 11A, 15, 15A, 17, 23(a), 24, and 36 thereof, 15 U.S.C. 78b, 78c(b), 78e, 78j, 78k–1, 78o, 

78o-1, 78q, 78w(a), 78x, and 78mm, the Commission is proposing amendments to § 240.17a-4 

and new §§ 242.1100 through 242.1102. 

C. Small Entities Subject to the Proposed Rule 

For purposes of a Commission rulemaking in connection with the RFA, a broker-dealer 

will be a small entity if it: (1) had total capital (net worth plus subordinated liabilities) of less 

than $500,000 on the date in the prior fiscal year as of which its audited financial statements 

were prepared pursuant to Rule 17a-5(d) under the Exchange Act,694 or, if not required to file 

such statements, had total capital (net worth plus subordinated liabilities) of less than $500,000 

on the last business day of the preceding fiscal year (or in the time that it has been in business, if 

shorter); and (2) is not affiliated with any person (other than a natural person) that is not a small 

business or small organization.695  

As discussed in section VI, the Commission estimates that approximately 3,498 broker-

dealers would be subject to proposed Regulation Best Execution.  Based on FOCUS Report data, 

the Commission estimates that as of June 30, 2022, approximately 761 of those broker-dealers 

might be small entities for purposes of this analysis.  For purposes of this RFA analysis, the 

Commission refers to broker-dealers that might be small entities under the RFA as “small 

                                                 

694  See 17 CFR 240.17a-5(d). 
695  See 17 CFR 240.0-10(c). 



   

416 

 

entities,” and the Commission continues to use the term “broker-dealers” to refer to broker-

dealers generally, as the term is used elsewhere in this release.  

D. Projected Compliance Requirements of the Proposed Rule for Small Entities  

The RFA requires a description of the projected reporting, recordkeeping, and other 

compliance requirements of proposed Regulation Best Execution, including an estimate of the 

classes of small entities that would be subject to the requirements and the type of professional 

skill necessary to prepare the required reports and records.  Following is a discussion of the 

associated costs and burdens of compliance with proposed Regulation Best Execution, as 

incurred by small entities.  As described above in section IV, the proposed rules would require a 

broker-dealer to establish, maintain, and enforce written policies and procedures reasonably 

designed to comply with the proposed best execution standard, as well as additional policies and 

procedures for conflicted transactions and tailored policies and procedures applicable to 

introducing brokers.  The proposed rules would also set forth documentation requirements 

related to conflicted transactions and execution quality reviews.  Moreover, the proposed rules 

would require a broker-dealer to review and assess, no less frequently than annually, the design 

and overall effectiveness of its best execution policies and procedures, including its order 

handling practices, and prepare a written report that is provided to its board of directors or 

equivalent governing body detailing the results.  Finally, proposed amendments to Rule 17a-4 

would set forth record preservation requirements for records made under proposed Regulation 

Best Execution. 

1. Required Policies and Procedures and Related Obligations 

To initially comply with these requirements, the Commission preliminarily believes that 

small entities would primarily rely on outside counsel to update existing policies and procedures, 



   

417 

 

as small broker-dealers generally have fewer in-house legal and compliance personnel.  As 

discussed in section VI above, the Commission preliminarily believes the initial costs associated 

with this requirement for small entities would be $32,240 per small entity (reflecting an 

estimated 65 hours of outside legal counsel services), and an aggregate cost of $24.53 million for 

all small entities.696  The Commission additionally estimates in-house compliance personnel 

would require 18 hours to review and approve the updated policies and procedures, for an 

aggregate burden of 13,698 hours.697   

The Commission preliminarily believes that small broker-dealers would mostly rely on 

outside legal counsel and outside compliance consultants to review and update their policies and 

procedures on a periodic basis.  The Commission preliminarily estimates that outside legal 

counsel would require approximately 11 hours per year, totaling approximately $5,456 annually 

for each small entity for an estimated aggregate ongoing cost of approximately $4.15 million.  In 

addition, the Commission estimates that small entities would require 11 hours of outside 

compliance services per year to update their policies and procedures for an ongoing cost of 

approximately $3,344 per year, and the estimated aggregate ongoing cost to be $2.54 million.  In 

addition, the Commission estimates that small entities would require 20 hours of outside 

compliance services per year to conduct and document their review of execution quality and 

document all their efforts to obtain best execution for conflicted transactions, including the basis 

and information relied on for its determinations, and payment for order flow arrangement for an 

ongoing cost of approximately $6,080 per year, and an aggregate ongoing cost of approximately 

                                                 

696  See supra notes 640-641.  
697  See supra note 642. 



   

418 

 

$4.63 million.  The total aggregate ongoing cost for small entities is therefore estimated at 

approximately $11.32 million per year.  Separately, the Commission estimates that small entities 

would incur approximately six internal burden hours for an in-house compliance manager to 

review and approve the updated policies and procedures per year and incur an internal burden of 

approximately 30 hours per year for in-house business-line personnel to conduct and document 

their execution quality reviews and document all their efforts to obtain best execution for 

conflicted transactions and payment for order flow arrangements.  The Commission further 

estimates that small entities would incur an internal burden of approximately 8 hours per year for 

in-house compliance personnel to review the regular reviews of execution quality and 

documentation of efforts to obtain best execution for conflicted transactions and payment for 

order flow arrangements.  Thus, the Commission estimates that the ongoing burden for each 

small entity would be 44 hours and the ongoing, aggregate annual burden for all small entities to 

be 33,484 hours.698  

 Finally, the Commission preliminarily believes that small entities would utilize their 

existing recordkeeping systems to preserve any documents necessary to comply with proposed 

Rule 1101.  Thus, the Commission estimates that broker-dealers will incur no new initial burdens 

or costs to retain the records made pursuant to proposed Regulation Best Execution.  Separately, 

the Commission estimates that the approximate ongoing burden associated with the 

recordkeeping requirements of proposed Rule 17a-4(b)(17) for any records made in compliance 

will proposed Rule 1101 pursuant to the proposed rule would be three burden hours per small 

entity for an ongoing aggregate annual burden for all small entities of approximately 2,283 

                                                 

698  See supra note 655. 



   

419 

 

hours.  The Commission does not believe that the ongoing costs associated with ensuring 

compliance with retention schedule would change from the current costs of ensuring compliance 

with existing Rule 17a-4.  

2. Annual Report    

 As discussed above in sections VI, the Commission believes small entities would 

primarily rely on outside counsel to update their existing compliance procedures for the annual 

reviews and assessments under proposed Rule 1102.  The Commission estimates that small 

entities would require approximately 10 hours of outside legal counsel services to update the 

compliance procedures, for total one-time costs of $4,960 per small entity, and an aggregate cost 

of $3.77 million for all small entities.699    

Additionally, the Commission believes that the in-house compliance personnel would 

require approximately five hours to review and approve the updated compliance procedure for an 

aggregate burden of 3,805 hours.700    

The Commission preliminarily estimates that outside legal counsel would require 

approximately five hours to conduct and document annual reviews and assessments for an 

approximate cost of $2,480 per year for each small entity.701  The estimated aggregate, ongoing 

cost for outside legal counsel to conduct and document the annual reviews and assessments 

                                                 

699  See supra notes 664-665. 
700  See supra note 666. 
701  See supra note 670. 



   

420 

 

would be approximately $1.88 million.702  Additionally, the Commission expects that an 

additional 10 hours of outside compliance services would be required to conduct and document 

its annual reviews and assessments, for an ongoing cost of approximately $3,040 per small entity 

each year and an aggregate ongoing cost of approximately $2.31 million.703  Separately, the 

Commission preliminarily estimates that outside counsel would require approximately three 

hours to prepare the annual report, resulting in an annual cost of $1,488 per year, and an 

aggregate ongoing cost of approximately $1.13 million per year.704  In addition, the Commission 

preliminarily estimates that outside compliance services would require three hours per year to 

prepare the annual report, for an ongoing cost of approximately $912 per small entity each year 

and an aggregate ongoing cost of approximately $694,032 per year.705  Together the aggregate, 

ongoing cost for small entities subject to the proposed rule is estimated at approximately $6.01 

million per year.706   

 In addition to these costs, the Commission additionally estimates each small entity would 

incur an internal burden of approximately 12 hours for business-line personnel to conduct and 

document the annual reviews and assessments, and four hours per year for in-house compliance 

personnel to review the reviews and assessments and preparation of the annual report.  The 

Commission further estimates an internal burden of approximately two hours for an in-house 

                                                 

702  See supra note 671. 
703  See supra note 672-673. 
704  See supra notes 674-675. 
705  See supra notes 676-677.  
706  See supra note 678.421 

 

compliance manager to review and approval the annual report for an ongoing, aggregate burden 

of 13,698 hours.  

 Finally, the Commission estimates that small entities would incur no new initial burdens 

or costs to retain the records made pursuant to proposed Rule 1102.  Additionally, the 

Commission estimates that the approximate ongoing burden associated with the recordkeeping 

requirement of proposed Rule 17a-4(b)(17) for any records made in compliance with proposed 

Rule 1102 would be one burden hour per small entity for an ongoing aggregate burden of 761 

hours. 

E. Duplicative, Overlapping, or Conflicting Federal Rules 

An analysis under the RFA requires a federal agency to identify, to the extent practicable, 

all relevant federal rules that may duplicate, overlap, or conflict with the proposed rules.  The 

Commission believes that there are no federal rules that duplicate, overlap, or conflict with 

proposed Regulation Best Execution and the proposed amendments to Rule 17a-4.    

F. Significant Alternatives 

An RFA analysis requires a discussion of alternatives to the proposed rule that would 

minimize the impact of small entities while accomplishing the stated objectives of the applicable 

statutes.  The analysis should include: (1) the establishment of differing compliance or reporting 

requirements or timetables that take into account the resources available to small entities; (2) the 

clarification, consolidation, or simplification of compliance and reporting under the rule for such 

small entities; (3) the use of performance rather than design standards; and (4) an exemption 

from coverage of the rule, or any part thereof, for such small entities. 

The Commission considered whether it would be necessary or appropriate to establish 

different compliance or reporting requirements or timetables; or to clarify, consolidate, or 



   

422 

 

simplify compliance and reporting requirements under the proposed rule for small entities.  

Because proposed Regulation Best Execution is designed to further enhance broker-dealers’ 

ability to maintain robust best execution practices and result in more vigorous efforts by broker-

dealers to achieve best execution, including in situations where broker-dealers have order 

handling conflicts of interest with retail customers, the Commission preliminarily believes that 

small entities should be covered by the proposed rules.  The proposed rule includes performance 

standards.  The Commission also preliminarily believes that the proposed rules are flexible 

enough for small broker-dealers to comply without the need for the establishment of different 

compliance or reporting requirements or timetables707 for small entities, or exempting them from 

the proposed rule’s requirements.   

However, the Commission is proposing that broker-dealers that meet the definition of 

introducing broker would be subject to different and more tailored requirements under proposed 

Rule 1101.  Specifically, under proposed Rule 1101(d), an entity that meets the definition of 

introducing broker and routes customer orders to an executing broker would not need to 

separately comply with proposed Rules 1101(a), (b), and (c), so long as the introducing broker 

establishes, maintains, and enforces policies and procedures that require the introducing broker 

to regularly review the execution quality obtained from such executing broker, compare it with 

the execution quality it might have obtained from other executing brokers, and revise its order 

                                                 

707  Proposed Regulation Best Execution does not include different timetables for small 
broker-dealers because the Commission preliminarily believes that customers of small 
broker-dealers would benefit from the protections offered by proposed Regulation Best 
Execution, just as customers of broker-dealers that are not small entities. 



   

423 

 

handling practices accordingly.  As discussed above,708 the Commission believes that small 

broker-dealers would be more likely to qualify as introducing brokers.  As such, certain small 

entities would be exempt from complying with proposed Rules 1101(a), (b), and (c).  To the 

extent a small broker-dealer does not qualify as an introducing broker, the Commission believes 

a small broker-dealer would be less likely to engage in conflicted transactions and be subject to 

the additional obligations of proposed Rule 1101(b) than a large broker-dealer. 

The Commission also considered a number of potential regulatory alternatives to 

proposed Regulation Best Execution, including: (1) adoption of FINRA Rule 5310 and MSRB 

Rule G-18 best execution rules; (2) requiring order execution quality disclosure for other asset 

classes; (3) defining “introducing broker” to include those entities that quality for relief under 

FINRA and MSRB rules; (4) banning or restricting off-exchange payment for order flow; (5) 

requiring broker-dealers to utilize best execution committees; (6) requiring order-by-order 

documentation for conflicted or all transactions; and (7) providing staggered compliance dates 

for certain broker-dealers.  For a more detailed discussion of these regulatory alternatives, see 

Section V, supra. 

1. Adopt FINRA Rule 5310 and MSRB Rule G-18 Concerning Best 
Execution 

As discussed above, the Commission considered adopting FINRA Rule 5310 and MSRB 

Rule G-18 regarding best execution and their associated guidance.709  Under this alternative, the 

                                                 

708  See supra section VI. 
709  See supra section V. 



   

424 

 

overall costs and benefits to small entities would be lower than compared to the proposal.  This 

alternative would not include the additional requirements related to transactions with broker-

dealer conflicts of interest, which represent the majority of retail transactions in the equity, 

options, and fixed income markets.710  Under this alternative, conflicted broker-dealers that 

would qualify for relief under the current FINRA rule would experience lower compliance costs 

as they would not be required to develop or update their own policies and procedures or adjust 

their business model to de-conflict from their executing broker.  The cost of the proposal could 

provide an advantage to larger broker-dealers as compared to smaller broker-dealers.  The lower 

compliance cost under this alternative would increase competition among broker-dealers 

compared to the proposed rule by lowering barriers to entry for new broker-dealers and decrease 

the likelihood that smaller broker-dealers would exit the market.  

The Commission preliminarily believes that adopting FINRA or the MSRB’s best 

execution rules would be less effective than the proposed rule because broker-dealers (including 

small entities) would not be required to establish the comprehensive and detailed policies and 

procedures relating to all aspects of a broker-dealer’s best execution practices, including 

additional requirements for broker-dealers with conflicts of interest, that would be required under 

the proposal.  The Commission preliminarily believes that the proposed policies and procedures-

based best execution framework, along with regular reviews and related documentation, would 

help broker-dealers maintain robust best execution practices and result in vigorous efforts by 

broker-dealers to achieve best execution, including in situations where broker-dealers have order 

handling conflicts of interest with retail customers.  The Commission also preliminarily believes 

                                                 

710  See section IV.C.2.a 



   

425 

 

that detailed policies and procedures, regular reviews, and related documentations would allow 

broker-dealers to effectively assess their best execution practices and assist the Commission and 

SROs to effectively examine and enforce broker-dealers’ compliance with the proposed rules.    

2. Require Order Execution Quality Disclosure for Other Asset Classes 

As discussed in section V, as an alternative, the Commission could require execution 

quality disclosures from market centers and broker-dealers in the options and fixed income 

markets.  In addition to execution quality data at the individual security-level, similar to Rule 

605 data, the execution quality disclosures could include aggregated standardized summary 

reports of key execution quality statistics, which could permit smaller and less sophisticated 

investors to analyze and compare their broker-dealers against other broker-dealers.  This 

alternative may permit investors to better evaluate execution quality for their orders within their 

broker-dealer’s overall executions in a given security and facilitate broker-to-broker comparisons 

of order execution beyond just the equities markets.  

Under the alternative, broker-dealers that engage in less efficient order handling practices 

may recognize the inadequacy when comparing their own execution quality statistics with those 

disclosed by more efficient broker-dealers, and improve the order handling practices accordingly 

to attract order flow.   

However, developing these execution quality disclosures may cause market centers and 

broker-dealers in the options and fixed income markets to incur higher startup costs relative to 

the proposal as market centers would need to develop systems to produce and post such reports.  

To the extent that certain market centers already have systems or infrastructures in place to 

produce execution quality metrics, they would incur costs to modify their current systems and/or 

the format of their current reports in order to comply with the potential execution quality 



   

426 

 

disclosure requirements.  Additionally, execution quality disclosures for the options and fixed 

income markets may be complex and difficult to produce for a number of reasons.711   

3. Define “Introducing Broker” to Include Those Entities That Qualify for 

Relief Under FINRA and MSRB Rules 

The Commission could alternatively propose to remove the requirements for introducing 

and executing brokers related to remuneration, carrying firm status, and affiliation.712  This 

alternative would more closely align with the FINRA and MSRB rules concerning a broker-

dealer that routes its order flow to another broker-dealer that has agreed to handle that order flow 

as agent or riskless principal for the customer.  Under this alternative, it is likely that most 

broker-dealers that currently qualify for relief under the FINRA and MSRB rules would continue 

to do so.  By categorizing to allow more broker-dealers to be classified as “introducing brokers,” 

the overall compliance cost carried by the market would be lower as compared to the proposal.  

This alternative would likely cause fewer small broker-dealers that currently qualify for relief 

under the FINRA or MSRB rule, and wish to continue to receive remuneration, carry customer 

accounts, or route to affiliates, to incur the expenses associated with the full obligations of 

proposed Regulation Best Execution.   

The broker-dealers who could benefit under this alternative are those that currently 

qualify for relief under the FINRA and MSRB rules but fail at least one of the criteria in 

proposed Rule 1101(d).  Thus, current “introducing brokers,” and to some extent their executing 

brokers, would have lower compliance costs since there would be no requirement to change their 

                                                 

711  See supra section V. 
712  See supra section IV.E. 



   

427 

 

business models or set-up their own best execution policies and procedures to comply with the 

proposal.  Additionally, this alternative may lower barriers to entry for some potential 

introducing brokers.  However, under this alternative, as discussed in section V above, the 

benefits of the proposed rule would be diminished.  The Commission preliminarily believes that 

instead of changing their business models, introducing brokers would be more likely to receive 

payment for order flow from their executing brokers or route customer orders to affiliated 

executing brokers.  Therefore, the benefits of the alternative would be lower since the incentive 

created by the payment for order flow or routing to an affiliated executing broker would still 

exist, leading to order routing which may benefit the broker-dealers at the expense of retail 

customers.   

4. Ban or Restrict Off-Exchange Payment for Order Flow 

Rather than requiring heightened best execution standards for transactions involving 

payment for order flow, alternatively the Commission could ban or restrict off-exchange 

payment for order flow in the equity and options markets.  Under this alternative, registered 

securities exchanges would still be allowed to pay rebates.  In contrast to the proposed rule, this 

alternative may reduce conflicts of interest and improve order handling practices by retail 

broker-dealers.  Separately, the Commission could impose specific restrictions on payment for 

order flow that could allow retail broker-dealers to pass through payments to end customers in 

cases where it would permit best execution.  A ban or restriction on payment for order flow 

could increase the likelihood of higher commissions for retail investors or an increase in the cost 

of other services offered by retail broker-dealers.  It may also reduce competition between 

broker-dealers as larger broker-dealers with more diversified business models may be more 



   

428 

 

likely to expand their market share and smaller broker-dealers who are more dependent on 

payment for order flow revenue streams may be more likely to exit the market.  

5. Require Broker-Dealers to Utilize Best Execution Committees 

The Commission considered requiring each broker-dealer to maintain a best execution 

committee to regularly review the broker-dealers’ best execution policies, procedures and the 

results of its efforts to secure best execution for its customers.  Requiring such a committee and 

defining its membership might improve execution quality by ensuring sufficient expertise is 

recruited to establish and monitor the broker-dealer’s best execution efforts.  Furthermore, 

requiring such a committee might increase executive attention on best execution, potentially 

improving execution quality for the broker-dealer’s customers. 

 Requiring such a committee and defining its membership would entail certain costs.  

First, if the Commission were to define the membership of the committee, it is likely that 

individual broker-dealers’ organizational structures would vary in ways that would make a 

defined membership structure a poor fit because of, for instance, a single employee performing  

multiple roles, or individual roles handled by groups rather than a single individual.  In addition, 

broker-dealers are diverse in their business plans and operations and a role that might be 

considered critical at one broker-dealer (such as managing fixed income executing brokers in 

thinly traded bonds) might be inapplicable at another broker-dealer that does not trade in these 

instruments.  If the Commission were to require the committee and not define its membership, 

broker-dealers might assign to the committee less senior staff or staff whose roles are not 

germane to achieving best execution for customer orders, significantly limiting the benefits of 

establishing such a committee.  Furthermore, based on its experience, the Commission believes 

that many broker-dealers, particularly large broker-dealers that are more likely to continue to 



   

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engage in conflicted transactions if the proposed rules are adopted, often have such a committee 

already established, further limiting the potential benefits of such a provision. 

6. Require Order-by-Order Documentation for Conflicted or All 

Transactions 

The Commission considered requiring each broker-dealer to document, for conflicted or 

all transactions, the data that it considered as it handled the order.  Such a requirement might 

offer two benefits.  First, it might improve the quality of the broker-dealer’s regular review of its 

execution practices compared to the proposed rules.  Because the broker-dealer could analyze 

orders on a case-by-case basis, it might identify routing practices that could be changed to 

improve customer order execution quality.  Second, it might improve regulators’ ability to 

supervise the broker-dealers efforts to provide best execution to its customers relative to the 

proposed rules as such records would be available to regulators during examinations of the 

broker-dealer or upon request for other regulatory purposes.   

 The Commission preliminarily believes that such a requirement would offer greater 

potential benefits for conflicted transactions because broker-dealers engaging in such 

transactions have greater incentives to route orders in a manner that might not result in the best 

prices for customers.  Based on its experience, the Commission believes that some broker-

dealers, particularly the largest broker-dealers that are likely to continue to engage in conflicted 

transactions if the proposed rules are adopted, already maintain this type of documentation for 

both internal review and operational purposes.  Nevertheless, the requirement would be costly.  

Broker-dealers that do not already retain this data likely have chosen not to do so because the 

data are not operationally valuable to them for business purposes, and they believe that they are 

satisfying their best-execution obligations based on other data that they have available for 



   

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review.  For these broker-dealers, the requirement could impose considerable costs.  For 

example, they would need to alter their information technology systems to capture this data, 

including contemporaneous pricing data and routing records, some of which (such as prices 

offered in response to a RFQ and information related to fixed income and crypto asset securities) 

is not incorporated into other regulatory data sources such as CAT and thus might be stored on 

systems not integrated with other order routing systems, or systems that capture regulatory data.  

Processing this data might be computationally demanding, particularly for broker-dealers who 

trade options, as they have very high quotation traffic.  Furthermore, creating and maintaining 

software to produce this documentation would require significant effort by highly skilled 

programmers which would further increase the costs associated with such a requirement.  As 

discussed previously,713 the Commission preliminarily believes that broker-dealers that elect to 

refrain from conflicted transactions if the proposed rules are adopted are more likely to be 

smaller broker-dealers and these costs, many of which are fixed, are more likely to result in the 

broker-dealer changing its business model or exiting the market, while the aggregate benefits to 

investors of such a requirement for smaller broker-dealers is likely to be smaller than for larger 

broker-dealers that handle more customer orders. 

7. Staggered Compliance Dates 

The Commission also considered whether there should be staggered compliance dates 

that take into consideration the concerns of smaller broker-dealers that may need additional time 

to comply with the proposed rule.  Because the Commission preliminarily believes that smaller 

                                                 

713  See supra section V.C.2.ii. 



   

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broker-dealers would primarily rely on outside legal counsel to update existing policies and 

procedures and outside compliance services to conduct and document their quarterly reviews of 

execution quality and document their efforts to obtain best execution for conflicted transactions 

and payment for order flow arrangements, the Commission does not believe that the proposal 

would unduly burden a smaller broker-dealer’s internal resources.  Furthermore, the Commission 

believes small broker-dealers would be less likely to engage in conflicted transactions subject to 

the additional procedural obligations of proposed Rule 1101(b), and would be more likely to 

qualify as introducing brokers and be exempt from complying with proposed Rules 1101(a), (b), 

and (c), and therefore would need to develop a less extensive set of policies and procedures.     

G. General Request for Comment 

The Commission encourages written comments regarding this initial regulatory flexibility 

analysis.  In particular, the Commission seeks comment on the number of small entities that 

would be affected by proposed Regulation Best Execution, and whether the effect on small 

entities would be economically significant.  The Commission requests that commenters describe 

the nature of any impact on small entities and provide empirical data to support the extent of 

such impact.  The Commission also requests comment on the proposed compliance burdens and 

the effects these burdens would have on small entities. 

Statutory Authority and Text of the Proposed Rule 

Pursuant to the Exchange Act, 15 U.S.C. 78a et seq., and particularly sections 2, 3(b), 5, 10, 

11A, 15, 15A, 17, 23(a), 24, and 36 thereof, 15 U.S.C. 78b, 78c(b), 78e, 78j, 78k-1, 78o, 78o-1, 

78q, 78w(a), 78x, and 78mm, the Commission is proposing amendments to § 240.17a-4 and new  

§§ 242.1100 through 242.1102. 

List of Subjects  



   

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17 CFR Parts 240 and 242 

Brokers, Reporting and recordkeeping requirements, Securities.  

Text of the Proposed Rules 

In accordance with the foregoing, Title 17, Chapter II of the Code of Federal Regulations is 

proposed to be amended as follows: 

PART 240 – GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE 

ACT OF 1934 

1. The authority citation for part 240 continues to read as follows: 

Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 

77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 

78o, 78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 80a-20, 80a-23, 

80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 

5221(e)(3); 18 U.S.C. 1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-106, 

sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.  

2. Amend § 240.17a-4 by adding a new paragraph (b)(17) to read as follows:  

§ 240.17a-4 Records to be preserved by certain exchange members, brokers and dealers. 

 * * * * *  

(b)***  

(17) All records made pursuant to §§ 242.1101 and 242.1102, other than required policies and 

procedures, as applicable. 

* * * * * 

PART 242 – REGULATIONS M, SHO, ATS, AC, NMS, SBSR, AND BEST EXECUTION, 

AND CUSTOMER MARGIN REQUIREMENTS FOR SECURITY FUTURES 



   

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3. The authority citation for part 242 is amended to read as follows:  

Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c(b), 78e, 78g(c)(2), 78i(a), 78j, 78k-1, 

78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 78o-1, 78q, 78w(a), 78x, 78dd-1, 78mm, 80a-23, 80a-29, 

and 80a-37. 

4. The heading of part 242 is revised to read as set forth above. 

5. Part 242 is amended by adding Regulation Best Execution, §§ 242.1100 through 

242.1102, to read as follows:  

Regulation Best Execution 

Sec. 
242.1100 The best execution standard. 
242.1101 Required policies and procedures; related obligations. 
242.1102 Annual report.  

§ 242.1100 The best execution standard. 

In any transaction for or with a customer, or a customer of another broker, dealer, 

government securities broker, government securities dealer, or municipal securities dealer 

(collectively, for purposes of Regulation Best Execution, “broker or dealer”), a broker or dealer, 

or a natural person who is an associated person of a broker or dealer, shall use reasonable 

diligence to ascertain the best market for the security, and buy or sell in such market so that the 

resultant price to the customer is as favorable as possible under prevailing market conditions (for 

purposes of Regulation Best Execution, “most favorable price”).  A broker or dealer, or a natural 

person who is an associated person of a broker or dealer, is not subject to this standard when: 

(a) Another broker or dealer is executing a customer order against the broker or dealer’s 

quotation;  



   

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(b) An institutional customer, exercising independent judgment, executes its order against 

the broker or dealer’s quotation; or  

(c) The broker or dealer receives an unsolicited instruction from a customer to route that 

customer’s order to a particular market for execution and the broker or dealer processes that 

customer’s order promptly and in accordance with the terms of the order.  

§ 242.1101 Required policies and procedures; related obligations. 

A broker or dealer that engages in any transaction for or with a customer or a customer of 

another broker or dealer shall establish, maintain, and enforce written policies and procedures 

reasonably designed to comply with the best execution standard as set forth in § 242.1100 (for 

purposes of Regulation Best Execution, “best execution policies and procedures”).   

(a) Requirements.  Such policies and procedures shall address: 

(1) How the broker or dealer will comply with the best execution standard by: 

(i) Obtaining and assessing reasonably accessible information, including 

information about price, volume, and execution quality, concerning the markets 

trading the relevant securities;  

(ii) Identifying markets that may be reasonably likely to provide the most 

favorable prices for customer orders (“material potential liquidity sources”); and 

(iii) Incorporating material potential liquidity sources into its order 

handling practices, and ensuring that the broker or dealer can efficiently access 

each such material potential liquidity source. 

(2) How the broker or dealer will determine the best market and make routing or 

execution decisions for customer orders that it receives by: 



   

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(i) Assessing reasonably accessible and timely information with respect to 

the best displayed prices, opportunities for price improvement, including midpoint 

executions, and order exposure opportunities that may result in the most favorable 

price; 

(ii) Assessing the attributes of customer orders and considering the trading 

characteristics of the security, the size of the order, the likelihood of execution, 

the accessibility of the market, and any customer instructions in selecting the 

market most likely to provide the most favorable price; and  

(iii) In determining the number and sequencing of markets to be assessed, 

reasonably balancing the likelihood of obtaining better prices with the risk that 

delay could result in a worse price. 

(b) Conflicts of Interest.  In any transaction for or with a retail customer, where the broker 

or dealer executes an order as principal, including riskless principal; routes an order to, or 

receives an order from, an affiliate for execution; or provides or receives payment for order flow 

as defined in § 240.10b-10(d)(8) of this chapter (each, a “conflicted transaction”):  

(1) The broker or dealer’s best execution policies and procedures additionally 

shall address how the broker or dealer will obtain and assess information beyond that 

required by paragraph (a)(1)(i) of this section, including additional information about 

price, volume, and execution quality, in identifying a broader range of markets beyond 

those identified as material potential liquidity sources;  

(2) The broker or dealer’s best execution policies and procedures additionally 

shall address how the broker or dealer will evaluate a broader range of markets, beyond 

those identified as material potential liquidity sources, that might provide the most 



   

436 

 

favorable price for customer orders, including a broader range of order exposure 

opportunities and markets that may be smaller or less accessible than those identified as 

material potential liquidity sources; and 

(3) The broker or dealer shall document its compliance with the best execution 

standard for conflicted transactions, including all efforts to enforce its best execution 

policies and procedures for conflicted transactions and the basis and information relied on 

for its determinations that such conflicted transactions would comply with the best 

execution standard.  Such documentation shall be done in accordance with written 

procedures.  The broker or dealer shall also document any arrangement, whether written 

or oral, concerning payment for order flow, including the parties to the arrangement, all 

qualitative and quantitative terms concerning the arrangement, and the date and terms of 

any changes to the arrangement.  

(4) For purposes of this paragraph (b):  

(i) “Any transaction for or with a retail customer” means any transaction 

for or with the account of a natural person or held in legal form on behalf of a 

natural person or group of related family members.  For purposes of this 

definition, a “group of related family members” means a group of natural persons 

with any of the following relationships: child, stepchild, grandchild, great 

grandchild, parent, stepparent, grandparent, great grandparent, spouse, domestic 

partner, sibling, stepbrother, stepsister, niece, nephew, aunt, uncle, mother-in-law, 

father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, 

including adoptive and foster relationships; and any other natural person (other 



   

437 

 

than a tenant or employee) sharing a household with any of the foregoing natural 

persons;   

(ii) A broker or dealer executes an order as “riskless principal” if, after 

having received an order to buy from a customer, the broker or dealer purchases 

the security from another person to offset a contemporaneous sale to the customer 

or, after having received an order to sell, the broker or dealer sells the security to 

another person to offset a contemporaneous purchase from the customer; and   

(iii) “Affiliate” means, with respect to a specified person, any person that, 

directly or indirectly, controls, is under common control with, or is controlled by, 

the specified person.  For purposes of this definition, “control” means the power, 

directly or indirectly, to direct the management or policies of the broker or dealer 

whether through ownership of securities, by contract, or otherwise.  A person is 

presumed to control a broker or dealer if that person is a director, general partner, 

or officer exercising executive responsibility (or having similar status or 

performing similar functions); directly or indirectly has the right to vote 25 

percent or more of a class of voting securities or has the power to sell or direct the 

sale of 25 percent or more of a class of voting securities of the broker or dealer; or 

in the case of a partnership, has contributed, or has the right to receive upon 

dissolution, 25 percent or more of the capital of the broker or dealer. 

(c) Regular Review of Execution Quality. A broker or dealer shall, no less frequently than 

quarterly, review the execution quality of its transactions for or with customers or customers of 

another broker or dealer, and how such execution quality compares with the execution quality 

the broker or dealer might have obtained from other markets, and revise its best execution 



   

438 

 

policies and procedures, including its order handling practices, accordingly.  The broker or dealer 

shall document the results of this review. 

(d) Introducing Brokers.  An introducing broker that routes customer orders to an 

executing broker does not need to separately comply with paragraphs (a), (b), and (c) of this 

section so long as the introducing broker establishes, maintains, and enforces policies and 

procedures that require the introducing broker to regularly review the execution quality obtained 

from such executing broker, compare it with the execution quality it might have obtained from 

other executing brokers, and revise its order handling practices accordingly.  The introducing 

broker shall document the results of this review.  For purposes of this provision, introducing 

broker means a broker or dealer that: 

(1) Does not carry customer accounts and does not hold customer funds or 

securities; 

(2) Has entered into an arrangement with an unaffiliated broker or dealer that has 

agreed to handle and execute on an agency basis all of the introducing broker’s customer 

orders (“executing broker”)  (For purposes of this paragraph, principal trades by an 

executing broker with the introducing broker’s customer to fill fractional share orders in 

NMS stocks and riskless principal trades (as defined in paragraph (b)) by an executing 

broker in fixed income securities will be considered to be handled on an agency basis); 

and  

(3) Has not accepted any monetary payment, service, property, or other benefit 

that results in remuneration, compensation, or consideration from the executing broker in 

return for the routing of the introducing broker’s customer orders to the executing broker.   

§ 242.1102 Annual report.   



   

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A broker or dealer that effects any transaction for or with a customer or a customer of 

another broker or dealer shall, no less frequently than annually, review and assess the design and 

overall effectiveness of its best execution policies and procedures, including its order handling 

practices.  Such review and assessment shall be conducted in accordance with written procedures 

and shall be documented.  The broker or dealer shall prepare a written report detailing the results 

of such review and assessment, including a description of all deficiencies found and any plan to 

address deficiencies.  The report shall be presented to the board of directors (or equivalent 

governing body) of the broker or dealer.   

 

By the Commission. 

December 14, 2022. 

 

J. Matthew DeLesDernier, 
Deputy Secretary.