The rule, scheduled for a vote on Wednesday, would require disclosure on trade execution quality from brokers and markets on:
- How quickly orders are filled
- Where those orders are routed
- How often “limit” orders are filled
- How often markets provide better prices than sought by the investor
Granted, the SEC is primarily worried about individual investors, who currently have little access to information other than the commission price itself.
The SEC hopes the new rule would in effect provide a “report card” for brokers and exchanges.
Quarterly reports from brokers would show if orders are “internalized” – filling buy/sell orders within the brokerage firm itself, rather than going outside. It would also reveal if they are paying financial advisors to send orders to them.
Exchanges would have to provide monthly reports on how they handle the orders they receive, using a standard, statistical measure that covers all stocks, based on order size. That should allow investors to better determine how well the market executes trades.
Those brokers and exchanges that do well are expected to play up the results in advertising.
According to SEC estimates, if better disclosure provides modest price improvement, bringing so-called “effective spreads” to a median level, investors could save $160 million on year trading NASDAQ stocks. Smaller savings are expected for trades on non-NASDAQ stocks.
The SEC estimates compliance will cost $41 million, but Wall Street brokerage firms are of another opinion. Aside from the cost of tracking, compiling and reporting, opponents are concerned about the additional litigation that could result from the information. The Securities Industry Association shares those concerns, which worries that the performance data could give investors new ammunition to use in court battles.
The SEC says the rule isn’t intended to define what constitutes “best execution,” or help plaintiffs’ lawyers make their case.
– Nevin Adams email@example.com