(November 17 – 12:05 ET) – The SEC has approved new rules governing the routing of equities and options orders that are designed to improve disclosure. Firms will be required to release monthly electronic reports evaluating their execution quality and to disclose quarterly the venues that receive the firm’s orders.

In the options market, firms are now required to tell customers when they have executed an order at a price inferior to the best quote precisely when the order is being handled, and options exchanges and market makers must publish firm quotes.

The Securities Industry Association is not pleased with the new SEC regulation. Investors bringing lawsuits against advisors will have a huge new arsenal of data on execution quality, says Stuart Kaswell, senior vice president and general counsel of SIA. They can use it to claim that they had been denied “best execution. Such claims would be tantamount to playing Monday morning quarterback,” Kaswell says.

Kaswell agrees that there are benefits to the increased disclosure of information about order executions. However, the statistical measures the commission selected emphasize price and speed too heavily over other, he says. “While some investors may value speed and price, others may value liquidity, anonymity, and transaction costs in determining how their order should be executed best. A best execution obligation encompasses many different factors, as the SEC has already recognized, of which price and speed are but two.”

“First, you need better linkages so the best quotes can be more readily accessed. Second, we need a trade through rule that is market wide. Then, more disclosure,” says Kaswell. “We encourage the SEC to find incentives that would promote state of the art market linkages.”

The SIA will be producing a brochure to help firms educate their clients about order execution processes that firms will be required to provide regularly on Web sites, he says.
-IE Staff