Understanding Rule 605 Execution Quality Statistics
SEC Rule 605 reports are designed to provide standardized information about order execution quality and can be a useful tool in evaluating and comparing execution outcomes across broker-dealers. When reviewing Rule 605 statistics, however, it is important to recognize that differences in reported results may reflect differences in the nature of the orders received by each firm, in addition to differences in execution performance.
Broker-dealers may serve materially different client populations with varying trading objectives, order sizes, order types, security selections, liquidity characteristics, investment time horizons, and use of marketable and non-marketable orders. These factors can significantly influence the composition of a firm's order flow and, consequently, many of the execution quality statistics reported under Rule 605. In addition, reported metrics may be affected by prevailing market conditions, including volatility, trading volumes, and liquidity during the reporting period.
Accordingly, Rule 605 data may be most informative when considered together with the characteristics of the underlying order flow and broader market conditions. Comparisons across broker-dealers should take these factors into account before drawing conclusions regarding relative execution quality. Rule 605 reports alone should not be viewed as a definitive measure or ranking of a firm's overall execution quality, whether on an aggregate basis or with respect to any particular security or order type.
Need help interpreting the reports?
Review the SEC Rule 605(a) Reports guide for a further breakdown of the numbers and calculations.
Terms and metrics used in SEC Rule 605 reports
A measurement of the frequency of shares receiving the quoted price or better on orders sent to the broker-dealer.
For buy orders, shares executed at the quote or better are those with a price the same or below the National Best Offer; for sell orders, shares executed at the quote or better are those with a price the same or above the National Best Bid. The sum of shares executed at the quote or better is divided by the sum of all executed shares from the same orders.
A measurement of the frequency of shares receiving better than the quoted price on orders sent to the broker-dealer.
For buy orders, shares that received price improvement are those with a price below the National Best Offer; for sell orders, shares that received price improvement are those with a price above the National Best Bid. The sum of shares that received price improvement is divided by the sum of all executed shares from the same orders.
A measurement of the average actual per-share cost of trading—exclusive of broker fees—relative to the share price on orders sent to the broker-dealer.
The share-weighted average effective spread needs to be calculated first.
For buys, effective spread is two times the difference between the execution price and the midpoint.
For sells, effective spread is two times the difference between the midpoint and the execution price.
Share-weighted average effective spread is divided by the share-weighted average midpoint for such orders.
A measurement of the average anticipated per-share cost of trading—exclusive of broker fees—relative to the share price on orders sent to the broker-dealer.
The share-weighted quoted spread needs to be calculated first. Quoted spread is the difference between the National Best Offer and the National Best Bid. Share-weighted average quoted spread is divided by the share-weighted average midpoint.
A measurement of the average per-share cost of trading—net of post-trade price changes and exclusive of broker fees—relative to the share price on orders sent to the broker-dealer.
The share-weighted realized spread needs to be calculated first.
For buy orders, realized spread is calculated as double the amount of difference between the execution price and the midpoint of the National Best Bid and Offer 1 minute after the time of order execution.
For sell orders, realized spread is calculated as double the amount of difference between the midpoint of the National Best Bid and Offer 1 minute after the time of order execution and the execution price.
Share-weighted realized spread is divided by the share-weighted average midpoint for such orders.
A measurement of the average per-share cost of trading—net of post-trade price changes and exclusive of broker fees—relative to the share price on orders sent to the broker-dealer.
The share-weighted realized spread needs to be calculated first.
For buy orders, realized spread is calculated as double the amount of difference between the execution price and the midpoint of the National Best Bid and Offer 15 seconds after the time of order execution.
For sell orders, realized spread is calculated as double the amount of difference between the midpoint of the National Best Bid and Offer 15 seconds after the time of order execution and the execution price.
Share-weighted realized spread is divided by the share-weighted average midpoint for such orders.
The average notional order size is a measurement of the average customer order size sent to the broker-dealer.
For limit orders, the notional value is calculated by multiplying the number of shares by the order's limit price. For market orders to buy, the notional value is calculated by multiplying the number of shares by the National Best Offer at the time of order entry; for market orders to sell, the notional value is calculated by multiplying the number of shares by the National Best Bid at the time of order entry. The notional value of each order is aggregated into a simple average.
The average order size is a measurement of the average customer order size sent to the broker-dealer.
For both market and marketable limit orders, average order size in shares is calculated as the sum of shares ordered divided by the sum of orders.
The National Best Bid is the highest displayed round lot price available for sell orders to immediately trade against. It is a composite of all national securities exchanges' quotes.
The National Best Offer is the lowest displayed round lot price available for buy orders to immediately trade against. It is a composite of all national securities exchanges' quotes.
The order size is a value showing one of nine notional order size categories. There are eight possible non-overlapping order size categories and one summary order size category containing all orders less than $200,000 in value.
An order type is a value showing whether the orders included in the calculations for the respective row are "market orders" (M) or "marketable limit orders" (MLIMIT).
A market order is an order to buy or sell a stock at the current market price. Market orders typically fill immediately at the best available price when entered during market hours.
A marketable limit order is an order to buy with a limit price at or above the National Best Offer or an order to sell with a limit price at or below the National Best Bid. Depending on market conditions, a marketable limit order may fill immediately in its entirety, fill partially, or not fill at all.
Visit https://www.investor.gov/introduction-investing/investing-basics/glossary/market-order to learn more about order types.
A round lot is the minimum share size eligible to be included in the National Best Bid or National Best Offer. This size is based on the price of the security, with higher-priced securities having a lower round lot size than lower-priced securities.
Visit https://www.ctaplan.com/publicdocs/ctaplan/CTA_Round_Lot_Changes_FAQ.pdf for frequently asked questions about round lots.
The S&P 500 flag is a value showing whether the orders included in the calculations for the respective row are on stocks within the S&P 500 index, with "Y" for "Yes" and "N" for "No."
A measurement of the average per-share amount of price improvement relative to the share price on orders sent to the broker-dealer.
The share-weighted average price improvement needs to be calculated first.
For buys, price improvement is the difference between the National Best Offer and the order's execution price.
For sells, price improvement is the difference between the order's execution price and the National Best Bid.
The share-weighted average price improvement is divided by the share-weighted average midpoint for such orders.
A measurement of the average time between when shares were ordered and executed on orders sent to the broker-dealer.
Execution speed is the share-weighted difference between the execution time and order entry time, expressed in milliseconds.
The share-weighted average mid-point is a measurement of the average share price on orders sent to the broker-dealer.
For both market and marketable limit orders, the midpoint is calculated as the average of the National Best Offer and National Best Bid at the time of order entry. The average midpoint of each order is aggregated by shares.
