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Fact Sheet
Market Structure Rules

New Rules Requiring Public Disclosure of
Order Execution and Routing Practices

The Commission is adopting two rules, Rule 11Ac1-5 and Rule 11Ac1-6, to improve public disclosure of order execution and routing practices. Taken together, the rules should greatly increase the opportunity for public investors to evaluate what happens to their orders after they submit them to a broker-dealer for execution. In addition, by making more visible the execution quality of the securities markets, the rules are intended to spur competition among market centers and broker-dealers to provide the best possible price and speed of execution for investor orders.

In today's markets, investor order flow in the same security can be divided among many different "market centers" – e.g., exchanges, over-the-counter ("OTC") market makers, and electronic communications networks ("ECNs"). The primary structural component linking these market centers in the national market system is the consolidated public quote – the best displayed bid and offer for each equity security are collected from all significant market centers and disseminated to the public on a real-time basis.

This centralized source of information, however, does not clearly show the significant extent to which the quality of order execution can vary across different market centers. At some market centers, for example, as many as 50% of certain orders, particularly market orders for small sizes (less than 500 shares) are executed at prices better than the public quotes. Similarly, for investors seeking to use limit orders to obtain better prices than the public quotes, there can be wide variations among market centers in the opportunity for such orders to be executed.

At present, few market centers provide detailed public disclosure concerning their execution quality. In addition, there is no market wide requirement that brokers disclose to customers where their orders are routed for execution. The rules adopted today are intended to remedy this lack of public information.

To address concerns that misuse of the information could pose a risk of merit less litigation, a "Preliminary Note" has been added to Rule 11Ac1-5 clarifying that the Rule is designed to produce general purpose statistics that will promote competition. It does not encompass all of the factors that may be important to investors. Accordingly, the Note states that the statistical information required by the Rule alone does not create a reliable basis to address whether any particular broker failed to meet its legal duty of best execution.

The first phase-in of the rules will begin on Monday, April 2, 2001. After the market center and broker information is made available to the public, all interested persons, including the financial press, independent analysts, consultants, and others, will be able to prepare analyses of order execution quality that respond to the needs and interests of individual investors. In time, improved public disclosure concerning order execution and routing practices should promote more vigorous competition in the markets to provide better prices to investors, as well as enable investors to make more informed decisions in choosing their brokers.

Market Structure Initiatives in the Options Market:
Adoption of New Trade-Through Disclosure Rule
and Changes to Quote Rule

On November 15, 2000, the Commission will consider approving initiatives designed to better ensure that customers' orders for exchange-traded options receive best execution. The absence of effective access for one market to reach a better price displayed on another market, together with the recent expansion of multiply-traded options, has significantly increased the likelihood that a customer order may be executed at a price that is inferior to a price available on another market, known as an "inter market trade-through." In fact, intermarket trade-throughs are estimated to occur in as many as 5% of all options trades.

To address the problem of inter market trade-throughs in the options markets, the Commission has, for several years, encouraged the options exchanges to develop a linkage voluntarily. In October 1999, the Commission ordered the options markets to develop a linkage, and last July, the Commission approved the Linkage Plan proposed by the Amex, CBOE, and ISE.

Although a linkage plan offers significant advantages, the Commission is reluctant to mandate a linkage that may fail to adapt over time to changes in the markets and may impede the entry of new participants using different business models. Moreover, the Commission recognized that there might be a number of effective ways in which technology may be relied upon to decrease the likelihood of inter market trade-throughs in the options markets. Consequently, the Commission authorized, but did not order, the options exchanges to participate in this linkage. All five options exchanges are now participants in this Linkage Plan. At the same time, the Commission proposed a flexible, market-based approach to reduce intermarket trade-throughs without mandating the means to achieve this goal. The Commission tomorrow will consider adopting a new Trade-Through Disclosure Rule and amendments to the Quote Rule, substantially as proposed.

November 15, 2000