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Institutional 606 Reports

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In theory, brokers will have to start providing institutional clients with 606 reports, on request, as of May 20th, 2019. We expect this to be delayed, as industry has been asking the SEC for guidance on a number of fronts since the rule was put out last November. Staff has suggested the implementation will likely be delayed until Oct 1.

The new rules expands 606 reports from retail held order (orders that are required to be direct to market on entry) to not held orders. While the final definition of not held isn’t clear, it essentially is any order where the broker has discretion on the timing of order entry. As such most, if not all, high touch and algo orders will be included.

Under the rules brokers will have to make clear to clients what destinations they send orders to – broker down by passive and active orders. What the economics they get at each venue look like. And for passive order, what the average resting time is.

So if Virtu ITG was sending 40% of its passive orders, for clients, to NYSE, where we get a rebate of ~ 26 mills, and resting times average 3 minute (a made up example number), and at the same time were only sending 2% of your passive orders to Bats Y, where we pay to post, and resting times average 20 seconds – you would be aware, and able to call us out on clearly poor routing habits.

Likewise for dark pools you will see which pools we route to – for both resting and active orders – the economics, average fill size and resting times. Again, you become informed and can call us out for using dark pools that pay us, or that have poor fill quality.

Where the rule really becomes interesting is around electronic IOIs. While definitions here need to be made more clear, if done right clients will know what Conditional dark pools their dealers are routing too, what % of the time they get a fill, what they pay, or get paid, by these pools, and average fill size. We suspect this will result in clients shutting off conditional pools with low fill rates, and small fill sizes. (Something better dealers have already done themselves).

Likewise firms that ping Central Risk Books, or Single Dealer Platforms (like Two Sigma) will need to make it clear to clients what percent of orders pinged those pools, what percent of pings received some type of fill, average fill size, and what the dealer pays or gets paid by the pool. Like the conditional pools, this will almost certainly allow clients to differentiate between CRBs that add real value, and take real risk, from the pools that are more marketing than product.

The rule also applies to option orders – although it isn’t clear how complex orders like spreads or buy writes are to be handled.

Several vendors, ourselves included, are working on tools that would aggregate the XHTML files that dealers will send. (Files will be a set format, so identical but not easy to read). These tools will let clients upload all their dealer reports and give them a list of categories with dealers ranked best to worst. (ie percent of passive fills on inverted, or average resting time of a passive order). Once the rule is finalized, and such tools are tweaked, it should make it much easier for the buyside to quickly compare dealers routing capabilities. The one concern that smaller dealers have, is bigger dealers are likely to have better conditional pools and CRBs, due to critical mass…as such it is possible the whole exercise results in flow migrating to the biggest dealer. That said, post MIFID this trend towards concentration of flow has already begun…it seems inevitable at this point.

Hope this helps, happy to answer any questions.

Thanks

Doug

Doug Clark

Virtu ITG Canada Corp.

130 King Street West | Suite 1040 | Toronto, ON M5X 1B1

t: 416.874.0740 | m: 416.931.8680

[email protected]  | www.virtu.com

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