SEC to Options Exchanges: Dash 5 Now!

The Securities and Exchange Commission is losing patience. The six options exchanges said they would work on a plan for publishing SEC Rule 605 statistics detailing their execution quality, but that process hasn’t yet concluded. Now the SEC wants action.

“I’ve frankly been a little disappointed about the lack of action there,” Erik Sirri, director of the SEC’s Division of Trading and Markets, told Traders Magazine. “I’d much prefer the industry to get together on this than having it be done by rule,” he said last week. Sirri said he sent the options exchanges letters urging them to “facilitate this conversation about the stats” in October.

The SEC would like to see more transparency from the options exchanges about the quality of the executions they provide customers, according to Sirri. He said the required Rule 605 statistics in the equities market, known as Dash 5 stats, have proven helpful to brokers in making routing decisions and thinking about best execution.

The Boston Options Exchange is the only exchange that has publicly announced plans to publish execution-quality statistics. “We will adapt the 605 format from equities with a couple adjustments for the options market,” said R. Scott Morris, BOX’s chief executive. “We wanted to come up with an impartial way of viewing execution quality. Because of our price-improvement process, we think we have the best execution quality in the business.”

The options committee of the Securities Industry and Financial Markets Association is spearheading efforts to create standardized 605 statistics for the options industry. A SIFMA spokesperson said the committee “has worked diligently with the [six options exchanges and Nasdaq] for the past six months to create consistent quality-of-execution reports which will benefit all investors.” The spokesperson said the committee has been responding to exchanges’ concerns and that the “final recommendation will be sent to the exchanges within the next week.” SIFMA said it hopes to see the 605 stats implemented in the second quarter of this year.

Rule 605 of Regulation NMS requires market centers to publish monthly reports detailing execution-quality data. The data include the percentage of shares executed at or within the NBBO, the percentage of shares that were price-improved, execution speed and information about the market’s effective spread. Broker-dealers use these reports to compare execution quality across market centers when determining their routing practices.

Rule 605’s companion rule, the SEC’s Rule 606, requires broker-dealers to publish quarterly reports on their routing practices. Brokers already do this for both equities and options.