Rule 605 and the Limits of Efficacy: A Policy Brief on Comparability, Order Flow, and Execution Quality

Executive Summary:

Securities and Exchange Commission (“SEC”) Rule 605 of Regulation National Market System (“NMS”) was designed to make order execution quality measurable and represents a substantive advance in the SEC’s disclosure-based framework. The SEC’s 2024 amendments to Rule 605, which became effective on August 1, 2026, substantially modernized the rule by extending reporting obligations to larger customer-facing broker-dealers, updating order size categorization, and requiring accessible public summaries. The updated rule provides investors, academia, broker-dealers, and regulators with enhanced data to evaluate whether orders are executed at competitive prices with appropriate speed and fill probability. To be clear, however, Rule 605 is a disclosure framework, and as such needs to be evaluated with a complete understanding of what the data provide. A broker serving a customer base that generates smaller orders, more fractional shares, different securities, or different trading behaviors may exhibit materially different Rule 605 statistics than a competitor, even when both firms diligently pursue best execution. 

The central purpose of this paper is to improve the interpretation of Rule 605 reports and offer potential future enhancements to the rule that would make the reports more useful. Execution quality is conditional on order-flow composition. Realizing the full value of this disclosure framework, therefore, requires complementary measures of order flow composition disclosure, best execution process accountability, quality standards for commercial analytics, and active monitoring of market structure conditions to ensure comparisons reflect genuine execution quality rather than customer-selection effects. Regulators and market participants should supplement headline statistics with matched order analysis and, where possible, measures of total execution cost.

Rule 605 captures effective spreads, quoted spreads, realized spreads at multiple horizons, price improvement, execution speed, fill rates for non-marketable orders, and size improvement. These are economically meaningful measures. We know from the academic literature that investors price illiquidity, or the risk of failing to execute when desired, as a real cost, confirming that fill probability and execution certainty are not secondary considerations (Amihud, 2002).  Further, Madhavan’s (2000) comprehensive survey of market microstructure research identifies execution quality as inherently multi-dimensional, with no single metric capturing the full set of relevant economic considerations. 

Best execution requires a broker to seek the most favorable terms reasonably available under the circumstances, taking into consideration factors like price, speed, likelihood of execution and settlement, and the nature and size of the order. While Rule 605 provides evidence that can inform that assessment, it does not replace the obligation to conduct an ongoing, broader best execution review. The U.S. framework emphasizes process obligations and monitoring rather than rigid outcome mandates, precisely because execution quality is context-dependent and improvements on one dimension can come at the cost of another dimension (Angel, Harris, and Spatt, 2011).

The distinction between disclosure and ranking is therefore not merely semantic. A broker with a strong Rule 605 report may not meet their best execution obligations if their routing practices, conflict management, or monitoring processes are deficient. Conversely, a broker whose aggregate statistics appear weaker than a peer’s may be performing equally well after controlling for the characteristics of the orders it receives.

Even with the 2024 amendments, the disclosure framework has important structural gaps. Rule 605 reports do not reveal whether one broker’s customers generate systematically easier or harder orders to execute; they do not report the adverse selection content of order flow that theory predicts will drive systematic execution quality differences. Rather, they describe what happened, not what would have happened had the order been routed differently. The statistics measure price improvement relative to the NBBO, but not total execution cost inclusive of fees, opportunity cost, or fill probability for marketable orders that go unfilled. Aggregate monthly statistics also obscure the impact of intraday volatility, conditions near market-open and market-close, and episodic market stress. Security composition effects can drive broker level averages in ways that are invisible without cohort level disclosure. Finally, the fractional-share architecture of integrated firms can influence which activity appears in which report without the pattern being immediately visible to an outside analyst.

The implication is not that Rule 605 is unhelpful. It is that Rule 605 should be interpreted as one layer of evidence in a broader execution quality analysis and that the analytical infrastructure required to support such interpretation must be deliberately built, not assumed to exist.

Given the natural tendency for market participants in a competitive landscape to want to determine which broker has better execution, such evaluation should only be done in the context of whether each firm executes comparable customer orders under comparable market conditions. Hosty and Billings (2025) discuss the importance of these distinctions in developing a robust methodology to avoid misleading results. If execution quality differences persist after normalization of the sample set, only then should regulators and the public weigh comparisons based on meaningful evidence of genuine performance differences. However, if differences largely disappear after controlling for order mix and customer behavior, it simply demonstrates that headline comparisons can exaggerate differences arising from customer selection rather than execution capability.

The academic literature on market microstructure establishes at a structural level why execution quality differences across brokers may reflect order-flow characteristics rather than routing decisions, and why this matters for regulators and policymakers. Glosten and Milgrom (1985) established foundationally that bid-ask spreads are endogenous to the composition of incoming order flow. Market makers set spreads as rational compensation for the risk of trading against informed counterparties. When a broker routes predominantly uninformed, liquidity-motivated retail flow, market makers are willing to quote tighter spreads and provide more price improvement. A broker whose customers trade more on time-sensitive signals generally will face rationally wider spreads from market makers. When we evaluate this from a market impact perspective: the permanent price change attributed to a trade reflects its informational content, not the broker’s routing decision (Kyle, 1985). Hasbrouck (2007) formalizes the empirical decomposition of the bid-ask spread into inventory, margin, and adverse selection components, confirming that the adverse selection component is largely beyond a broker’s control.

Dyhrberg and Shkilko’s (2026) study of the retail execution landscape documents that order flow toxicity is substantially greater on exchanges than in wholesaler-executed retail flow, with price impacts running 43% to 114% higher depending on stock size, and finds that industry insiders attribute the variation in toxicity among wholesalers to the mix of brokerages and the types of accounts they serve, rather than to differences in wholesaler market power. Their data further show that when one wholesaler provides slightly smaller price improvement than a competitor but receives considerably more toxic flow, simple comparisons of price improvement become unfair. 

The practical consequence is that aggregated Rule 605 statistics cannot cleanly isolate broker performance from customer selection effects. As with benchmark definitions and outlier treatment, choices in sample selection can produce materially different comparative conclusions from identical underlying data. Academic research has further shown that structurally different segments of U.S. equity markets produce systematically different execution outcomes reflecting participation differences, not infrastructure quality (Bessembinder, 2003; Hatheway, Kwan, and Zheng, 2017).

This creates a classic selection problem. Two firms with identical execution technology will report different Rule 605 statistics if one receives more marketable small orders in highly liquid securities while the other receives more limit orders, larger orders, or orders in less-liquid securities. Any policy or public analysis that ignores order-flow composition risks mistaking customer-selection effects for evidence of superior or inferior execution capability. 

1. Distinguish disclosure from ranking in all official guidance and examination priorities. 

The SEC should state explicitly in FAQs, investor alerts, and examination guidance that unadjusted aggregate Rule 605 statistics cannot establish superior or inferior best execution across brokers with different customer populations. The rule’s value is in enabling rigorous analysis. Framing it as a league table undermines both its analytical utility and investor confidence in its integrity.

2. Require standardized order-flow composition disclosure alongside execution statistics.

Reporting entities should disclose the distribution of their covered orders across order type, security liquidity buckets, notional-size bands, and fractional-order indicators. Order-flow composition is an endogenous determinant of execution quality, meaning that no cross-broker comparison is interpretable without it. The structural deficiencies in the detailed report that remain unanswered post disclosure due to a large swath of a reporting brokers’ order mix being non- covered, however, will skew any insights that might otherwise possibly be gleaned from analysis of a firm’s 605 report. As such, without this information, headline statistics cannot be meaningfully compared across firms serving different customer bases.

3. Establish quality standards for third-party execution quality analytics. 

The commercial market for Rule 605 analytics creates genuine value by making complex data accessible. It also creates the risk of selective presentation. Providers whose clients have commercial interests in particular execution arrangements may highlight comparisons that favor those arrangements. The SEC should consider rules or guidance requiring methodology disclosure, conflict-of-interest disclosure, and acknowledgment of known limitations from providers publishing execution quality rankings or assessments. The asymmetry in analytical capacity between sophisticated market participants and retail investors identified by Boehmer, Saar, and Yu (2005) argues for regulatory attention to the intermediaries who translate Rule 605 data into actionable intelligence for the public.

Rule 605 is an important component of U.S. market structure governance because execution quality cannot be meaningfully improved without disclosure, measurement, and analysis. The 2024 amendments substantially advance the purpose of Rule 605 by extending coverage to larger customer-facing brokers and modernizing its metrics, but measurement and interpretation are distinct activities. The central challenge is that execution quality is conditional on the types of orders a broker receives. A comparison that ignores the order-flow composition of orders will mistake customer-selection effects for execution quality differences, producing conclusions that can mislead investors, distort competition, and undermine the credibility of the disclosure regime itself.

The appropriate response is not to abandon the SEC’s disclosure-based framework for order execution quality, which allows for comparative transparency. It is to make the comparison more rigorous: through order flow composition disclosure, best execution process accountability, quality standards for commercial analytics, and active monitoring of the market structure conditions. Disclosure frameworks should be accompanied by the analytical infrastructure and interpretive guidance needed to translate raw data into actionable insight for the retail investors the rule is designed to protect. Rule 605, if used properly, can move the policy debate from competing claims about who has “better execution” based on the reports alone to an evidence-based understanding of how and why execution outcomes differ and how to account for those differences.  

See references here.