What Are the Key Differences between the Rule 606(A) and 606(B) Reports?

Concept

The distinction between Rule 606(a) and Rule 606(b) reports represents a fundamental partition in the philosophy of market transparency. It separates the general, aggregated view of a broker-dealer’s routing practices from the specific, client-centric history of individual order handling. Both are outputs from the same complex market system, yet they serve distinctly different purposes and audiences, flowing from the SEC’s mandate to illuminate potential conflicts of interest in how client orders achieve execution. Understanding this division is the first step for any market participant seeking to evaluate the quality of their brokerage relationships and the efficacy of their own trading protocols.

Rule 606(a) is the public-facing component, a quarterly disclosure that provides a wide-angle lens on a broker-dealer’s order routing behavior for “non-directed” orders ▴ those where the client has not specified a particular execution venue. This report is a standardized, aggregated summary intended for public consumption. Its primary function is to offer a general overview of where a firm sends its clients’ held order flow, particularly for NMS (National Market System) stocks and options.

The data is broken down by calendar month and must differentiate between marketable and non-marketable limit orders, providing a high-level map of a broker’s routing decisions and the corresponding payment for order flow (PFOF) arrangements. This report is accessible to anyone, published on a firm’s website, and serves as a baseline for comparing the general routing policies of different brokers.

Rule 606(a) offers a quarterly, public, and aggregated summary of a broker’s routing for held orders, while Rule 606(b) provides a detailed, on-demand report of not-held order routing specific to an individual client.

Conversely, Rule 606(b) operates as a private, high-resolution instrument available to a client upon request. It provides a granular accounting of how that specific client’s orders were handled over the previous six months. The modern iteration of the rule bifurcates this report. Rule 606(b)(1) covers held orders, providing details on the venues to which a client’s orders were routed and the time of execution.

The more substantial report, Rule 606(b)(3), is designed for clients who place “not-held” orders ▴ typically larger, more complex orders where the broker is given discretion over the time and price of execution. This report offers a far deeper level of detail, including information on orders that provided or removed liquidity and specifics on routing paths that may involve multiple intermediaries. This on-demand mechanism empowers clients to conduct a forensic analysis of their broker’s performance and alignment with their execution objectives.

Strategy

From a strategic standpoint, the two report types function as distinct toolsets for institutional clients to manage and optimize their trading relationships. The 606(a) report is a tool for preliminary due diligence and broad market comparison. The 606(b) report is a precision instrument for deep performance analysis and direct engagement with a broker-dealer. Leveraging them effectively requires an understanding of their respective strengths and limitations.

Comparative Analysis of Reporting Mandates

The strategic value of each report is rooted in its specific disclosure requirements. The public 606(a) report provides a macro view, while the client-specific 606(b) report offers a micro-level audit trail. An institutional trader uses the former to survey the landscape and the latter to inspect a specific plot of land.

The table below outlines the core informational differences, highlighting the shift from a general overview to a granular, client-focused analysis.

Strategic Application for Institutional Clients

For an institutional client, the utility of these reports extends beyond mere compliance. They form a critical data layer for assessing best execution and managing broker relationships.

• Using Rule 606(a) for Initial Vetting ▴ Before establishing a relationship, a portfolio manager can review a prospective broker’s 606(a) reports. This analysis reveals the broker’s reliance on wholesale market makers and the materiality of any payment for order flow arrangements. A high concentration of order flow to a few venues that provide substantial rebates might suggest a business model that prioritizes revenue generation over optimal execution outcomes for all client types. While not definitive, it provides a valuable starting point for conversation.
• Employing Rule 606(b) for Performance Reviews ▴ The true analytical power lies in the 606(b)(3) report for not-held orders. An institution can use this data to perform a rigorous post-trade analysis. By examining the routing paths of their large orders, they can ask critical questions:
  • Were my orders routed through multiple intermediaries before reaching an execution venue?
  • What portion of my orders provided liquidity versus removing it, and did this align with my trading strategy?
  • How did the execution quality (e.g. fill rates, timing) vary across the different venues my broker utilized?

Strategically, the 606(a) report serves as a market-wide scanner for initial broker assessment, whereas the 606(b) report is the high-resolution diagnostic tool for detailed performance audits of a specific relationship.

This detailed, client-specific data empowers the institution to move beyond subjective assessments of broker performance. It facilitates a data-driven dialogue. Instead of asking “Did you get me a good fill?”, the client can ask, “I see 40% of my non-executed orders were routed to Dark Pool X, which has a lower fill rate than Dark Pool Y, where you sent 10% of my flow.

Can you explain the logic behind this routing allocation?”. This level of specificity fundamentally changes the dynamic between client and broker, fostering a partnership oriented around measurable execution quality.

Execution

The operational execution of Rule 606 reporting represents a significant data management challenge for broker-dealers and a critical analytical opportunity for their institutional clients. The distinction between the two reports is most pronounced at this level, where theoretical requirements are translated into concrete data points and analytical workflows.

The Broker-Dealer’s Operational Framework

For a broker-dealer, compliance with Rule 606 necessitates a robust technological infrastructure capable of capturing, storing, and categorizing every single order event. The core operational challenge lies in the distinction between “held” and “not-held” orders, as this determines which reporting regime applies.

• Held Orders (Rule 606(a)) ▴ These are typically retail orders requiring immediate execution. The system must tag these orders and aggregate their routing data quarterly. This involves tracking the total number of non-directed orders, separating them into marketable limit, non-marketable limit, and market orders, and then calculating the net fees paid or rebates received from each of the top execution venues. The process is largely automated, producing a standardized XML and PDF report for public posting.
• Not-Held Orders (Rule 606(b)(3)) ▴ These orders, characteristic of institutional trading, grant the broker discretion. The operational burden here is substantially higher. The system must not only track the initial routing decision but also any subsequent “hops” if the order is sent to an intermediary broker (a Primary Routing Venue) that then routes it elsewhere. The broker must be able to produce, on-demand, a six-month historical report for any client, detailing this entire lifecycle. This requires a sophisticated Order Management System (OMS) and a data warehouse capable of reconstructing complex routing chains.

The Client’s Execution Analysis Playbook

For an institutional client, receiving a Rule 606(b)(3) report is the beginning of the execution analysis process. The data within the report is dense, and extracting actionable intelligence requires a systematic approach. The goal is to translate raw data into an assessment of execution quality and alignment with the broker’s stated strategy.

Executing on the insights from a 606(b) report involves a client-driven forensic analysis of routing paths to hold a broker accountable for their discretionary decisions.

Below is a simplified example of what a client might look for in a 606(b)(3) report for a specific stock over a six-month period.

A Checklist for Report Analysis

Upon receiving the report, a client’s analyst or portfolio manager should undertake a structured review:

1. Identify Primary Routing Venues (PRVs) ▴ The presence of PRVs indicates the broker is outsourcing routing decisions. The client should inquire about the nature of this relationship and why the broker delegates this function. Is the PRV an expert in a particular type of liquidity, or is it a pass-through arrangement?
2. Analyze Liquidity Profile ▴ Compare the “providing” versus “removing” liquidity percentages for each execution venue. If the client’s strategy is to minimize market impact by using passive orders, the data should show a high percentage of orders providing liquidity. A high percentage of liquidity-removing orders might suggest the broker’s algorithms are more aggressive than desired.
3. Correlate Venues with Fill Rates ▴ Calculate or examine the fill rates at each venue. A venue receiving a large number of orders but showing a low fill rate is a point of concern. The client should question the logic of routing significant flow to a destination where execution is less certain.
4. Cross-Reference with TCA ▴ The 606(b) report is not a full Transaction Cost Analysis (TCA), but it is a vital input. The routing data should be used to explain the results seen in TCA reports. For example, high market impact costs in a TCA report might be explained by the 606(b) data showing a high percentage of orders routed to aggressive, liquidity-removing venues.
5. Question Fee/Rebate Structures ▴ While specific fee details are more prominent in the 606(a) report, the routing patterns in the 606(b) report can infer conflicts of interest. If a disproportionate amount of flow is sent to a venue known for high rebates, it warrants a discussion about whether that routing choice serves the client’s best execution interests or the broker’s revenue model.

This analytical process transforms the Rule 606(b) report from a static compliance document into a dynamic tool for dialogue and continuous improvement of the client-broker relationship. It provides the empirical foundation for holding brokers accountable for the discretionary power they wield over not-held orders.

Reflection

The dual structure of Rule 606 reporting provides a transparency framework that mirrors the layered complexity of modern markets. The public 606(a) report offers a map of the general landscape, useful for orientation but lacking in detail. The private 606(b) report provides the satellite imagery of a specific path taken, enabling a forensic examination of a single journey. For the institutional participant, mastering the market requires the ability to move between these two views seamlessly.

The data contained within these reports is not an end in itself. It is an input into a larger system of broker evaluation, strategy calibration, and the perpetual pursuit of superior execution quality. The ultimate value of these disclosures is realized when they are transformed from regulatory artifacts into catalysts for a more rigorous, data-driven conversation between a client and their broker, ensuring the architecture of the relationship is built on a foundation of aligned interests and verifiable performance.