Regulators are pulling back the curtain on trade order routing.

The sell side long has had limited answerability to the buy side in terms of trade handling and routing practices. Brokers have a fiduciary duty to achieve best execution on every trade, and they want to make clients happy, but providing information about the logic behind why a given trade went where it did is ultimately at the broker’s discretion.

This changes on June 1, when U.S. Securities and Exchange Commission Rule 606(b)(3) is scheduled to go into effect, reflecting a two-month delay due to the effects of Covid-19. The rule requires a broker-dealer, upon request of a customer that places not held orders, to provide specific disclosures, for the prior six months, regarding routing and execution of such orders.

The intent behind 606(b)(3) is simple: to help buy-side investment managers trade more efficiently by empowering them with more data and information about their trades.

“The analysis of routing data, not only where your order was routed to but also the execution protocol, is critical,” said Joe Wald, CEO at trading-technology provider Clearpool Group. “By understanding the way broker algorithms route orders, and being able to see data on the venue and order-type level, you get a sense of what tools, venues, order types and liquidity you can use to build a best-execution protocol that’s right for you.”

Greenwich Associates is producing a research report that assesses how the buy side intends to use 606(b)(3) order routing data on ‘child’ orders, which are offshoots of the initial ‘parent’ trader order. The report will also cover the buy side’s access to unique liquidity sources and their brokers’ capability of managing liquidity workflows.

Once 606(b)(3) is in place, regulators will first survey the sell side to make sure brokers are gathering, collating, and disseminating the appropriate data on a timely basis. After that, attention will turn to the buy side, regarding what data they are using and how they are using it.

That’s the expectation of Shane Swanson, senior analyst in market structure and technology at Greenwich. “We find the number one priority for the buy side is sourcing natural liquidity,” Swanson said. “How do you find not just natural liquidity, but how do you use technology to identify unique sources of liquidity that you might not be able to find otherwise?”

Swanson noted that the largest, most technology-centric investment managers already do 606(b)(3)-type data gathering and analysis; it’s the rest of the buy-side universe that stands to benefit from the new regulation. “For those firms that haven’t been able to make that investment or didn’t have relationship capital to be able to demand transparency on an order-by-order basis, this levels the playing field by making the data available to all.”

“The buy side will have more granular data on how their brokers execute not-held orders, especially if their broker is utilizing the execution services of another broker downstream,” said Khody Azmoon, an electronic trading consultant previously with State Street and Cowen Inc. “This will enable the buy side to better determine any potential conflicts of interest, like a broker favoring their own pool or prioritizing explicit transaction costs in the routing logic.”

On the sell side, Clearpool’s Wald expects 606(b)(3) to result in a bifurcation of brokers: those the newly revealed data flatters, and those it doesn’t.

“Brokers with the right strategy, and the right approach to venue and liquidity, will be able to demonstrate better execution quality than their peers, and that’s what this is all about,” Clearpool’s Wald said. “Things are going to get much more bespoke.”