Washington D.C., July 18, 2018 — The Securities and Exchange Commission today announced it has voted to adopt amendments to Regulation ATS to enhance operational transparency and regulatory oversight of alternative trading systems (ATSs) that trade stocks listed on a national securities exchange.
“I applaud the staff’s retrospective review of our regulation of ATSs. I agree that promoting greater transparency in order interaction, matching, and execution will help empower investors and their intermediaries to find those trading venues that best meet their trading and investing objectives,” said SEC Chairman Jay Clayton.
Certain ATSs will be required to file detailed public disclosures on new Form ATS-N. These disclosures are designed to allow market participants to assess potential conflicts of interest and risks of information leakage arising from the ATS-related activities of the ATS’s broker-dealer operator and its affiliates. The disclosures will also inform market participants about how the ATS operates, including order types and market data used on the ATS, fees, the ATS’s execution and priority procedures, and any procedures to segment orders on the ATS.
Forms ATS-N will be made publicly available on the Commission’s website via the Commission’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.
The amendments also provide a process for the Commission to review Form ATS-N filings and, after notice and opportunity for hearing and upon certain findings, declare a Form ATS-N ineffective.
In addition, all ATSs will be required to have written safeguards and procedures to protect subscribers’ confidential trading information.
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SEC Open Meeting
July 18, 2018
The Securities and Exchange Commission adopted new Form ATS-N and amendments to Regulation ATS and Exchange Act Rule 3a1-1 to enhance transparency and oversight of alternative trading systems (ATSs) that trade stocks listed on a national securities exchange (NMS Stock ATSs). The amendments will require NMS Stock ATSs to publicly disclose detailed information about their operations and the ATS-related activities of their broker-dealer operators.
Highlights of the Adopted Amendments
Detailed Disclosure of the Operations of NMS Stock ATSs
Form ATS-N will require an NMS Stock ATS to publicly disclose on Form ATS-N information about its manner of operations and the ATS-related activities of the broker-dealer that operates the ATS (“broker-dealer operator”) and its affiliates. These public disclosures will allow market participants to understand how their orders will interact, match, and execute in the NMS Stock ATS. The disclosures will also inform market participants about differences that may exist in the treatment of subscribers and the broker-dealer operator (and its affiliates) on the ATS, and allow them to assess potential conflicts of interest and risks of information leakage. The enhanced disclosures are also designed to enable market participants to compare an NMS Stock ATS to other trading venues and better evaluate the ATS as a potential destination for their orders.
Specifically, Form ATS-N will require an NMS Stock ATS to disclose information regarding:
- Information about its broker-dealer operator, including identifying information and ownership.
- ATS-related activities of its broker-dealer operator, and the broker-dealer operator’s affiliates, including:— the trading activities of the broker-dealer operator and its affiliates on the ATS;
— whether subscribers to the ATS can opt out from interacting with orders and trading interest of the broker dealer operator and its affiliates;
— arrangements between the broker-dealer operator or its affiliates and trading centers to access the ATS services;
— products and services offered to ATS subscribers by the broker-dealer operator and its affiliates;
— the activities of service providers to the broker-dealer operator and its affiliates; and
— safeguards and procedures established to protect the confidential trading information of subscribers.
- The manner of operations of the NMS Stock ATS, including:— types of subscribers, the criteria for eligibility for ATS services, and conditions for excluding subscribers from ATS services;
— means of entry for orders and trading interest;
— connectivity and co-location procedures;
— order types, attributes, and order size requirements and procedures;
— use of and terms and conditions governing conditional orders and indications of interest;
— hours of operation, opening, reopening, and closing processes, and procedures for trading outside of regular trading hours;
— trading services, facilities, and rules of the ATS;
— arrangements with any subscriber or the broker-dealer operator to provide liquidity;
— segmentation of orders and trading interest and the provision of notice regarding segmentation;
— counter-party selection;
— display of orders and other trading interest;
— outbound routing from the ATS;
— procedures for stopping or suspending trading;
— procedures regarding trade reporting, clearance, and settlement;
— sources and uses of market data;
— as applicable, information about an NMS Stock ATS’s obligations related to order display and execution access pursuant to Rule 301(b)(3) of Regulation ATS and fair access pursuant to Rule 301(b)(5) of Regulation ATS; and
— aggregate platform-wide order flow and execution statistics provided by the NMS Stock ATS to one or more subscribers.
Public Availability of Form ATS-N
The Commission, through the Commission’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system, will make public an NMS Stock ATS’s Form ATS-N when it becomes effective, as well as amendments to an effective Form ATS-N. In addition, each NMS Stock ATS will be required to make public on its website a direct URL hyperlink to the Commission’s website where these documents are located.
Commission Review of Form ATS-N Filings
The amendments to Regulation ATS establish a process for the Commission to review Form ATS-N filings. Among other things:
- An NMS Stock ATS’s initial Form ATS-N will become effective, unless declared ineffective, upon the earlier of: (1) the completion of the Commission’s review and publication via posting on the Commission’s website, or (2) the expiration of the Commission review period, or, if applicable, the end of the extended review period.
- An NMS Stock ATS will be required to file amendments to its Form ATS-N, which includes filing of material amendments. Material amendments must be filed 30 calendar days prior to the implementation of the change and are made public upon the expiration of the 30 calendar day period, although a brief summary of the change will be made public upon filing.
- The amendments to Regulation ATS will provide a process for the Commission to review all Form ATS-N filings and, after notice and opportunity for hearing, and upon certain findings, declare, by order, an NMS Stock ATS’s Form ATS-N ineffective.
Safeguards and Procedures for Protecting Subscriber’s Confidential Trading Information
The amendments to Regulation ATS will require all ATSs to have and maintain written safeguards and procedures to protect the confidential trading information of their subscribers, and written procedures to ensure that those safeguards and procedures are followed.
In 1998, the Commission adopted Regulation ATS, which established a new regulatory framework designed to encourage market innovation, while ensuring basic investor protections. It gave securities markets a choice to register as a national securities exchange, or operate as an alternative trading system.
Since the adoption of Regulation ATS, the equity markets have evolved substantially and ATSs have become a significant source of liquidity in NMS stocks, accounting for approximately 11.4 percent of total share trading volume (11.5 percent of total dollar volume) in NMS stocks. NMS Stock ATSs have grown in complexity and sophistication, and some NMS Stock ATSs now offer features similar to registered national securities exchanges, which applicable laws and regulations require to be transparent trading venues.
Despite the important role of NMS Stock ATSs in the U.S. equity markets, prior to these amendments to Regulation ATS, inconsistent information was available to market participants about NMS Stock ATS’s manner of operations and the relationship between NMS Stock ATSs and the other business interests of their broker-dealer operators.
The amendments will be published on the Commission’s website and in the Federal Register and will become effective 60 days from the date of publication in the Federal Register. An NMS Stock ATS that is operating pursuant to an initial operation report on Form ATS as of January 7, 2019 will be required to file a Form ATS-N no earlier than January 7, 2019 and no later than February 8, 2019. As of January 7, 2019, an entity seeking to operate as an NMS Stock ATS will be required to file a Form ATS-N.