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Statement on Adoption of Rules to Increase the Operational Transparency of Alternative Trading Systems (ATS)

July 18, 2018

I want to join the Chairman in thanking the staff for the hard work that went into this release. Thank you to Tyler Raimo , Matthew Cursio, Marsha Dixon, Jennifer Dodd, David Garcia, and Megan Mitchell from the Division of Trading and Markets as well as Amy Edwards, John Ritter, and Hermine Wong from the Division of Economic and Risk Analysis. And, thank you to everyone else on the team for your dedication and hard work.

Today, the Commission considers the staff’s recommendation to issue new rules that will significantly increase the transparency of alternative trading systems (ATS), which are commonly known as “dark pools.”[1]

About 50 years ago, the first automated trading system emerged. This trading center functioned like an exchange in many ways. But instead of using trading floors and hand gestures, and shouting from one trader to another, it used mathematical algorithms to match buyers and sellers.[2] As both hardware and software improved, more and more automated trading systems emerged.

Today, the digital revolution has morphed our securities markets into a complex web of trading centers, with more than twenty-one national securities exchanges, nearly 90 ATSs, and an unknown number of other online trading platforms.[3] Approximately 11% of stock trading now occurs on alternative trading systems, which is a nearly 50% increase since 2009.[4]

While the importance of ATSs to our markets has increased, very little information about their operations has been available to market participants. To most people, dark pools are a mystery, and that’s because they often function in great secrecy. With today’s rule, the Commission will shine light into that darkness.

For the first time, ATSs that trade National Market System (NMS) stocks[5] will be required to publicly reveal important information about who they are, what they do, and how they do it. Investors will gain new insight into the range of trading centers available, and into their services and fees. The provision of a wide array of information to the marketplace should help both buyers and sellers, and will likely result in an increase in competition.[6]

NMS stock ATSs will also be required to assess and disclose conflicts of interest. For example, a broker-dealer operator will need to disclose a potential conflict that might arise from its own dealing activities within the dark pool.

In addition, for the first time, all ATSs will be required to put in writing safeguards and procedures to protect confidential trading information.[7] Furthermore, all ATSs that trade NMS stocks will be required to publicly describe their safeguards and procedures for protecting confidential trading information. This is all a step in the right direction.

Unfortunately, some important trading centers are being left out of today’s rules. The Commission is missing an opportunity to provide public disclosure for ATSs trading over-the-counter equity securities, government securities, municipal securities, and corporate debt securities. Investors and other market participants overwhelmingly support more and better information about venues that trade these other securities.[8]

I also believe the improvements to increase operational transparency and to protect investors trading NMS securities should not be limited to only those platforms trading NMS stocks. All ATSs should provide investors with information about who they are, what they do, and how they do it. Also, all ATSs should be required to disclose conflicts of interest and to protect confidential trading information. This minimum set of requirements should be required of all ATSs in order to strengthen the entire trading environment. [9]

I echo the concerns of the members of the Fixed Income Market Structure Advisory Committee (FIMSAC) about the need to address this deficiency. I’m pleased that Chairman Clayton has asked the staff to review and assess the disclosures in this area and to present a recommendation to the Commission. However, I also believe the Commission can and should do more to support the information needs of investors in government securities. In particular, I hope the Chairman and staff will work with the Department of the Treasury to begin to address the opacity in the operations of ATSs trading government securities.

In addition to ATS improvements, I look forward to working to finalizing changes to modernize disclosures about market quality and order routing (Rules 605 and 606). These enhanced disclosures will provide investors with invaluable information[10] about their investment decisions and should benefit the entire trading ecosystem.

Thank you.

[1] The term “dark pool” is not used or defined in the Exchange Act or Commission rules. The term has generally come to refer to systems that do not publicly display quotations in the consolidated quotation data. See SEC Release No. 34-60997, Regulation of Non-Public Trading Interest, (November 13, 2009).

[2] See Ian Domowitz, An Exchange Is a Many-Splendored Thing: The Classification and Regulation of Automated Trading Systems, in THE INDUSTRIAL AND REGULATION OF THE SECURITIES INDUSTRY 93 (Andrew Wold ed. 1996).

[3] See Statement on Potentially Unlawful Online Platforms for Trading Digital Assets, available at

[4] The market share of NMS stock volume that is attributable to dark pools has increased from 7.9% in 2009 to 11.4% during the first quarter of 2018.

[5] Rule 600(b)(47) of Regulation NMS defines “NMS stock” to mean any NMS security other than an option. Rule 600(b)(46) defines “NMS security” to mean any security for which trade reports are made available pursuant to an effective transaction reporting plan. In general, NMS stocks are those that are listed on a national securities exchange. There are more than 8,500 stocks in the National Market System (NMS). See Office of Analytics and Research, Division of Trading and Markets, U.S. Securities and Exchange Commission, Empirical Analysis of Liquidity Demographics and Market Quality For Thinly-Traded NMS Stocks (Apr. 10, 2018), available at

[6] See Regulation of NMS Stock Alternative Trading Systems, Section X.C.; see also STA Letter at 2; Consumer Federation of America Letter at 6; Investor Advocate Letter at 3, 11-12.

[7] Rule 301(a)(4)(ii)(A) of Regulation ATS provides and exemption for electronic platforms that solely trade government securities. Accordingly, government securities ATSs are exempt from this requirement.

In addition, government securities ATSs are not subject to Regulation SCI. Regulation SCI requires certain ATSs to establish written policies and procedures reasonably designed to ensure that their systems have levels of capacity, integrity, resiliency, availability, and security adequate to maintain their operational capability and promote the maintenance of fair and orderly markets, and that they operate in a manner that complies with the Exchange Act. In addition, Regulation SCI requires corrective action with respect systems disruptions, systems compliance issues, and systems intrusion.

[8] See Better Markets Letter at 3, 8; CFA Institute Letter; Citadel Letter; Consumer Federation of America Letter at 6-7; Fidelity Letter at 6-7; HMA Letter at 5-6, 10, 12; ICI Letter at 11; Investor Advocate Letter at 2, 12-15; KCG Letter at 12-13; Liquidnet Letter at 3; Luminex Letter at 2, 4; MarketAxess Letter; Markit Letter at 2, 4, 9; MFA/AIMA Letter 2-4; MFA Letter 2 at 30; Morgan Stanley Letter at 5-6; PDQ Letter at 2; SIFMA Letter at 3, 5; T. Rowe Price Letter at 2; Virtu Letter at 2, Luminex Letter at 2; Morgan Stanley Letter 2, 5; STANY Letter at 3; SIFMA Letter at 3-4,Better Markets Letter at 3, 8; CFA Institute Letter at 3-4; Consumer Federation of America Letter at 6-7; HMA Letter 5-6, 10, 12.

[9] Further, the Commission became concerned about the number and types enforcement actions that highlighted issues regarding how some ATSs have been functioning. See enforcement actions settled by the Commission, including allegations that subscribers were fraudulently misled about the operations of certain ATSs:

In the Matter of Liquidnet, Inc. Exchange Act Release No. 72339 (June 6, 2014) (Liquidnet paid a $2 million penalty and settled to charges of improperly using subscribers’ confidential trading information in marketing its services.)

In the Matter of Pipeline Trading Systems LLC, et al., Exchange Act Release No. 65609 (October 24, 2011) (Pipeline paid a $1 million penalty and settled to charges of conflicts of interest and misleading customers.)

In the Matter of ITG Inc. and Alternet Securities, Inc., Exchange Act Release No. 75672 (Aug. 12, 2015) (ITG paid more than $20 million, including an $18 million penalty (the largest SEC penalty against an ATS to-date), and admitted to wrongdoing, for operating a secret trading desk and misusing the confidential trading information of dark pool subscribers.)

In the Matter of UBS Securities LLC, Exchange Act Release No. 74060 (Jan. 15, 2015) (UBS paid more than $14.4 million, including a $12 million penalty, for failing to properly disclose to all dark pool subscribers an order type that was marketed almost exclusively to market makers and high frequency trading firms, which allowed those participants to place sub-penny-priced orders that then received priority over other orders.)

[10] See Securities Exchange Act Release No. 78309 (July 13, 2016), 81 FR 49432 (July 27, 2016); see also Exchange Act Release No. 34-43590, Disclosure of Order Execution and Routing Practices, November 2000,available at

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