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

Commissioner Kara M. Stein

Nov. 18, 2015

I want to join my colleagues 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, Derek James, and Carl Emigholz from the Division of Trading and Markets as well as Amy Edwards, Salil Pachare, and Claudia Moise from the Division of Economic and Risk Analysis (DERA). And, thank you to everyone else on the team for your dedication and hard work.

Today, the Commission meets to consider a proposal to increase the transparency of alternative trading systems (ATS). Many ATSs are commonly referred to as “dark pools”.[1] To most people, dark pools are a little bit of a mystery, and that’s because they often function in great secrecy. Today’s proposal seeks to shine a light into that darkness.

Modern ATSs are a product of the rapid technological advances that have revolutionized the way stocks are bought and sold. An ATS is an electronic order matching system operated by a broker-dealer. Much like an exchange, it brings together buyers and sellers. There are many types of ATSs, and they facilitate the purchase and sale of all types of securities ranging from equities to corporate bonds to Treasuries, and more.[2] Unlike an exchange, which must disclose publicly quotes and prices at which securities transactions occur, an ATS can operate in the dark with only limited information about its operations.[3]

Beginning in the 1990s, broker-dealers started using emerging electronic communications networks to reimagine the capital markets. One of the first ATSs was launched in 1996 and competed directly with exchanges through an entirely electronic platform. This platform eliminated both the specialists and the market makers.[4] These trading venues were also a place for larger-sized or “block” trades. Relatively quickly, alternative trading systems started handling a significant amount of securities order volume.[5]  Dark pools were in many ways replacing the traditional “upstairs” market, while also providing services conventionally delivered only by registered exchanges. And, they had a growing footprint in the capital markets.

Since 1998, ATSs have been governed by Regulation ATS.[6] This 17-year old Commission rule started to integrate these emerging trading systems into the regulatory framework Reg ATS provided an exemption for these alternative venues from ordinary exchange regulation in order to encourage the development of these new and innovative market centers.[7] In addition, unlike exchanges, ATSs were not required to provide public transparency about their operations or their activities.

These late 1990s regulatory changes did encourage the proliferation of these alternative trading venues. By 2009, the number of active dark pools had grown to 32 and accounted for 8% of the shares traded.[8] Over the past six years, both the number of active dark pools and the percentage of shares traded in dark pools has increased. Since 2009, the number of active dark pools has increased over 25%, and now accounts for over 15% of the total shares traded in U.S. markets.[9] It is currently estimated that over 200 billion shares of NMS stocks[10] are traded on 40 of these private trading venues, representing over $10 trillion in securities transactions each year.[11] What was once a niche venue for certain sophisticated parties negotiating large-sized trades is now a significant part of the capital markets.

Moreover, the line between ATSs and exchanges has become much blurrier. These alternative trading systems have become a major part of the marketplace. In recent years, the average trade size of about 200 shares has proven to be not significantly different from the average trade size that occurs on exchanges.[12] And the volume of the business done in dark pools has grown so significantly that one must at least consider what, if any, effect it is having on price discovery in the larger marketplace, or perhaps how it could be contributing to a masking of true supply and demand.

Recent enforcement actions by the Commission and others have also highlighted issues regarding how some ATSs have been functioning.[13]

Today’s proposal seeks to begin to address some of the issues that have emerged during the past 17 years. It relies heavily on the tool of disclosure, proposing to increase the operational transparency of dark pools and their operators. It is an important first step, and one that I support. Greater transparency, the hallmark of the U.S. capital markets, should benefit both issuers and investors.

Under today’s proposal, ATSs would for the first time be required to publicly reveal important information about what they do and how they work. The new form in the proposal, Form ATS-N, requires ATSs to answer some basic questions that should inform investors about the range of operations of the ATS. This includes information about its fees, trading services, use of market data, and fair access standards. It also requires ATS operators to describe their smart order router and the algorithms they use to send or receive orders.

In addition, ATSs would be required to disclose any potential conflicts of interest. For example, a broker-dealer operator would need to disclose a potential conflict that might arise from its own dealing activities within the dark pool.

Finally, the proposed rule would require an ATS to publicly report important metrics or performance statistics if they are provided to one or more subscribers. Sometimes this information, such as the characteristics of the ATS’s order flow or execution, is provided only to certain subscribers so that they can evaluate whether a venue may meet their investment objectives. While the Commission is not prescribing a one-size fits all approach in this proposal, we are asking about ways to improve the standardization and comparability of such data and reporting across ATSs. I hope market participants and others will help us think through the best practices for disclosure in this area.

While disclosure is absolutely a positive step forward, the question I am left pondering today is whether we have done enough. For example, does the relationship between a broker-dealer operator and its ATS make it more difficult for disclosure to adequately address certain inherent conflicts of interest with its subscribers? Are there certain conflicts of interest that should be addressed in other ways? Should certain conflicts of interest just be prohibited going forward?

Finally, there are important venues that are left out of this ATS transparency proposal. Has the Commission missed the mark by creating a new class of NMS Stock ATSs, which will have greater transparency than other alternative trading systems?

Forty years ago, Congress directed the Commission “to remove impediments to and perfect the mechanism of a national market system.” My predecessor, Commissioner Phillip Loomis, described these improvements as “a maximum opportunity for…orders to interact and be matched, and [to enable] market professionals…to have access to the entire order flow and this in turn greatly improves their ability to perform their functions effectively and efficiently.”[14] Have we achieved that objective, or more importantly, the objective of making sure ATSs contribute to fair and orderly markets that promote capital formation while protecting investors?

I look forward to commenters views about whether this proposal is the right approach and how the Commission can better address the fairness and efficiency of ATSs and their role in the larger capital markets. 

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] Currently, 84 ATSs have filed Form ATS with the Commission Approximately 46 of those ATSs stated that they expect to trade NMS stocks Approximately 27 ATSs disclose that they exclusively trade fixed income securities Approximately two ATSs disclose that they transact both fixed income securities and other equity securities. The remaining ATSs trade a variety of other securities, including non-NMS equities, unregistered securities, securitized notes, etc. A majority of the total NMS share volume that occurs on an ATS is transacted on approximately eight ATSs Source: Data compiled from Forms ATS submitted to the Commission as of November 1, 2015.

[3] FINRA Rule 4552 requires weekly reporting of aggregated trade data to its Alternative Trading System (ATS) Transparency Data repository The data has been aggregated on a weekly basis and can be viewed by symbol or by ATS.

[4] See Scott Patterson, Dark Pools :The Rise of Machine Traders and the Rigging of the US Stock Market, (2012).

[5] “Alternative trading systems now handle more than twenty percent of the orders in securities listed on The Nasdaq Stock Market ("Nasdaq"), and almost four percent of orders in exchange listed securities.” See SEC Release No. 34-40760, Regulation of Exchanges and Alternative Trading Systems, December 1998, available at

[6] “These systems operate markets similar to the registered exchanges and Nasdaq Over time, an alternative trading system may become the primary market for some securities Yet these markets are private, available only to chosen subscribers, and are regulated as broker-dealers, not in the way registered exchanges and Nasdaq are regulated This creates disparities that affect investor protection and the operation of the markets as a whole…. Moreover, these trading systems have no obligation to provide investors a fair opportunity to participate in their systems or to treat their participants fairly These systems may also not be adequately surveilled for market manipulation and fraud In fact, market participants can manipulate the prices in the public securities markets through the use of alternative trading systems.”  See SEC Release No. 34-40760, Regulation of Exchanges and Alternative Trading Systems, December 1998, available at

[7] “First, it provides a streamlined regulatory structure for ECNs that choose to be regulated as alternative trading systems (’ATSs’) rather than national securities exchanges and thereby enhances the opportunity for innovative market center competition.”  See Testimony of Chairman Arthur Levitt before the Senate Committee on Banking, Housing, and Urban Affairs, Preserving and Strengthening the National Market System for Securities in the United States, May 8, 2000, available at

[8] Data compiled from Forms ATS submitted to the Commission for the third quarter of 2009. There were approximately 10 active dark pools in 2002.

[9] “The number of active dark pools trading NMS stocks has increased from approximately 10 in 2002, to 32 in 2009, to over 40 today.” Source: Data compiled from Forms ATS and Forms ATS-R filed to the Commission as of the end of, and for the third quarter of, 2015.

[10] An “NMS Security” is defined in Rule 600(b)(46) (17 CFR 242.600(b)(46)) as “any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options.”  In general, the term “NMS Security” refers to exchange-listed equity securities and standardized options, but does not include exchange-listed debt securities, securities futures, or open-end mutual funds, which are not currently reported pursuant to an effective transaction reporting plan.

[11] In the second quarter of 2015, there were 38 ATSs that reported transactions in NMS stocks, accounting for 59 billion shares traded in NMS stocks ($2.5 trillion), and represented approximately 15.0% of total share trading volume (15.4% of total dollar trading volume) on all national securities exchanges, ATSs, and non-ATS OTC trading venues combined Total dollar trading volume on all exchanges and off-exchange trading in the second quarter of 2015 was approximately $16.3 trillion and approximately 397 billion shares See Market Volume Summary,

[12] These results are consistent with prior findings that average trade sizes on “lit” national securities exchanges are similar to those taking place on “dark ATSs.”  Unlike “lit” national securities exchanges, dark ATSs do not publicly disseminate top of the limit-order book information Laura Tuttle, Alternative Trading Systems: Description of ATS Trading in National Market System Stocks, at 9-10 (October 2013), available at

[13] See recent 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.)

[14] Commissioner Philip A. Loomis, Jr., The Securities Acts Amendments of 1975, Self-Regulation and the National Market System, November 1975, available at

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