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Statement at Open Meeting on Regulation of NMS Stock Alternative Trading Systems

Chair Mary Jo White

Nov. 18, 2015

Good afternoon.  This is an open meeting of the U.S. Securities and Exchange Commission on November 18, 2015 under the Government in the Sunshine Act.

The Commission will consider today an important recommendation to enhance equity market structure by requiring alternative trading systems – or ATSs – to provide significant new information to the public about their operations.  In addition to improving the SEC’s ability to oversee these trading venues, the collection and dissemination of this information would enable investors and other market participants to better assess trading on a particular ATS platform and compare it to trading on other platforms.

From Market Alternative to Market Center

In 1998, the Commission adopted Regulation ATS to establish a new regulatory framework for certain electronic trading venues operated by broker-dealers, rather than regulate them as national securities exchanges.  Since then, the equity markets have evolved substantially, driven by advancements in the technologies for generating, routing, and executing orders.  These technologies have markedly improved the speed, capacity, and sophistication of trading, sparking a rise in trading volume that has come to be dispersed across multiple, highly competitive trading venues.  Equity trading now occurs every day across 11 registered equity exchanges, more than 40 ATSs, and a great many broker-dealers.

ATSs that trade stocks listed on a national securities exchange – that is, NMS stocks – have become an integral part of the national market system.  They are a significant source of liquidity for market participants, accounting for approximately 15 percent of total dollar volume in NMS stocks.  While regulated differently, they compete with registered exchanges, and, in many cases, operate with comparable sophistication.

But despite the prominence of ATSs in today’s U.S. equity market, Regulation ATS has remained largely as it was in 1998, with little information made available to the public about either ATS operations or the important relationship between the ATS and its broker-dealer operator.  The information available oftentimes does not empower investors to perform deeper, more meaningful analyses or compare trading venues.  Among other challenges, it can be almost impossible for an investor to assess adequately the conflicts of interest that can arise for a broker-dealer operating an ATS.  In addition to running the ATS, the broker-dealer may conduct a wide range of brokerage, dealing, and other activities that raise potential conflicts, including customer services such as algorithmic trading software, agency sales desk support, automated smart order routing services, and OTC market making.

It is now time to amend Regulation ATS to shine a brighter and clearer light on ATSs for the benefit of investors and the markets generally.

Enhancing Transparency and Oversight for All Trading Venues

Transparency is the primary means by which investors are empowered to protect their own interests; it is also a critical tool by which the Commission exercises its oversight of the market.  The recommendation before us today is a significant step forward in delivering this transparency, modernizing Regulation ATS, and ultimately enhancing our equity market structure. 

Central to the recommendation is a new requirement that ATSs that transact in NMS stocks disclose extensive information to the public about their operations and the activities of their broker-dealer operators.  Investors and other market participants would – in most cases, for the first time – have detailed information about: the types of subscribers to an ATS; how the ATS handles orders and executions; the fees charged by the ATS; the market data used by the ATS; the conflicts of interest present in the operation of the ATS; and many other significant areas.  All of this information would be provided on a new Form ATS-N, which would be filed with the Commission and made available to the public on the Commission’s website.

As the staff will detail shortly, the enhanced public transparency provided by Form ATS-N would be concentrated in two primary areas.

  • First, ATSs transacting in NMS stocks would be required to publicly disclose information relating to the activities of its broker-dealer operator and the operator’s affiliates.  These disclosures would give market participants insight into potential conflicts of interest that can arise when business interests of the broker-dealer operator or its affiliates compete with the interests of market participants that access and trade on the ATS.
  • Second, these ATSs would be required to provide market participants with important information about the manner in which they operate.  This operational transparency would allow market participants to better evaluate an ATS and make more informed decisions about where to route their orders. 

Critically, these disclosures would be subject to direct, focused Commission oversight of their accuracy, completeness, and consistency with the federal securities laws.  Pursuant to the recommendation, the Commission would review and, by order, declare an initial Form ATS-N effective or, after notice and opportunity for hearing, ineffective.  Absent an effective Form ATS-N, the ATS would not be permitted to operate without registering as a national securities exchange.  This is a significant change from the current “notice” filing that an ATS provides to the Commission.  The Commission would also review and, if necessary, halt material changes to the operation of the ATS platform, and could, after notice and opportunity for a hearing, suspend, limit, or revoke an ATS’ exemption from operating as an exchange if warranted.

This disclosure and review program will complement another of our ongoing initiatives to update and expand the disclosures provided to investors under Regulation NMS.  The staff is preparing a recommendation that would give an investor new disclosures tailored to how the investor’s trades are routed and executed – including information about order and execution sizes, price improvement, midpoint executions, and the use of indications of interest.  Such investor-specific disclosures would complement the platform-specific disclosures that are before us today.

A Word on Fixed Income Platforms

It is important to note that today’s recommendation does not propose to extend these transparency enhancements from NMS stock ATSs to platforms that trade fixed income securities, including those that trade government securities.  This incremental approach is a reflection of the significant differences between the equity markets and the fixed income markets, as well as the need to implement rules that appropriately account for them.  For each segment of the fixed income markets, including government securities, we must consider fully these differences before deciding what additional regulations would be optimal.

But as I have said previously, serious consideration must be given to additional transparency initiatives in the various fixed income markets.  I am therefore pleased that the recommendation solicits comment on a range of issues that should assist in the assessment of such initiatives, including whether parts of today’s proposal are appropriate for fixed income platforms.  In particular, I welcome comment on the treatment of platforms trading government securities as part of our ongoing review of the U.S. Treasury markets in partnership with the Treasury Department, Federal Reserve, and CFTC, which all share jurisdiction over those markets.

Protecting Confidential Subscriber Information

One important aspect of today’s proposal, however, would apply to all ATS platforms currently subject to Regulation ATS.  Specifically, the recommendation would require all ATS platforms to have written safeguards and procedures to protect subscribers’ confidential trading information.  ATSs are required today to establish such safeguards and procedures, but they are not required to maintain them in writing.  Although the requirement to protect subscribers’ confidential trading information is a key component of the ATS regulatory framework, violations have been a component of several settled enforcement actions brought by the Commission against ATSs in recent years.  Confidentiality of subscriber trading information is of paramount importance when trading on ATSs.  Indeed, market participants may choose to send orders to an ATS for the very purpose of trading anonymously and mitigating the impact their trading may have on the market.  It is essential that we further strengthen this requirement as proposed today.

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Before I ask Steve Luparello, Director of the Division of Trading and Markets, to discuss the recommendation in greater detail, I would like to thank Steve, as well as Gary Goldsholle, David Shillman, Tyler Raimo, Matthew Cursio, Marsha Dixon, Jennifer Dodd, David Garcia, Derek James, and Carl Emigholz from the Division of Trading and Markets for their hard work on this rulemaking.

I would also like to thank Meredith Mitchell, Lori Price, Robert Teply, Donna Chambers, and Janice Mitnick from the Office of the General Counsel; and Mark Flannery, Scott Bauguess, Vanessa Countryman, Amy Edwards, Salil Pachare, Claudia Moise, and Hermine Wong from the Division of Economic and Risk Analysis.

Finally, I would like to thank my fellow Commissioners and all of our counsels for their work on the proposed amendments.

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Before we proceed to Commissioners’ comments, I want to take just a moment to recognize our colleague and friend, Commissioner Luis Aguilar, for his tremendous service to the Commission.  While this is likely not Commissioner Aguilar’s last open meeting, as you all know, he announced on Monday that he would be leaving the Commission no later than the end of December.

Commissioner Aguilar has been a true champion of protecting investors and our markets.  From his days as a staff attorney more than 30 years ago to his service as the senior most Commissioner, Luis has always shown great passion for his work at the Commission.

Luis, we will miss your depth of knowledge and your passion for the agency and its mission.  Thank you for your outstanding public service.  You will be greatly missed, but will leave behind a legacy of accomplishments.

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