SEC Proposes Rules to Enhance Transparency and Oversight of Alternative Trading Systems

The Securities and Exchange Commission today announced it has voted to propose rules to enhance operational transparency and regulatory oversight of alternative trading systems (ATSs) that trade stocks listed on a national securities exchange (NMS stocks), including “dark pools.” 

“Investors and other market participants need more and better information about how alternative trading systems work,” said SEC Chair Mary Jo White. “The proposed changes would represent a critical step forward in delivering greater transparency to investors and enhancing equity market structure.”

The proposal would require an NMS stock ATS to file detailed disclosures on newly proposed Form ATS-N about its operations and the activities of its broker-dealer operator and its affiliates.  These disclosures would include information regarding trading by the broker-dealer operator and its affiliates on the ATS, the types of orders and market data used on the ATS, and the ATS’ execution and priority procedures. 

In addition, the proposal would make Form ATS-N disclosures publicly available on the Commission’s website, which could allow market participants to better evaluate whether to do business with an ATS, as well as to be better informed when evaluating order handling decisions made by their broker.

The proposals also would provide a process for the Commission to qualify NMS stock ATSs for the exemption under which they operate and to review disclosures made on Form ATS-N.  This would provide a process for the Commission to declare Form ATS-N filings effective or ineffective, as well as provide a process to review amendments.  The proposed processes would enhance the Commission’s ongoing oversight of NMS stock ATSs.

The SEC is seeking public comment on the proposal for 60 days following its publication in the Federal Register.

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FACT SHEET

Regulation of Alternative Trading Systems

SEC Open Meeting

November 18, 2015

Action

The Securities and Exchange Commission will consider whether to propose amendments that would require alternative trading systems (ATS) that trade stocks listed on a national securities exchange (NMS stocks), including “dark pools,” to publicly disclose detailed information about the operations and activities of a broker-dealer operator and its affiliates.  The proposed amendments would enhance transparency and oversight of alternative trading systems.

Highlights of the Proposed Amendments

Detailed Disclosure of the Operations of NMS Stock ATSs

The detailed information disclosed on new Form ATS-N would provide market participants with important information regarding potential conflicts of interest that may be present when a broker-dealer operator’s business interests compete with the interests of market participants that access its ATS.  The enhanced disclosures would also enable market participants to better assess an ATS’ operations and make more informed decisions regarding its order routing.  It would also enhance the Commission’s ability to oversee this segment of the equity market.

Specifically, Form ATS-N would require an NMS Stock ATS to disclose information regarding:

• Activities of its broker-dealer operator, and the broker-dealer operator’s affiliates, including:
  • operation of non-ATS trading centers and other NMS Stock ATSs;
  • products or services offered to subscribers;
  • arrangements with unaffiliated trading centers;
  • trading activities on the NMS Stock ATS;
  • use of smart order routers (or similar functionality) or algorithms to send or receive subscriber orders;
  • shared employees that service the operations of the NMS Stock ATS and any other business unit or affiliate of the broker-dealer operator;
  • service providers to the NMS Stock ATS;
  • differences in the availability of services, functionalities, or procedures available to subscribers, as compared to the broker-dealer operator, and its affiliates; and
  • safeguards and procedures established to protect confidential trading information.

• The manner of operations of the NMS Stock ATS, including:
  • subscribers;
  • types of orders; connectivity, order entry, and co-location;
  • segmentation of order flow and notice of segmentation provided to any persons; display of orders and other trading interest;
  • trading services, including rules and procedures governing priority, pricing methodologies, allocation, matching, and execution;
  • procedures governing trading during a suspension, system disruption or malfunction;
  • opening, reopening, and closing processes, and after hours procedures; outbound routing;
  • use of market data;
  • fees;
  • procedures regarding trade reporting and clearance and settlement;
  • order display and execution access;
  • fair access standards; and
  • market quality statistics published or provided by the NMS Stock ATS to one or more subscribers. 

Public Availability of Form ATS-N

The Commission’s website would make public each NMS Stock ATS’ Form ATS-N and amendments.  In addition, each NMS Stock ATS would 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 proposal would provide a process for:

• The Commission to review Form ATS-N filings for compliance with the form requirements and consistency with federal securities laws.

• The Commission to review and declare, by order, initial filings on Form ATS-N effective or ineffective.

• An NMS Stock ATS to file amendments to Form ATS-N and the Commission to review and declare, by order, Form ATS-N Amendments ineffective.

Safeguards and Procedures Protecting Subscriber’s Confidential Trading Information

The proposal would amend Regulation ATS to 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.

Background

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, which would be required to register as a broker-dealer and comply with Regulation ATS. 

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 15 percent of volume in NMS stocks.  ATSs that trade NMS stocks generally operate with complexity and sophistication similar to registered national securities exchanges, which applicable laws and regulations require to be transparent trading venues. 

Currently, although Regulation ATS requires disclosure of an NMS Stock ATS’operations to the Commission, it is not public.  Despite the evolution in the equity markets, and growth of NMS stock trading on ATSs since 1998, information available to market participants about the operations of ATSs that trade NMS stocks is often limited.  In addition, little information is available to market participants about the relationship between these ATSs and the other business operations of their broker-dealer operators.

What’s Next?

If approved for publication by the Commission, the proposed amendments will be published on the Commission’s website and in the Federal Register.  The comment period for the proposed amendments will be 60 days after publication in the Federal Register.