Statement on Amendments to Exchange Act Rule 3b-16, Regulation ATS, and Regulation SCI

Washington D.C.

Thank you Chair Gensler, and thank you to my fellow Commissioners for their thoughtful remarks.  I want to join my colleagues in thanking the staff of the Division of Trading and Markets, Division of Economic and Risk Analysis, and the Office of the General Counsel for the hard work that went into this release.  I’d also like to thank Sai Rao in the Chair’s Office, and the other counsels, for all their assistance in getting the proposal to this open meeting.

When Congress amended the Exchange Act in 1975, it found it to be in the public interest to assure “fair competition…among exchange markets, and between exchange markets and markets other than exchange markets.”[1] The Commission quoted that language when it adopted Regulation ATS in 1998, more than 20 years ago,[2] and has reiterated the principle in subsequent releases relating to alternative trading systems (ATSs).[3]  Assuring fair competition has been, and continues to be, an important objective for the SEC’s regulation of exchanges and ATSs.

The amendments we are proposing today would advance that objective in two important ways.  First, fair competition requires entities performing similar functions to be regulated similarly.  However, under our current framework, there is a disparity among similar markets.[4]  Specifically, entities that offer the use of protocols and non-firm trading interest to bring together buyers and sellers of securities are not currently subject to our exchange regulatory framework, despite performing a similar function to ATSs and registered exchanges.  These trading venues have become increasingly popular for fixed income and government securities, and in the U.S. Treasury market in particular, account for approximately 50% of total electronic trading volume on multilateral trading venues.[5] This has both competitive effects and negative implications for investor protection, as these systems are not subject to SEC oversight or the SEC’s requirements related to transparency or fair and orderly markets.

I am pleased that today we are proposing to address this disparity by bringing these Communication Protocol Systems under our exchange regulatory framework.[6]  We are proposing to do this by updating the definition of exchange to include systems that offer the use of non-firm trading interest and communication protocols to bring together buyers and sellers of securities.  This should help ensure that there is a level playing field for entities performing similar functions, as well as providing important investor protections, including requiring these entities to establish written safeguards and procedures to protect confidential subscriber trading information, meet the operational transparency requirements of Form ATS-N (for entities that trade National Market System (NMS) stocks or government securities or repos), and comply with fair and orderly markets provisions under the Fair Access Rule.[7]

Furthermore, as far back as 1998, the Commission was concerned that system providers might label trading interest that is firm in practice as non-firm, in order to avoid registering as an exchange or complying with Regulation ATS.[8]  This amendment would remove that potential loophole and ensure that the distinction between firm orders and non-firm trading interest is not used to evade our rules.   I look forward to hearing from commenters on the scope of these amendments, and whether they may be over- or under-inclusive.  However, as our former colleague Commissioner Roisman put it, the failure to regulate these significant venues is “obviously a gap,”[9] and I am pleased that today, we are taking steps to close it.

Turning to the second way in which this proposal helps advance the objective of fair competition, competition among venues requires customers to have the ability to evaluate and compare them in order to determine which best meets their needs.  However, ATSs trading government securities are not currently subject to the operational transparency rules that apply to ATSs that trade NMS stocks, including the obligation to file public disclosures.  In addition, ATSs that trade government securities are exempt from the Fair Access Rule and the requirements of Regulation SCI, and ATSs that trade only government securities are exempt from the requirements of Regulation ATS altogether.

As Commissioner Lee noted, it is hard to overstate the importance of the government securities markets, and the U.S. Treasury market in particular, to the U.S. and global economies.  Recent disruptions, such as the flash rally of October 2014, the sudden spike in repo rates in September 2019, and the Covid-related market disruption in March 2020 triggered extensive interventions by the Federal Reserve and are a reminder of how critical these markets are to the financial system.  And ATSs and Communication Protocol Systems together represent over half of the trading activity in those markets.[10] The proposed extension of Regulation SCI and the Fair Access Rule to those venues is an important and overdue step that should enhance market stability, resiliency, and integrity.[11] 

Additionally, and critically, we are proposing to extend certain operational transparency requirements to ATSs that trade government securities.[12] If adopted, these amendments will provide more transparency to market participants about the operations of these ATSs, including how trading interests are handled, fee structures, the ATS’s interaction with related markets, liquidity providers, activities the ATS undertakes to surveil and monitor its market, and any potential conflicts of interest that might arise from the activities of the broker-dealer operator or its affiliates. This should enhance competition among these ATSs by allowing investors to compare different venues using standardized, publicly available information, and to choose the one that best suits their trading objectives.  Additionally, it would help shrink the disparity between the regulation of ATSs and exchanges by requiring a greater share of ATSs to make public disclosures related to their operations, which would be subject to the Commission’s review and effectiveness process.

Finally I want to highlight that in this release, we are soliciting comment on other ways to improve the ATS framework.  For example, we are soliciting comment on the possibility of extending the operational transparency requirements of Rule 304 to all categories of ATSs, including ATSs that trade corporate debt securities, municipal securities, and equity securities other than NMS stocks.  Many of the same concerns that motivate the proposal to extend transparency requirements to government securities ATSs are present in these other markets, which have also become increasingly electronic.  Extending these transparency requirements to all ATSs, and making them subject to the Commission’s review and effectiveness process, may present another opportunity to advance the objective of fair competition, as well as the protection of investors and market transparency, resiliency, and stability.  We are also soliciting comment on whether to prohibit certain practices that present potential conflicts of interest, including the disclosure of confidential subscriber information and trading by the broker-dealer operator and its affiliates in the ATS.  I look forward to hearing commenters’ views on these issues, other potential reforms to the ATS regulatory structure, and all aspects of the proposal.

Thank you again to the staff for all your hard work.  I am pleased to support the proposal.


[1] 15 U.S.C. 78k-1(a)(1)(C)(ii).

[2] See Regulation of Exchanges and Alternative Trading Systems, Securities Exchange Act Release No. 40760 (December 8, 1998).

[3] See Regulation of NMS Stock Alternative Trading Systems, Securities Exchange Act Release No. 76474 (November 18, 2015) at 11; Regulation of NMS Stock Alternative Trading Systems, Securities Exchange Act Release No. 83663 (July 18, 2018) at 52-53.

[4] Several commenters highlighted this disparity in response to the 2020 concept release regarding electronic trading in the fixed income markets. See Letter from Robert Laorno, General Counsel, ICE Bonds Securities Corporation, dated March 15, 2021 at 2-4; Letter from Stephen John Berger, Managing Director, Global Head of Government and Regulatory Policy, Citadel, dated March 1, 2021 at 2; Letter from Jennifer W. Han, Chief Counsel & Head of Regulatory Affairs, Managed Funds Association, dated March 1, 2021 at 6.

[7] The Fair Access Rule currently applies to entities that meet specified volume thresholds in NMS stocks, equity securities that are not NMS stocks and for which transactions are reported to an SRO, municipal securities, and corporate debt securities.  See 17 CFR 242.301(b)(5).  The proposal would extend the Fair Access Rule to platforms that meet certain thresholds in government securities. Release at 102.  In addition, registering as a broker-dealer would subject a Communication Protocol System to Commission and Financial Industry Regulatory Authority (“FINRA”) oversight. As a FINRA member, a Communication Protocol System would also be subject to FINRA’s investor protection and examination and market surveillance programs and would be required to comply with FINRA’s trade reporting rules. Release at 27.

[8] See Regulation of Exchanges and Alternative Trading Systems, Securities Exchange Act Release No. 40760 (December 8, 1998).

[9] Commissioner Elad L. Roisman, Remarks at U.S. Treasury Conference (September 29, 2020).

[10] Release at 377-78, 392 (noting that ATSs accounted for approximately 32 percent of U.S. Treasury Securities trading volume in the first half of 2021, and that Communication Protocol Systems account for approximately 30 to 40 percent of the total trading volume in U.S. Treasuries).

[11] The proposal would apply the Fair Access Rule and Regulation SCI to platforms that exceed certain volume thresholds. Release at Sections III.B.4, Section III.C.

[12] The requirements would apply to current ATSs that trade government securities as well as Communication Protocol Systems that register as ATSs as a result of the amendments to the definition of exchange. These requirements currently apply only to ATSs that trade NMS stocks.

Last Reviewed or Updated: Jan. 26, 2022