On November 18, 2015, the Securities and Exchange Commission (“SEC”) issued Release No. 34-76474 (the “Proposing Release”) in which the SEC proposed rules designed to enhance operational transparency and regulatory oversight of alternative trading systems (“ATSs”), including “dark pools,” that trade stocks listed on a national securities exchange (“NMS stocks”).
The proposed rules would require (i) broker-dealers that operate ATSs to file with the SEC information about the ATS in new Form ATS-N; (ii) the public filing of Form ATS-N; and (iii) an approval process in which the SEC could deny a Form ATS-N filing, in which case a broker-dealer would either have to discontinue its ATS operations or file to become a national securities exchange.
The primary regulation regarding the registration and operation of ATSs is Regulation ATS, promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Regulation ATS requires, amongst other things, that broker-dealer operators of an ATS file a Form ATS with the SEC. The following information must be included in the Form ATS:
- Type of persons permitted to subscribe to the ATS (i.e. broker-dealers, investment advisors, retail customers) and any difference(s) in functionality among subscribers;
- The identity of any third parties involved in the operation of the ATS;
- The manner in which the ATS operates, including the identity of distinct crossing sessions, order types, order priority, counterparty permissioning functionality and which party to a transaction receives price improvement;
- Procedures for ensuring subscribers’ compliance with system guidelines; and
- A copy of the ATS’ subscriber manual and any other materials provided to subscribers.
Form ATS is filed with both the SEC and FINRA. Additionally, ATS operators must file a revised Form ATS with the SEC and FINRA at least 20 calendar days prior to implementing any material changes to the system (such as the inclusion of new order types or crossing sessions). The SEC will review, and may request additional information regarding, Form ATS filings. However, there currently is no approval process in place regarding Form ATS. Rather, Form ATS is considered “notice filed” and operators may implement any changes 20 days after filing.
An ATS operator is not required to make its Form ATS publicly available. Indeed, Form ATS is treated as confidential and exempt from disclosure under the Freedom of Information Act (“FOIA”). However, a number of ATS operators have recently elected to make their Form ATSs publicly available, many in response to certain high-profile enforcement actions against individual ATSs.1
Additionally, ATS operators are required to submit quarterly Form ATS-R filings. These filings, which are submitted to the SEC and are not publicly available, require ATS operators to provide:
- A list of all subscribers that were participants of the ATS during the most recent quarter;
- A list of all securities that were traded on the ATS during the most recent quarter;
- Transaction volume, both by shares and notional value, across certain types of securities; and
- If an ATS is subject to certain “fair access” requirements (applicable to ATSs that have reached certain volume thresholds), a list of all persons granted, denied, or limited access to the ATS during the most recent quarter.
Again, Form ATS-R filings are treated as confidential and exempt from disclosure under FOIA. However, FINRA recently enacted rules that require ATS operators to report to FINRA weekly volume information and the number of trades in equity securities within the ATS. FINRA publishes volume information from each ATS on a delayed basis.
The SEC is proposing a number of changes to Regulation ATS that it claims will enhance operational transparency and regulatory oversight of ATSs that trade NMS stocks.
Form ATS-N would, relative to Form ATS, require more detailed disclosure regarding the operation of the ATS. Additionally, Form ATS-N would require ATS operators to provide detailed information regarding their non-ATS business lines and product offerings, as well as detailed information regarding the business lines and product offerings of their affiliates, both of which are not required by Form ATS. A list of information that would be required by Form ATS-N is provided below.
- Activities of the broker-dealer operator and its affiliates, including:
- their operation of non-ATS trading centers and other ATSs;
- products and services offered to subscribers;
- arrangements with unaffiliated trading centers;
- trading activities on the ATS;
- smart order router (or similar functionality) and algorithms used to send or receive orders or other trading interest to or from the ATS;
- personnel and third parties used to operate the ATS;
- differences in the availability of services, functionalities, or procedures; and
- safeguards and procedures to protect subscribers’ confidential trading information;
- The manner of operations of the ATS, including:
- types of subscribers;
- hours of operation;
- types of orders;
- connectivity, order entry, and co-location procedures;
- segmentation of order flow and notice about segmentation;
- display of order and other trading interest;
- trading services, including matching methodologies, order interaction rules, and order handling and execution procedures;
- procedures governing the suspension of trading or trading during system disruptions or malfunctions;
- opening, reopening, closing, and after-hours procedures;
- outbound routing services;
- market data;
- trade reporting;
- clearance and settlement;
- order display and execution access (if applicable);
- fair access (if applicable); and
- market quality statistics published or provided to one or more subscribers.
Some of this information is already publicly available through other sources and filings. However, much of the requested information, such as the identity of subscribers and fees charged, is not currently publicly available.
The SEC is proposing to make all Form ATS-Ns filed with the SEC publicly available on the SEC’s website. Accordingly, the information noted above, including information relating to the operations of affiliated entities, would be in the public domain. This is a substantial departure from current Form ATS filings which, as discussed above, are treated as confidential and exempt from disclosure under FOIA.
The Proposing Release requests comment on whether the SEC should simply require that current Form ATS be publicly available rather than adopt a new publicly available Form ATS-N.
SEC Approval to Operate as an ATS
Unlike the current notice filing system applicable to Form ATS, the Proposed Rule would require an ATS operator to obtain SEC approval of a firm’s Form ATS-N filing, including any amendments thereto. In the event the SEC rejects a firm’s Form ATS-N, the firm would be required to either cease ATS operations or file for approval to operate as a national securities exchange.
Requests for Comment
Firms that wish to comment on the proposal must do so within 60 days of publication of the Proposing Release in the Federal Register. While the proposed rules, including proposed Form ATS-N, would result in significant changes to the current ATS regulatory regime, the Proposing Release includes approximately 550 requests for comments. We recommend that firms take a careful look at the SEC’s requests for comment and take the opportunity to address proposed rules that would be unduly burdensome or that would have other negative impacts.