6279 Alternative Trading Systems

The Securities Industry and Financial Markets Association (“SIFMA”)1 respectfully submits this letter to the U.S. Securities and Exchange Commission (“Commission”) to comment on the above referenced proposal2 to amend Regulation ATS under the Securities Exchange Act of 1934 (“Exchange Act”) for alternative trading systems (“ATSs”) that trade government securities as defined under Section 3(a)(42) of the Exchange Act. The Commission proposes to eliminate the exemption from compliance with Regulation ATS for alternative trading systems examples an ATS that limits its securities activities to government securities or repurchase and reverse repurchase agreements on government securities, and registers as a broker-dealer or is a bank. Thus, the Commission proposes to require a government securities ATS to file publicly Form ATS-G, which would require such ATS to disclose information about its manner of operations and the ATS-related activities of the ATS operator and provide a process for the Commission to review Form ATS-G filings. The Commission also proposes to apply the fair access rule under Rule 301(b)(5) of Regulation ATS and Regulation Systems Compliance and Integrity (“SCI”) to government securities ATSs that meet certain volume thresholds in U.S.

What Is Securities and Exchange Commission (SEC) Form ATS-R?

The fair access rule will also be amended so that for the purpose of calculating the average transaction volume for fair access thresholds, ATSs would be required to aggregate the trading volume for a security or category of securities for ATSs that https://www.xcritical.com/ are operated by a common broker-dealer, or ATSs that are operated by affiliated broker-dealers. For any ATSs operated by a common broker-dealer or broker-dealer affiliates, this will increase the likelihood of needing to comply with the fair access rule. This overlap between dark trading volume throughout off-exchange trading venues and change trading is identified in Figure 4.5.

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Types of Tokenized Securities that Can Be Traded on ATS Platforms

Regulators have stepped up enforcement actions against ATSs for infractions such as trading against customer order flow or making use of confidential customer trading information. These violations may be more common in ATSs than in national exchanges because ATSs face fewer regulations. Trading systems created in the future will need to determine if they qualify as exchanges, and if so, these must comply with the new regulations, and must determine which regulatory status best suits their operations. After registration, the ATS will have to comply with ongoing reporting requirements and other obligations, such as file quarterly transaction summaries and permit examination and inspection of the site, systems, and records by the SEC and FINRA in case of inspection or investigation. Also, as broker-dealers and FINRA members, ATSs platfroms are subject to strict standards of due diligence.

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While the SEC’s volume has been impressive, the speed at which it is issuing proposals and the truncated time limits for comment it is providing mean that the SEC and market participants may not have an opportunity to meaningfully consider the impact that the proposed rules will have. Persons meeting the definition of an exchange are required by Exchange Act Section 5 to register with the SEC under Exchange Act Section 6. As self-regulatory organizations (SROs), exchanges registered under Section 6 are subject to a panoply of requirements in Sections 5, 6, and 19 of the Exchange Act. Given the breadth of the Proposal, this LawFlash focuses solely on the proposed changes to Exchange Act Rule 3b-16 that would bring so-called Communication Protocol Systems within the regulatory framework applicable to securities exchanges. In what has become a common tactic at the SEC under Chair Gary Gensler, on January 26, 2022, the SEC proposed sweeping and wide-ranging changes to the rules governing the way that securities exchanges are defined, while only providing a 30-day comment period (the Proposal). The Proposal, which as of the date of this LawFlash has not been published in the Federal Register, comes in at an astounding 654 pages.

Amendments Applicable to NMS Stock ATSs and Other ATSs

This optional tool is provided to assist member firms in fulfilling their regulatory obligations. This tool is provided as a starting point, and you must tailor this tool to reflect the size and needs of the applicant. Using this tool does not guarantee compliance with or create any safe harbor with respect to FINRA rules, the federal securities laws or state laws, or other applicable federal or state regulatory requirements.

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A stock exchange is a heavily regulated marketplace that brings together buyers and sellers to trade listed securities. An ATS is an electronic venue that also brings buyers and sellers together; however, it does not have any regulatory responsibilities (though it is regulated by the SEC) and trades both listed and unlisted securities. In 1997, however, the SEC questioned its historic treatment of PTSs as broker dealers, ultimately adopting the new regulatory scheme.

• This overlap between dark trading volume across off-exchange trading venues and exchange trading is identified in Figure 4.5.
• The Proposal does not directly address platforms — such as decentralized exchanges — that may trade digital assets that are securities.
• The SEC did not articulate how a willingness to buy or sell would be evidenced, or the features that would make an IOI non-firm.
• Duplicates of the reports required by paragraph (b)(9) of this section shall be provided to surveillance personnel of such self-regulatory authority upon request.
• This is another curious decision, based on the difficulties the agency had in clearing the original slog of ATS-N filings submitted in 2019, for which the SEC extended its own review period by 120 for some filers.
• The reason is that ATS venues can indeed be lit, for example, in the form of an ECN venue while part of the exchange trading is actually dark.8 However, ATSs in the form of lit ECNs play an insignificant role in terms of total trading today.

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Information about these transactions is mostly unavailable to the public, which is why they are called «dark.» The bulk of dark pool liquidity is created by block trades facilitated away from the central stock market exchanges and conducted by institutional investors (primarily investment banks). The SEC has been the subject of much criticism for its regulation by enforcement and regulation by staff interpretation approaches to the crypto industry, and rightfully so. However, the reopening release provides interested parties with some opportunity to directly address the SEC and seek regulatory clarity for the crypto industry in the US. The reopening also offers market participants a second bite at the apple on other areas that previously drew significant comment.

The information can be transparent either pre-trade, which gives investors access to information about buying and selling interest before trading, or post-trade, which means that trade information is disseminated to the public after the execution of the trade. In both the United States and Europe, post-trade disclosure is required for all trades, including trades that are executed on off-exchange platforms and internal trading systems of firms. The SEC would bring Communication Protocol Systems within the meaning of an exchange by amending Rule 3b-16 to include non-firm indications of a willingness to buy or sell a security, in addition to orders, within the interpretation provided for in the rule. The proposed amendments would also define “trading interest,” and add “communication protocols” as an established method that an organization, association, or group of persons can provide to bring together buyers and sellers of securities.

An ATS must file amendments to Form ATS to provide notice of any changes to its operations and must file a cessation of operation report on Form ATS if it closes. The requirements for filing reports using Form ATS are in Rule 301(b)(2) of Regulation ATS. While the focus of the reopening is on the crypto industry, the proposal drew significant comment on the expanded definition generally.

Digital asset platforms, which are considered trading securities in the US, are subject to securities laws requiring such platforms to be registered as a national securities exchange (NSE) or fall within an exemption from an NSE registration. Starting in October 2019, tZERO operated a separate ATS for NMS stock trading after regular market hours, while continuing to offer trading in digital securities during regular market hours through its original ATS. In the realm of finance, an Alternative Trading System (ATS) stands as a pivotal component, offering a dynamic platform for securities trading outside traditional stock exchanges. This intricate ecosystem serves various participants, including institutional investors, broker-dealers, and high-frequency traders, enabling them to execute trades efficiently.

Among other things, more operational transparency would aid investors in conducting analysis of executions. As noted in our previous comment letter,3 SIFMA supports tailoring Form ATS disclosures in a manner that addresses the unique characteristics of the fixed income and other marketplaces to best serve investors. The proposed changes to Rule 3b-16 have the potential to capture a number of systems and platforms that may otherwise have never contemplated being captured under the regulatory framework applicable to exchanges. (e) Order means any firm indication of a willingness to buy or sell a security, as either principal or agent, including any bid or offer quotation, market order, limit order, or other priced order. FINRA’s Office of General Counsel (OGC) staff provides broker-dealers, attorneys, registered representatives, investors, and other interested parties with interpretative guidance relating to FINRA’s rules. FINRA reminds member firms to stay apprised of new or amended laws, rules and regulations, and update their WSPs and compliance programs on an ongoing basis.

A hedge fund interested in building a large position in a company may use an ATS to prevent other investors from buying in advance.

As of 1 December 2015, there were 85 trading venues operating as ATSs.6 Of these, 44 venues traded NMS stocks.7 Figure 4.4 displays the distribution of traded volume among the different ATS venues based on data retrieved from FINRA. Securities and Exchange Commission (SEC), the federal agency responsible for facilitating the operations of the securities market to protect investors and ensure the fairness of transactions. In contrast to call markets are auction markets, which conduct trades as soon as a buyer and a seller are found who agree upon a specified price for the security. A key component of call markets are auctioneers, who are responsible for matching the supply and demand for a traded security before arriving at an equilibrium clearing price, which is the price at which market orders are traded.

One of them focuses on the impact of structural changes in stock markets, including the effects of fragmentation and new investment techniques and instruments, such as ETF and high-frequency trading (HFT), on the lower liquidity of small company stocks. It has been claimed that the new market structure encourages a focus on large liquid company stocks and less appetite to hold and trade in small company stocks. As a result, the attention of investors has been diverted away from potential growth companies that in turn have been discouraged from going public (Economist, 2009; Bradley and Litan, 2010; Haslag and Ringgenberg, 2015).