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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 232, 240, 242, and 249

[Release No. 34-83663; File No. S7-23-15]

RIN 3235-AL66

Regulation of NMS Stock Alternative Trading Systems

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY: The Securities and Exchange Commission is adopting amendments to regulatory

requirements in Regulation ATS under the Securities Exchange Act of 1934 (“Exchange Act”)

applicable to alternative trading systems (“ATSs”) that trade National Market System (“NMS”)

stocks (hereinafter referred to as “NMS Stock ATSs”), including so called “dark pools.” First,

we are adopting new Form ATS-N, which will require NMS Stock ATSs to disclose information

about their manner of operations, the broker-dealer that operates the ATS (“broker-dealer

operator”), and the ATS-related activities of the broker-dealer operator and its affiliates. Second,

as amended, the regulations will require public posting of certain Form ATS-N filings on the

Commission’s website, which will be accomplished through the Commission’s Electronic Data

Gathering, Analysis, and Retrieval system (“EDGAR”) and require each NMS Stock ATS that

has a website to post on its website a direct URL hyperlink to the Commission’s website. Third,

the amendments that we are adopting today provide a process for the Commission to review

Form ATS-N filings and, after notice and opportunity for hearing, declare an NMS Stock ATS’s

Form ATS-N ineffective. Fourth, the regulations, as amended, will require all ATSs subject to

the regulations to place in writing its safeguards and procedures to protect subscribers’

confidential trading information. We are also adopting conforming amendments.

DATES: Effective Date: October 9, 2018.

Compliance Dates: The applicable compliance dates are discussed in the section of the

release titled “VIII. Effective Date and Compliance Date.”

FOR FURTHER INFORMATION CONTACT: Tyler Raimo, Senior Special Counsel, at

(202) 551-6227; Matthew Cursio, Special Counsel, at (202) 551-5748; Marsha Dixon, Special

Counsel, at (202) 551-5782; Jennifer Dodd, Special Counsel, at (202) 551-5653; David Garcia,

Special Counsel, at (202) 551-5681; or Megan Mitchell, Special Counsel, at (202) 551-4887;

Office of Market Supervision, Division of Trading and Markets, Securities and Exchange

Commission, 100 F Street, NE, Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: We are adopting: (1) amendments to 17 CFR

242.300 through 242.303 (“Regulation ATS”) to add new 17 CFR 242.304 (“Rule 304”) under

the Exchange Act to provide new conditions for NMS Stock ATSs seeking to rely on the

exemption from the definition of “exchange” provided by 17 CFR 240.3a1-1(a) (“Rule 3a11(a)”) of the Exchange Act; (2) new Form ATS-N 1 under the Exchange Act, which NMS Stock

ATSs will file to comply with the new conditions provided under Rule 304; and (3) related

amendments to 17 CFR 242.300; 17 CFR 242.301, 17 CFR 242.303, and 17 CFR 240.3a1-1

under the Exchange Act (respectively, “Rule 300,” “Rule 301,” and “Rule 303” of Regulation

ATS, and “Rule 3a1-1”). We are also adopting amendments to 17 CFR 242.301(b)(10) and 17

CFR 242.303 (“Rules 301(b)(10) and 303 of Regulation ATS”) under the Exchange Act to

17 CFR 249.640.

require all ATSs to make and keep written safeguards and written procedures to protect

subscribers’ confidential trading information.

Table of Contents

Introduction

II.

Background

Role of ATSs in the Current Equity Market Structure

Significant Source of Liquidity for NMS Stocks

Operational Complexity; Conflict of Interests

Exemption for Alternative Trading Systems

Conditions to the ATS Exemption; Confidential Notice Regime

Concerns Regarding the Lack of Operational Transparency

III.

Heightened Regulatory Requirements for NMS Stock ATSs

Exchange Act Rule 3a1-1(a) Exemption: New Conditions for NMS Stock ATSs

Comments on the Rule 304 Requirements; Effectiveness

a. Comments on Form ATS-N Requirement

b. Comments on Effects on ATSs Relative to National Securities Exchanges

c. Comments on Effectiveness Requirement

Comments on Extending Rule 304 to Non-NMS Stock ATSs

Amendments to Existing Regulation ATS Rules for NMS Stock ATSs

Rule 300(k): Definition of NMS Stock ATS

Rule 301(a): Exemption from Compliance with Regulation ATS

Rule 301(a)(5): Exemptions from Certain Requirements of Regulation ATS Pursuant to

Application to the Commission

Rule 301(b)(2): Form ATS Reporting Requirements No Longer Apply to NMS Stock

ATSs

Rule 301(b)(9): Form ATS-R Quarterly Reports

Rule 303: Recordkeeping Requirements for Form ATS-N

Comments Recommending Changes to Other Existing Regulation ATS Rules

IV.

Form ATS-N Filing Process; Effectiveness Review

Initial Form ATS-N

Rule 304(a)(1)(i): Filing and Effectiveness Requirement

Rule 304(a)(1)(ii): Commission Review Period

Rule 304(a)(1)(iii): Effectiveness; Ineffectiveness Determination

a. Comments on the Standard of Review to Accept Filings on Form ATS-N

b. Comments on the Review for Declarations of Ineffectiveness

c. Effectiveness, Ineffectiveness Process

d. Effectiveness; Ineffectiveness Determinations Under Rule 301(a)(1)(iii)

Rule 304(a)(1)(iv): Transition for Legacy NMS Stock ATSs

a. Rule 304(a)(1)(iv)(A): Initial Filing Requirements

b. Rule 304(a)(1)(iv)(B): Commission Review Period; Ineffectiveness Determination

c. Rule 304(a)(1)(iv)(C): Amendments to Initial Form ATS-N

Rule 304(a)(2): Form ATS-N Amendments

Rule 304(a)(2)(i): Filing Requirements

a. Material Changes

(i) Comments on Advance Notice

(ii) Comments on Materiality

(iii) Order Display and Fair Access Amendments

b. Updating Amendments

c. Correcting Amendments

Rule 304(a)(2)(ii): Commission Review Period; Ineffectiveness Determination

Rule 304(a)(3): Notice of Cessation

Rule 304(a)(4): Suspension, Limitation, or Revocation of the Exemption from the

Definition of Exchange

Rule 304(b): Public Disclosure of Form ATS-N and Related Commission Orders

Rule 304(b)(1): Form ATS-N “Report”

Rule 304(b)(2): Making Public Form ATS-N Filings and Commission Orders

a. Public Disclosure of Effective Initial Form ATS-N, As Amended

b. Public Disclosure of Orders of an Ineffective Initial Form ATS-N

c. Public Disclosure of Form ATS-N Amendments

d. Public Disclosure of Ineffective Form ATS-N Amendment

e. Public Disclosure of Notices of Cessation

f. Public Disclosure of Each Order Suspending, Limiting, or Revoking the Rule 3a11(a)(2) Exemption

Rule 304(b)(3): Disclosure of Form ATS-N on the NMS Stock ATS’s Website

Form ATS-N Disclosures

Form ATS-N Disclosure Requirements and Definitions

Rule 304(c): Disclosure Requirements

Terminology

a. Definitions for Form ATS-N

(i) Proposed Defined Terms

(ii) New Defined Terms

b. Comments on the Definition of “Subscriber”

Cover Page and Part I of Form ATS-N: Identifying Information

Cover Page

Part I of Form ATS-N: Identifying Information

a. Part I: Identifying Information

b. Comments on Proposed Exhibit 1

c. ATS Governance Structure and Compliance Programs and Controls

Part II of Form ATS-N: ATS-Related Activities of the Broker-Dealer Operator and

Affiliates

Broker-Dealer Operator and its Affiliate Trading Activities on the NMS Stock ATS

a. Proposed Requests and Response to Comments

b. Adopted Part II, Item 1 and 2 of Form ATS-N; ATS-Related Trading Activities of

the Broker-Dealer Operator and its Affiliates

Order Interaction with Broker-Dealer Operator; Affiliates

Arrangements with Trading Centers

Other Products and Services

Activities of Service Providers

a. Shared Employees

b. Third-Party Service Providers

Protection of Confidential Trading Information

Differences in Availability of Services, Functionalities, or Procedures

Other Recommendations from Commenters

Part III Form ATS-N: Manner of ATS Operations

Types of ATS Subscribers

Eligibility for ATS Services

Exclusion from ATS Services

Hours of Operations

Means of Entry

Connectivity and Co-location

Order Types and Attributes

Order Sizes

Conditional Order and Indications of Interest

10. Opening and Reopening

11. Trading Services, Facilities and Rules

12. Liquidity Providers

13. Segmentation; Notice

14. Counter-Party Selection

15. Display

16. Routing

17. Closing

18. Trading Outside of Regular Trading Hours

19. Fees

20. Suspension of Trading

21. Trade Reporting

22. Clearance and Settlement

23. Market Data

24. Order Display and Execution Access

25. Fair Access

26. Aggregate Platform-Wide Data; Trading Statistics

a. Disseminated Aggregated Platform-Wide Data

b. Other Standardized Statistical Disclosures

VI.

Amendments to Rule 301(b)(10) and Rule 303(a)(1) for Written Safeguards and Written

Procedures to Protect Confidential Trading Information

VII.

EDGAR Filing Requirements; Structured Data

VIII.

Effective Date and Compliance Date

IX.

Paperwork Reduction Act

Summary of Collection of Information

Requirements Relating to Rule 301(b)(10) and 303(a)(1) of Regulation ATS

Requirements Relating to Rules 301(b)(2)(viii) and 304 of Regulation ATS, including

Form ATS-N

Proposed Use of Information

Amendments to Rule 301(b)(10) and 303(a)(1) of Regulation ATS

Rules 301(b)(2)(viii), 304 of Regulation ATS, Including Form ATS-N, and 301(b)(9)

Respondents

Total Initial and Annual Reporting and Recordkeeping Burdens

Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS

a. Baseline Measurements

b. Burdens

Rules 301(b)(2)(viii) and 304 of Regulation ATS, including Form ATS-N

a. Baseline Measurements

b. Burdens

(i) Analysis of Estimated Additional Burden for Form ATS-N

(a) Part I

(b) Part II

(ii) Estimated Burden above the Current Baseline for an Initial Form ATS-N,

Form ATS-N Amendment, and Notice of Cessation on Form ATS-N

(a) Initial Form ATS-N

(b) Form ATS-N Amendments

(iii) ATSs that Trade Both NMS and Non-NMS Stocks

(iv) Access to EDGAR

(v) Recordkeeping Requirements

Collection of Information is Mandatory

Confidentiality of Responses to Collection of Information

Retention Period for Recordkeeping Requirements

Economic Analysis

Background

Baseline

Current NMS Stock ATSs

Current Reporting Requirements For NMS Stock ATSs

Lack of Standardized Public Disclosure

NMS Stock ATS Treatment of Subscriber Confidential Trading Information

Competition

a. Competition Bewteen NMS Stock ATSs and Registered National Securities

Exchanges

b. Competition Among NMS Stock ATSs

c. Competition Between Broker-Dealers That Operate NMS Stock ATSs And BrokerDealersThat Do Not Operate NMS Stock ATSs

Effect of NMS Stock ATSs on the Current Market for NMS Stock Execution Services

a. Trading Costs

b. Price Discovery

c. Market Efficiency

Economic Effects and Effects on Efficiency, Competition, and Capital Formation

Economic Effects of Enhanced Filing Requirements of Form ATS-N

a. Benefits

b. Costs

Economic Effects of Public Disclosure of Form ATS-N

a. Benefits

(i) Benefits of Public Disclosure of Standardized Information of Operations of

NMS Stock ATSs

(ii) Benefits of Public Disclosure of the ATS-Related Activities of the BrokerDealer Operator and its Affiliates

(iii) Benefits of Public Disclosure of Aggregate Platform-Wide Order Flow and

Execution Statistics

(iv) Benefits of Filing Form ATS-N in a Structured Format

b. Costs

(i) Costs to NMS Stock ATSs

(ii) Price Impact Costs

(iii) Filing in Structured Format

Economic Effects of Written Safeguards and Written Procedures to Protect Subscribers’

Confidential Trading Information

a. Benefits

b. Costs

Impact on Efficiency, Competition, and Capital Formation

a. Competition

(i) Entry of New and Continuation of Legacy NMS Stock ATSs

(a) Enhance Filing Requirements of Form ATS-N

(b) Implementation and Ongoing Compliance Costs

(ii) Effects on Changes in Number of NMS Stock ATSs on Market Participant

Trading Costs

(iii) Innovation

b. Efficiency

c. Capital Formation

Reasonable Alternatives

Require NMS Stock ATSs to Publicly Disclose Current Form ATS

Require Form ATS-N But Deem Information Confidential

Require NMS Stock ATSs to Publicly Disclose Form ATS-N But Not Declare Form

ATS-N Ineffective

Initiate Differing Levels of Public Disclosure Depending on NMS Stock ATS

Characteristics

Require NMS Stock ATSs to Register as National Securities Exchanges and Become

SROs

Discontinue Quarterly Volume Reports on Form ATS-R

Require NMS Stock ATSs to Operate as Limited Purpose Entities

Prohibit Broker-Dealer Operators and Affiliates from Trading on the NMS Stock ATS

Lower the Fair Access Threshold for NMS Stock ATSs

10. Requirements to Disclose Aggregate Platform-Wide Order Flow and Execution

Statistics to all Subscribers

11. Specify Alternative Structured Formats for Form ATS-N

12. Specify Other Filings Methods for Form ATS-N

XI.

Regulatory Flexibility Act Certification

I. Introduction

NMS Stock ATSs, including trading centers commonly referred to as dark pools, 2 have

become an integral part of the national market system. Since the adoption of Regulation ATS in

1998, 3 the number of these ATSs, and the volume of NMS stocks traded on them, has

significantly increased. NMS Stock ATSs, which meet the definition of an exchange but are not

required to register as national securities exchanges, compete with, and operate with complexity

akin to, national securities exchanges. Many NMS Stock ATSs are operated by multi-service

broker-dealers, whose business activities have become increasingly intertwined with those of the

ATS, adding further complexity to their operations of NMS Stock ATSs and creating the

potential for conflicts between the interests of the broker-dealer operator and the ATS’s

subscribers.

Despite their role in the equity markets, little information is widely available to market

participants about NMS Stock ATSs, which restricts their ability to adequately assess these ATSs

as potential routing destinations. On November 18, 2015, we proposed to amend Regulation

ATS with the stated goals of enhancing operational transparency for NMS Stock ATSs to enable

market participants to make more informed order routing decisions, and to facilitate better

The term “dark pool” is not used or defined in the Exchange Act or Commission rules. For purposes of this

release, the term refers to NMS Stock ATSs that do not publicly display quotations in the consolidated

quotation data. See Securities Exchange Act Release No. 76474 (Nov. 18, 2015), 80 FR 80998, 81008

n.123 (Dec. 28, 2015) (“Proposal”). Currently, NMS Stock ATSs operate predominantly as dark pools.

See infra Section II.A.1.

A “trading center” means a national securities exchange or national securities association that operates an

SRO trading facility, an ATS, an exchange market maker, an OTC market maker, or any other broker or

dealer that executes orders internally by trading as principal or crossing orders as agent. 17 CFR

242.600(b)(78). Some trading centers, such as OTC market makers, also offer dark liquidity, primarily in a

principal capacity, and do not operate as ATSs. For purposes of this adopting release, these trading centers

are not defined as dark pools because they are not ATSs.

Securities Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844, 70863 (December 22,

1998) (Regulation of Exchanges and Alternative Trading Systems) (“Regulation ATS Adopting Release”).

Commission oversight of these trading venues. 4 To achieve these goals, we proposed to require

NMS Stock ATSs to publicly report on new Form ATS-N information about how the ATS

operates and activities of the broker-dealer operator and its affiliates that relate to the ATS; and

provide a process for the Commission to determine whether an NMS Stock ATS qualifies for the

exemption from the definition of “exchange,” in which the Commission would, by order, declare

a Form ATS-N effective or, after notice and opportunity for hearing, ineffective.

We received 32 comment letters on the Proposal from a variety of interested persons,

including ATSs, a national securities exchange, broker-dealers, institutional investors, industry

trade groups, the Commission’s Investor Advocate, and the Attorney General of the State of New

York. 5 Commenters generally support the goals of the Proposal, although some commenters

express concern about various specific elements, and recommend certain modifications or

clarifications. We are adopting Form ATS-N and amendments to Regulation ATS and Exchange

Act Rule 3a1-1(a) with modifications from the Proposal, as discussed below. 6

II. Background

A. Role of ATSs in the Current Equity Market Structure

1. Significant Source of Liquidity for NMS Stocks

See Proposal, supra note 2. Section 11A(a)(2) of the Exchange Act (15 U.S.C. 78k-1(a)(2)) enacted as part

of the Securities Acts Amendments of 1975 (“1975 Amendments”) (Pub. L. 94-29, 89 Stat. 97 (1975))

directs the Commission, having due regard for the public interest, the protection of investors, and the

maintenance of fair and orderly markets, to use its authority under the Exchange Act to facilitate the

establishment of a national market system for securities in accordance with the Congressional findings and

objectives set forth in Section 11A(a)(1) of the Exchange Act. See 15 U.S.C. 78k-1(a)(1). See also

Regulation ATS Adopting Release, supra note 3, at 70858; Proposal, supra note 2, at 80999-81000.

Comments received on the Proposal are available on the Commission’s website, available at:

https://www.sec.gov/comments/s7-23-15/s72315.shtml. See Appendix A for a citation key to comment

letters cited in this release.

If any of the provisions of these rules, or the application thereof to any person or circumstance, is held to be

invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or

circumstances that can be given effect without the invalid provision or application.

At the time Regulation ATS was proposed, there were 8 registered national securities

exchanges, 7 and the Commission estimated that there were approximately 43 systems that would

be eligible to operate as ATSs. 8 As of March 31, 2018, there were 21 registered national

securities exchanges and 87 ATSs with a Form ATS on file with the Commission. Of these,

there were 12 national securities exchanges that trade NMS stocks and 41 ATSs that had noticed

on Form ATS that they expect to trade NMS stocks. 9 Approximately 502.8 billion shares ($25.4

trillion) were traded in NMS stocks during the first quarter of 2018. 10 During this period, the 33

ATSs that reported transactions in NMS stocks 11 accounted for 57.3 billion shares

(approximately $2.9 trillion in dollar volume), representing 11.4% of the combined total share

trading volume (11.5% of the total dollar volume) in NMS stocks on all national securities

See Securities Exchange Act Release No. 39884 (April 21, 1998), 63 FR 23504, 23523 (April 29, 1998)

(“Regulation ATS Proposing Release”) at 23543 n.341.

See id. at 23540 n.313 and accompanying text.

Data compiled from Forms ATS submitted to the Commission as of March 31, 2018.

NYSE National, Inc. (f.k.a. National Stock Exchange, Inc.) was not trading as of March 31, 2018 but filed

a proposed rule change with the Commission for its proposed relaunch. See Securities Exchange Act

Release No. 82819 (March 7, 2018) 83 FR 11098 (March 13, 2018) (NYSENAT-2018-02) (notice of

proposed ruled change). The Commission has approved the proposed rule change. See Securities

Exchange Act Release No. 83289 (May 17, 2018) 83 FR 23968 (May 23, 2018) (NYSENAT-2018-02)

(order approving proposed ruled change).

In contrast to dark pools, an ATS could be an Electronic Communication Network (“ECN”), which are

ATSs that provide their best-priced orders for inclusion in the consolidated quotation data, whether

voluntarily or as required by Rule 301(b)(3) of Regulation ATS. See Rule 600(b)(23) of Regulation NMS,

17 CFR 242.600(b)(23) (definition of “electronic communications network”); see also 2010 Equity Market

Structure Release, supra note 13, at 3599. In general, ECNs offer trading services (such as displayed or

non-displayed order types, maker-taker pricing, and data feeds) that are analogous to national securities

exchanges. See id. Currently, however, based on Form ATS filings, there are no NMS Stock ATSs

operating as ECNs.

See infra Table 1 – “NMS Stock ATSs Ranked by Dollar Trading Volume – January 1, 2018 to March 30,

2018” (citing Trade and Quote (TAQ) Data).

Data compiled from Forms ATS and Forms ATS-R filed with the Commission as of the end of, and for the

first quarter of 2018.

exchanges, ATSs, and non-ATS OTC trading centers. 12 By comparison, the number of active

dark pools trading NMS stocks in 2002 was approximately 10, 13 and in 2009, dark pools

accounted for 7.9% of NMS share volume. 14 Additionally, no individual ATS executed more

than 20.1% of the total share volume on NMS Stock ATSs or more than 2.3% of total NMS

stock share volume during the first quarter of 2018. 15 Given this dispersal of trading volume in

NMS stocks among an increasing number of trading centers, NMS Stock ATSs, with their

approximately 11.4% market share, represent a significant source of liquidity in NMS stocks.

See infra Table 1 – “NMS Stock ATSs Ranked by Dollar Trading Volume – January 1, 2018 to March 30,

2018.” See id. (citing Trade and Quote (TAQ) Data).

During the second quarter of 2015, there were 38 ATSs that reported transactions in NMS stocks,

accounting for 59 billion shares traded in NMS stocks ($2.5 trillion), which represented approximately

15.0% of total share trading volume (15.4% of total dollar trading volume) on all national securities

exchanges, ATSs, and non-ATS OTC trading venues combined. See Proposal, supra note 2, at 81008

n.121 and accompanying text.

Competitors for listed-equity (NMS) trading services also include several hundred OTC market makers and

broker-dealers.

See Regulation of Non-Public Trading Interest, Securities Exchange Act Release No. 60997 (November 13,

2009) 74 FR 61208, 61209 n.9 (November 23, 2009) (“Regulation of Non-Public Trading Interest”).

In 2009, there were 32 active dark pools trading in NMS stocks. See Securities Exchange Act Release No.

61358 (January 14, 2010), 75 FR 3594 (January 21, 2010) (“2010 Equity Market Structure Release”)), at

3598 n.22 and accompanying text.

See id. at 3598.

The NMS Stock ATS with the greatest volume executed approximately 20.1% of NMS Stock ATS share

volume and 2.3% of the total consolidated NMS stock share trading volume.

The market share percentages were calculated by Commission staff using aggregate trade data reported by

ATSs to the FINRA equity trade reporting facilities and made available on FINRA’s website and TAQ

Data. See infra Table 1 – “NMS Stock ATSs Ranked by Dollar Trading Volume – January 1, 2018 to

March 30, 2018.”

Pursuant to FINRA rules, each ATS is required to use a unique MPID in its reporting to FINRA, such that

its volume reporting is distinguishable from other transaction volume reported by the broker-dealer

operator of the ATS, including volume reported for other ATSs operated by the same broker-dealer. See

FINRA Rules 6160, 6170, 6480, and 6720. FINRA aggregates on a weekly basis ATS data reported by

ATSs to the FINRA equity trade reporting facilities. The data can be viewed on a security-by-security

basis or by ATS. See FINRA Rules 6110 and 6610. See also Securities Exchange Act Release No. 76931

(January 19, 2016), 81 FR 4076 (January 25, 2016) (SR-FINRA-2016-002) (notice of filing and immediate

effectiveness of a proposed rule change relating to ATS volume and trading information) (“FINRA ATS

Reporting Notice”).

2. Operational Complexity; Conflict of Interests

NMS Stock ATSs have grown increasingly complex in terms of the services and

functionalities that they offer subscribers, and they have used advances in technology to improve

the speed, capacity, and efficiency of the trading functionalities that they offer to execute orders

in NMS stocks. 16 Additionally, NMS Stock ATSs today offer a wide range of order types,

matching systems to bring together orders and counterparties in NMS stocks, order interaction

protocols, or opportunities to customize trading parameters, such as parameters that allow

subscribers to preference interaction of their order flow with that of certain other specific

subscribers or types of subscribers. 17 A variety of market participants use these ATSs to display

or execute orders and trading interest in NMS stocks, including broker-dealers that route

customer orders to ATSs for execution and potential price improvement, and asset managers that

seek to execute large size orders without suffering adverse price impact. 18

The relationships between broker-dealer operators 19 and the ATSs they operate have also

become more complex and intertwined since the adoption of Regulation ATS. 20 The brokerdealer operator of an NMS Stock ATS controls all aspects of the operation of the ATS,

including, among other things: the means of access to the ATS; who may trade on the ATS; how

orders are matched and executed; and any differences in access to services among subscribers. 21

The broker-dealer operator, or its affiliate, may also own, and control access to, the technology

ATSs that traded NMS stocks prior to the adoption of Regulation ATS did not offer the same services and

functionalities that they do today. See Proposal, supra note 2, at 81009.

See id. at 81009-81010.

Market participants may include many different types of persons seeking to transact in NMS stocks,

including broker-dealers and institutional or retail investors. See id. at 81001 n.28 and accompanying text.

See Proposal, supra note 2, at 81010, 81041-81043.

See id.

See id. at 81010.

and systems that support the trading facilities of the NMS Stock ATS, or provide and control the

personnel servicing the ATS’s trading facilities. 22 Additionally, the broker-dealer operator, or in

some cases, its affiliates, determines the means by which orders are entered on the ATS, in many

cases, through the use of a smart order router that is owned and operated by the broker-dealer

operator or one of its affiliates. 23 The broker-dealer operator, or in some cases, its affiliates, also

controls the market data that the ATS uses to match, and execute orders and the transmission of,

and access to, confidential order and execution information sent to and from the ATS. 24 The

operations of the NMS Stock ATS and the other operations of the broker-dealer operator are

usually closely intertwined, and the broker-dealer operator may leverage its information

technology, systems, personnel, and market data, and those of its affiliates, to operate the ATS.

Furthermore, ATSs that trade NMS stocks are increasingly operated by multi-service

broker-dealers that engage in significant brokerage and dealing activities in addition to operation

of their ATS. 25 These other business activities may include, among others, providing

algorithmic trading software, agency sales desk support, and automated smart order routing

services, often with, or through, their affiliates. As indicated by commenters, the fees charged to

subscribers for their use of an NMS Stock ATS operated by a multi-service broker-dealer are

generally bundled with other services offered by the broker-dealer operator to subscribers. 26

See id. Some technology or functions of an ATS may be licensed from a third party. The broker-dealer

operator of the ATS is nonetheless legally responsible for ensuring that all aspects of the ATS comply with

applicable laws. See id. at 81041 n.362.

See id. at 81041.

See id. For example, the broker-dealer operator determines the source of market data that the NMS Stock

ATS uses to calculate the NBBO and how the NBBO will be calculated.

Throughout the Proposal and this release, broker-dealer operators of NMS Stock ATSs that provide

brokerage or dealing services in addition to operating an ATS are referred to as “multi-service brokerdealers.” See id. at 81001 n.30.

See infra Section V.D.19.

Multi-service broker-dealers that also operate NMS Stock ATSs may use the ATS as a

complement to the broker-dealer’s other service lines. For instance, the broker-dealer operator

of an NMS Stock ATS, or its affiliate, may also operate an OTC market making desk or principal

trading desk, 27 or may have other business units that actively trade NMS stocks on a principal or

agency basis in the ATS or at other trading centers. 28 Some of these broker-dealer operators that

operate multiple NMS Stock ATSs may use their ATSs as an opportunity to execute orders “in

house” before seeking contra-side interest at other execution venues. A multi-service brokerdealer may also execute orders in NMS stocks internally (and not within its ATS) by trading as

principal against such orders or crossing orders as agent in a riskless principal capacity, before

routing the orders to its NMS Stock ATS or another external trading center. Consequently, the

non-ATS trading centers operated by the broker-dealer operator of an NMS Stock ATS, or its

affiliates, may compete with the ATS for the execution of transactions in NMS stocks.

B. Exemption for Alternative Trading Systems

Exchange Act Rule 3b-16(a) 29 provides a functional test to assess whether a trading

platform meets the definition of exchange, and if so, triggers the requirement to register as a

national securities exchange pursuant to Section 5 of the Exchange Act 30 and comply with the

requirements applicable to exchanges. Under Rule 3b-16(a), “an organization, association, or

group of persons shall be considered to constitute, maintain, or provide ‘a market place or

These non-ATS, OTC activities in NMS stocks may include operating as an OTC market maker or block

positioner or operating an internal broker-dealer system. See 2010 Equity Market Structure Release, supra

note 13, at 3599-3600. Additionally, an affiliate of the broker-dealer operator of an NMS Stock ATS may

also operate non-ATS trading centers.

See id. See also infra Section V.C (discussing comments on the proposed disclosure requirements of Form

ATS-N).

See 17 CFR 240.3b-16. See generally Regulation ATS Adopting Release, supra note 3. See also Proposal,

supra note 2, at 81004 (discussing the current exemption from the definition of exchange available to

ATSs).

See 15 U.S.C. 78f.

facilities for bringing together purchasers and sellers of securities or for otherwise performing

with respect to securities the functions commonly performed by a stock exchange,’ if such

organization, association, or group of persons: (1) brings together the orders for securities of

multiple buyers and sellers; and (2) uses established, non-discretionary methods (whether by

providing a trading facility or by setting rules) under which such orders interact with each other,

and the buyers and sellers entering such orders agree to the terms of a trade.” 31 Exchange Act

Rule 3b-16(b) explicitly excluded certain systems that the Commission believed were not

exchanges. 32 Accordingly, a system is not included in the Commission’s interpretation of

“exchange” if: (1) the system fails to meet the two-part test in paragraph (a) of Rule 3b-16; (2)

the system falls within one of the exclusions in paragraph (b) of Rule 3b-16; or (3) the

Commission otherwise conditionally or unconditionally exempts 33 the system from the

definition.

Section 5 of the Exchange Act 34 requires an organization, association, or group of

persons that meets the definition of “exchange” under Section 3(a)(1) of the Exchange Act, 35

unless otherwise exempt, to register with the Commission as a national securities exchange

See 17 CFR 240.3b-16(a).

See Regulation ATS Adopting Release, supra note 3, at 70852. Specifically, Rule 3b-16(b) excludes from

the definition of exchange systems that perform only traditional broker-dealer activities, including: (1)

systems that route orders to a national securities exchange, a market operated by a national securities

association, or a broker-dealer for execution, or (2) systems that allow persons to enter orders for execution

against the bids and offers of a single dealer if certain additional conditions are met.

See 17 CFR 240.3b-16(e).

15 U.S.C. 78e.

Pursuant to Section 3(a)(1) of the Exchange Act, the statutory definition of “exchange” means “any

organization, association, or group of persons, whether incorporated or unincorporated, which constitutes,

maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities

or for otherwise performing with respect to securities the functions commonly performed by a stock

exchange….” 15 U.S.C. 78c(a)(1).

pursuant to Section 6 of the Exchange Act. 36 Registered national securities exchanges are also

SROs, 37 and must comply with regulatory requirements applicable to both national securities

exchanges and SROs. 38 Before a national securities exchange may commence operations, the

Commission must approve the national securities exchange’s application for registration filed on

Form 1. Section 6(b) of the Exchange Act requires, among other things, that the national

securities exchange be so organized and have the capacity to carry out the purposes of the

Exchange Act and to comply, and enforce compliance by its members and persons associated

with its members, with the federal securities laws and the rules of the exchange. 39 Both a

national securities exchange’s registration application and the Commission’s order approving the

15 U.S.C. 78f. A “national securities exchange” is an exchange registered as such under Section 6 of the

Exchange Act.

A trading platform that meets the definition of “exchange” under Section 3(a)(1) of the Exchange and fails

to register with the Commission as a national securities exchange pursuant to Section 6 of the Exchange

Act, unless exempt, risks operating as an unregistered exchange in violation of Section 5 of the Exchange

Act. See, e.g., Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of

1934: The DAO, Securities Exchange Act Release No. 81207 (July 25, 2017)

https://www.sec.gov/litigation/investreport/34-81207.pdf (“DAO Report”) (finding that certain tokens

offered and sold by a “virtual” organization were securities, and confirming that issuers of distributed

ledger or blockchain technology-based securities must register offers and sales of such securities unless a

valid exemption applies, and that securities exchanges providing for trading in these securities must register

unless they are exempt). Specifically, we confirmed that a system that meets the criteria of Rule 3b-16(a),

and is not excluded under Rule 3b-16(b), must register as a national securities exchange pursuant to

Sections 5 and 6 of the Exchange Act or operate pursuant to an appropriate exemption. See id. at Section

III.D. See also In the Matter of BTC Trading, Corp. and Ethan Burnside, Respondents, Securities

Exchange Act Release No. 73783 (December 8, 2014), https://www.sec.gov/litigation/admin/2014/339685.pdf (order instituting administrative and cease-and-desist proceedings, making findings, and imposing

remedial sanctions and a cease-and-desist order and alleging, among other things, that an operator of two

online venues through which account holders could trade securities using virtual currencies violated

Section 5 of the Exchange Act by failing to register the trading venues as exchanges).

Section 3(a)(26) of the Exchange Act defines a self-regulatory organization as any national securities

exchange, registered securities association, registered clearing agency, or (with limitations) the Municipal

Securities Rulemaking Board. See 15 U.S.C. 78c(a)(26). See also Proposal, supra note 2, at 81000-81001

nn. 20-26 and accompanying text (discussing certain differences between certain obligations and benefits

applicable to national securities exchanges and those applicable to ATSs).

See, e.g., 15 U.S.C. 78f and 78s.

See Section 6(b)(1) of the Exchange Act, 15 U.S.C. 78f(b)(1). The Commission must also find that the

national securities exchange has rules that meet certain criteria. See generally Exchange Act Section

6(b)(2) through (10), 15 U.S.C. 78f(b)(2) through (10).

application are public. After registering, a national securities exchange must file with the

Commission any proposed changes to its rules. 40 The initial application on Form 1, amendments

thereto, and filings for proposed rule changes, in combination, publicly disclose important

information about national securities exchanges, such as the trading services they offer and fees

they charge for those services.

Exchange Act Rule 3a1-1(a)(2) 41 exempts from the Exchange Act Section 3(a)(1)

definition of “exchange” an organization, association, or group of persons that complies with

Regulation ATS, 42 which requires, among other things, meeting the definition of an ATS and

registering as a broker-dealer. 43 As a result of the exemption, an organization, association, or

group of persons that meets the definition of an exchange and complies with Regulation ATS is

not required by Section 5 of the Exchange Act to register as a national securities exchange

pursuant to Section 6 of the Exchange Act, is not an SRO, and, therefore, is not required to

comply with regulatory requirements applicable to national securities exchanges and SROs. 44

An ATS that fails to comply with the requirements of Regulation ATS would no longer qualify

See generally Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b), and Exchange Act Rule 19b-4, 17 CFR

240.19b-4.

See 17 CFR 240.3a1-1(a)(2).

See id. Rule 3a1-1 also provides two other exemptions from the definition of “exchange” for any ATS

operated by a national securities association and any ATS not required to comply with Regulation ATS

pursuant to Rule 301(a) of Regulation ATS. See 17 CFR 240.3a1-1(a)(1) and (3).

Rule 3a1-1(b) provides an exception to the Rule 3a1-1(a) exemptions pursuant to which the Commission

may require a trading system that is a substantial market to register as a national securities exchange, if the

Commission finds doing so is necessary or appropriate in the public interest or consistent with the

protection of investors. See 17 CFR 240.3a1-1(b). See also Regulation ATS Adopting Release, supra note

3, at 70857-70858.

See 17 CFR 242.300(a); 17 CFR 242.301(a); and 242.301(b)(1). In addition to the other requirements of

Regulation ATS, to qualify for the Rule 3a1-1(a) exemption, an organization, association, or group of

persons must otherwise meet the definition of “exchange.”

See generally Sections 5, 6, and 19 of the Exchange Act, 15 U.S.C. 78e, 78f, and 78s.

for the exemption provided under Rule 3a1-1(a)(2), and thus, risks operating as an unregistered

exchange in violation of Section 5 of the Exchange Act. 45

C. Conditions to the ATS Exemption; Confidential Notice Regime

Rule 300(a) of Regulation ATS defines an ATS as: “any organization, association,

person, group of persons, or system: (1) [t]hat constitutes, maintains, or provides a market place

or facilities for bringing together purchasers and sellers of securities or for otherwise performing

with respect to securities the functions commonly performed by a stock exchange within the

meaning of [Rule 3b-16]; and (2) [t]hat does not: (i) [s]et rules governing the conduct of

subscribers other than the conduct of such subscribers’ trading on such organization, association,

person, group of persons, or system; or (ii) [d]iscipline subscribers other than by exclusion from

trading.” 46 Governing the conduct of or disciplining subscribers are functions performed by an

SRO that we believe should be regulated as such. 47 Accordingly, pursuant to the definition in

Rule 300(a), a trading system that performs SRO functions, or performs functions common to

national securities exchanges, such as establishing listing standards, is precluded from the

definition of ATS and would be required to register as a national securities exchange or be

operated by a national securities association (or seek another exemption). 48

See 15 U.S.C. 78e.

See 17 CFR 242.300(a).

See Regulation ATS Adopting Release, supra note 3, at 70859. As we noted when we adopted Regulation

ATS, any system that uses its market power to regulate its participants should be regulated as an SRO. We

stated that it would consider a trading system to be “governing the conduct of subscribers” outside the

trading system if it imposed on subscribers, as conditions of participation in trading, any requirements for

which the trading system had to examine subscribers for compliance. In addition, we stated our belief that

if a trading system imposed as conditions of participation, directly or indirectly, restrictions on subscribers’

activities outside of the trading system, such a trading system should be a registered exchange or operated

by a national securities association, but that the limitation would not preclude an ATS from imposing credit

conditions on subscribers or requiring subscribers to submit financial information to the ATS. See id.

See id.

Rule 301(b)(1) of Regulation ATS requires that every ATS that is subject to Regulation

ATS, pursuant to paragraph (a) of Rule 301, 49 be registered as a broker-dealer under Section 15

of the Exchange Act. 50 As a registered broker-dealer, an ATS must also, in addition to

complying with Regulation ATS, comply with broker-dealer filing and conduct obligations,

including becoming a member of an SRO, such as the Financial Industry Regulatory Authority

(“FINRA”), and comply with SRO rules. 51 An ATS must also comply with Rule 301(b)(2) of

Regulation ATS, which currently requires all ATSs to file an initial operation report with the

Commission on Form ATS 52 at least 20 days before commencing operations. 53 Form ATS

requirements include that an ATS provide information about: classes of subscribers and

differences in access to the services offered by the ATS to different groups or classes of

subscribers; securities the ATS expects to trade; any entity other than the ATS involved in its

Pursuant to Rule 301(a), certain ATSs that are subject to other appropriate regulations are not required to

comply with Regulation ATS. These ATSs include those that are: registered as a national securities

exchange under Section 6 of the Exchange Act; exempt from national securities exchange registration

based on the limited volume of transactions effected; operated by a national securities association;

registered as a broker-dealer under Sections 15(b) or 15C of the Exchange Act, or are banks, that limits

their activities to certain instruments; or exempted, conditionally or unconditionally, by Commission order,

after application by such ATS. See 17 CFR 242.301(a).

See 17 CFR 242.301(b)(1).

Section 15(b)(8) of the Exchange Act requires a broker or dealer to become a member of a registered

national securities association, unless it effects transactions in securities solely on an exchange of which it

is a member. 15 U.S.C. 78o(b)(8). See also Regulation ATS Adopting Release, supra note 3, at 70903

(discussing some of the regulatory obligations of registered broker-dealers, such as membership in an SRO

and compliance with that SRO’s rules). For example, a broker-dealer that is a FINRA member must file an

application for approval of a material change to its business operations (as defined in FINRA Rule

1011(k)). See FINRA Rule 1017(a). Among other obligations, a broker-dealer operator of an NMS Stock

ATS that is a FINRA member is subject to trade reporting requirements pursuant to FINRA rules. See,

e.g., supra note 15 (discussing FINRA trade reporting requirements applicable to NMS Stock ATSs).

Form ATS and the Form ATS Instructions are available at http://www.sec.gov/about/forms/formats.pdf.

See 17 CFR 242.301(b)(2)(i). The Commission stated in the Regulation ATS Adopting Release that Form

ATS would provide the Commission the opportunity to identify problems that might impact investors

before the system begins to operate. See Regulation ATS Adopting Release, supra note 3, at 70864;

Proposal, supra note 2, at 81005 n.70 and accompanying text. Unlike a Form 1 filed by a national

securities exchange, Form ATS is not approved by the Commission. Instead, Form ATS provides the

Commission with notice about an ATS’s operations prior to commencing operations. See Regulation ATS

Adopting Release, supra note 3, at 70864.

operations; the manner in which the system operates; how subscribers access the trading system;

procedures governing order entry; and procedures governing execution, reporting, clearance, and

settlement of transactions effected through the ATS. 54 Regulation ATS states that information

filed by an ATS on Form ATS is “deemed confidential when filed” 55 and ATSs are not otherwise

required to publicly disclose such information. 56

ATSs must notify the Commission of any changes in their operations by filing an

amendment to its Form ATS initial operation report. There are three types of amendments to an

initial operation report. 57 First, if any material change is made to its operations, the ATS must

file an amendment on Form ATS at least 20 calendar days before implementing such change. 58

Second, if any information contained in the initial operation report becomes inaccurate for any

reason and has not been previously reported to the Commission as an amendment on Form ATS,

the ATS must file an amendment on Form ATS correcting the information within 30 calendar

days after the end of the calendar quarter in which the system has operated. 59 Third, an ATS

must promptly file an amendment on Form ATS correcting information that it previously

See Proposal, supra note 2, at 81005.

17 CFR 242.301(b)(2)(vii). See Form ATS.

As we noted in the Proposal, some ATSs may currently make voluntary public disclosures. See Proposal,

supra note 2, at 81011, n.156. See also infra note 559 and accompanying text (discussing comments

regarding voluntary postings of Form ATS by NMS Stock ATSs).

Form ATS is used for three types of submissions: initial operation reports; amendments to initial operation

reports; and cessation of operations reports. An ATS designates the type of submission on the form. See

Form ATS.

See 17 CFR 242.301(b)(2)(ii). A “material change,” includes, but is not limited to, any change to the

operating platform, the types of securities traded, or the types of subscribers. In addition, the Commission

has stated that ATSs implicitly make materiality decisions in determining when to notify their subscribers

of changes. See Regulation ATS Adopting Release, supra note 3, at 70864. See also infra Section

IV.B.1.a.ii (discussing the materiality standard that would apply to the filing of amendments on Form ATSN).

See 17 CFR 242.301(b)(2)(iii).

reported on Form ATS after discovery that any information was inaccurate when filed. 60 Also,

upon ceasing to operate as an ATS, an ATS is required to promptly file a cessation of operations

report on Form ATS. 61 As is the case with respect to initial operation reports, Form ATS

amendments and cessation of operations reports serve as notice to the Commission of changes to

the ATS’s operations, 62 and Rule 301(b)(2)(vii) and the Instructions to the form state that Form

ATS is “deemed confidential.” 63

Rule 301(b)(9) of Regulation ATS also requires an ATS to periodically report certain

information about transactions on the ATS and information about certain activities on Form

ATS-R within 30 calendar days after the end of each calendar quarter in which the market has

operated. 64 Form ATS-R requires quarterly volume information for specified categories of

securities, as well as a list of all securities traded on the ATS during the quarter and a list of all

subscribers that were participants during the quarter. 65 As with respect to Form ATS, Rule

301(b)(2)(vii) and the instructions to Form ATS-R state that Form ATS-R is “deemed

See 17 CFR 242.301(b)(2)(iv).

See 17 CFR 242.301(b)(2)(v).

See Regulation ATS Adopting Release, supra note 3, at 70864.

See 17 CFR 242.301(b)(2)(vii); Form ATS at 3, General Instructions A.7. Under the final rules, NMS

Stock ATSs that trade only NMS stocks will not be required to file Form ATS in accordance with Rules

301(b)(2)(i) through (vii), but instead will be required to comply with the requirements of new Rule 304

and file Form ATS-N. See infra Section III.B.4. See also infra Sections IV.A, B, and C.

See 17 CFR 242.301(b)(9)(i). Form ATS-R and the Form ATS-R Instructions are available at

https://www.sec.gov/about/forms/formats-r.pdf. In the Regulation ATS Adopting Release, the Commission

stated that the information provided on Form ATS-R would permit the Commission to monitor the trading

on ATSs. See Regulation ATS Adopting Release, supra note 3, at 70878.

See Form ATS-R at 4, Items 1 and 2 (describing the requirements for Exhibit A and Exhibit B of Form

ATS-R). Form ATS-R also requires an ATS that is subject to the fair access obligations under Rule

301(b)(5) of Regulation ATS to provide as Exhibit C, a list of all persons granted, denied, or limited access

to the ATS during the period covered by the Form ATS-R and designate for each person (a) whether it was

granted, denied, or limited access; (b) the date the ATS took such action; (c) the effective date of such

action; and (d) the nature of any denial or limitation of access. ATSs must also complete and file Form

ATS-R within 10 calendar days after ceasing to operate. See 17 CFR 242.301(b)(9)(ii); Form ATS-R at 2,

General Instructions A.2 to Form ATS-R.

confidential.” 66 Under the amendments we are adopting, the requirements of Rule 301(b)(9) will

continue to apply to all ATSs, including NMS Stock ATSs, as will the other requirements of

Regulation ATS other than the Form ATS reporting requirements of Rule 301(b)(2). 67

Under Rule 301(b)(3), an ATS that (1) displays subscriber orders in an NMS stock to any

person (other than an employee of the ATS) and (2) during at least four of the preceding six

calendar months, had an average daily trading volume of 5% or more of the aggregate average

daily share volume for that NMS stock, as reported by an effective transaction reporting plan,

must comply with certain order display and execution access obligations. 68 An ATS that meets

these criteria must comply with Rule 301(b)(3)(ii), which requires the ATS to provide to a

national securities exchange or national securities association (each an SRO), for inclusion in the

quotation data made available by the SRO to vendors, the prices and sizes of its orders at the

highest buy price and lowest sell price for that NMS stock that are displayed to more than one

subscriber. 69 An ATS that meets the volume threshold also is required to comply with Rule

301(b)(3)(iii), which sets forth certain access standards regarding the orders that the ATS is

required to provide to an SRO pursuant to Rule 301(b)(3)(ii). 70 Under Rule 301(b)(4), an ATS

must not charge any fee to broker-dealers that access the ATS through a national securities

exchange or national securities association that is inconsistent with the equivalent access to the

ATS that is required under Rule 301(b)(3)(iii). 71

See 17 CFR 242.301(b)(2)(vii); Form ATS-R at 2, General Instruction A.7.

See generally infra Section III. See also Section III.B.5.

See 17 CFR 242.301(b)(3)(i).

See 17 CFR 242.301(b)(3)(ii).

See 17 CFR 242.301(b)(3)(iii).

See 17 CFR 242.301(b)(4). In addition, if the national securities exchange or national securities association

to which an ATS provides the prices and sizes of orders under Rules 301(b)(3)(ii) and 301(b)(3)(iii)

establishes rules designed to assure consistency with standards for access to quotations displayed on such

Under Rule 301(b)(5) – and even if the ATS does not display subscribers’ orders to any

person (other than an ATS employee) – an ATS with 5% or more of the average daily volume in

an NMS stock during at least four of the preceding six calendar months, as reported by an

effective transaction reporting plan, must: 72 establish written standards for granting access to

trading on its system; not unreasonably prohibit or limit any person in respect to access to

services offered by such ATS by applying the above standards in an unfair or discriminatory

manner; make and keep records of all grants of access including, for all subscribers, the reasons

for granting such access, and all denials or limitations of access and reasons, for each applicant,

for denying or limiting access; and report the information required in Exhibit C of Form ATS-R

regarding grants, denials, and limitations of access. 73 These requirements are referred to as the

“fair access” requirements and apply on a security-by-security basis. 74 A denial of access to a

market participant after an ATS reaches the 5% fair access threshold in an NMS stock would be

reasonable if it is based on objective standards. 75

national securities exchange, or the market operated by such national securities association, the ATS shall

not charge any fee to members that is contrary to, that is not disclosed in the manner required by, or that is

inconsistent with any standard of equivalent access established by such rules. See id.

17 CFR 242.301(b)(5)(i).

See 17 CFR 242.301(b)(5)(ii). Regulation ATS does not mandate compliance with these requirements

when an ATS reaches the 5% trading threshold in an NMS stock if the following conditions are met: the

ATS matches customer orders for a security with other customer orders; such customers’ orders are not

displayed to any person, other than employees of the ATS; and such orders are executed at a price for such

security disseminated by an effective transaction reporting plan, or derived from such prices. See 17 CFR

242.301(b)(5)(iii).

The fair access requirements also apply for non-NMS stocks when an ATS reaches a 5% trading threshold

in certain securities other than NMS stocks, including certain equity securities, municipal securities, and

corporate debt securities. See 17 CFR 242.301(b)(5)(i).

See Regulation ATS Adopting Release, supra note 3, at 70874.

Prior to the Commission’s adoption of Regulation SCI, 76 NMS Stock ATSs were

required to comply with Rule 301(b)(6), which requires certain ATSs trading 20% or more of the

volume in any equity security or debt securities to comply with standards regarding the capacity,

integrity, and security of their automated systems. 77 Regulation SCI superseded and replaced

Rule 301(b)(6)’s requirements with regard to ATSs that trade NMS stocks and equity securities

that are not NMS stocks 78 and requires SCI entities, 79 including NMS Stock ATSs that meet the

definition of an “SCI ATS,” 80 to establish written policies and procedures reasonably designed to

ensure that their systems have levels of capacity, integrity, resiliency, availability, and security

adequate to maintain their operational capability and promote the maintenance of fair and orderly

markets, and that they operate in a manner that complies with the Exchange Act. 81

Rule 301(b)(7) 82 requires all ATSs, regardless of the volume traded on their systems, to

permit the examination and inspection of their premises, systems, and records, and cooperate

with the examination, inspection, or investigation of subscribers, whether such examination is

See Securities Exchange Act Release No. 73639 (November 19, 2014), 79 FR 72251 (December 5, 2014)

(adopting final rules for systems compliance and integrity) (‘‘SCI Adopting Release’’).

See 17 CFR 242.301(b)(6).

Regulation SCI does not apply to ATSs that trade municipal securities or corporate debt securities. See

SCI Adopting Release, supra note 76, at 72262.

Regulation SCI defines “SCI entity” to mean “an SCI self-regulatory organization, SCI alternative trading

system, plan processor, or exempt clearing agency subject to [the Commission’s Automation Review

Policies].” See 17 CFR 242.1000.

Regulation SCI defines “SCI alternative trading system” or “SCI ATS” to mean an ATS, which during at

least four of the preceding six calendar months: (1) had with respect to NMS stocks (a) five percent (5%) or

more in any single NMS stock, and one-quarter percent (0.25%) or more in all NMS stocks, of the average

daily dollar volume reported by applicable transaction reporting plans, or (b) one percent (1%) or more in

all NMS stocks of the average daily dollar volume reported by applicable transaction reporting plans; or (2)

had with respect to equity securities that are not NMS stocks and for which transactions are reported to a

self-regulatory organization, five percent (5%) or more of the average daily dollar volume as calculated by

the self-regulatory organization to which such transactions are reported. However, an SCI ATS is not

required to comply with the requirements of Regulation SCI until six months after satisfying the

aforementioned criteria. See 17 CFR 242.1000.

See SCI Adopting Release, supra note 76, 79 FR at 72252.

See 17 CFR 242.301(b)(7).

being conducted by the Commission or by an SRO of which such subscriber is a member. Rule

301(b)(8) 83 requires all ATSs to make and keep current the records specified in Rule 302 of

Regulation ATS 84 and preserve the records specified in Rule 303 of Regulation ATS. 85

Under Rule 301(b)(10), all ATSs must establish adequate safeguards and procedures to

protect subscribers’ confidential trading information, which includes limiting access to the

confidential trading information of subscribers to those employees of the ATS who are operating

the system or responsible for its compliance with Regulation ATS or any other applicable rules;

and implementing standards controlling employees of the ATS trading for their own accounts. 86

Furthermore, all ATSs must adopt and implement adequate oversight procedures to ensure that

the above safeguards and procedures are followed. 87 Finally, Rule 301(b)(11) 88 expressly

prohibits any ATS from using the word “exchange” or derivations of the word “exchange,” such

as the term “stock market,” in its name. 89

D. Concerns Regarding the Lack of Operational Transparency

Despite their role in the equity markets and complexity of their operations, NMS Stock

ATSs are not required under Regulation ATS to publicly disclose information about their

See 17 CFR 242.301(b)(8).

See 17 CFR 242.302.

See 17 CFR 242.303. In the Regulation ATS Adopting Release, the Commission stated that these

requirements to make, keep, and preserve records are necessary to create a meaningful audit trail and to

permit surveillance and examination to help ensure fair and orderly markets. See Regulation ATS

Adopting Release, supra note 3, at 70877-78.

See 17 CFR 242.301(b)(10)(i).

See 17 CFR 242.301(b)(10)(ii).

See 17 CFR 240.301(b)(11).

When we proposed Regulation ATS, we said that “it is important that the investing public not be confused

about the market role [ATSs] have chosen to assume.” See Regulation ATS Proposing Release, supra note

7 at 23523. We expressed concern that “use of the term ‘exchange’ by a system not regulated as an

exchange would be deceptive and could mislead investors that such alternative trading system is registered

as a national securities exchange.” See id.

operations. We are concerned that little information is widely available to market participants

about NMS Stock ATSs, and that the lack of, or differential access to, information about

operations of NMS Stock ATSs inhibits the ability of market participants to assess NMS Stock

ATSs as potential trading venues. These concerns are shared by several commenters. 90

Commenters also concur with our belief that NMS Stock ATSs today play a significant role in

equity market structure, and that their role has changed since Regulation ATS was adopted in

1998. 91 In addition, commenters reinforce our belief that NMS Stock ATSs have become more

operationally complex, that the potential for conflicts of interest has risen as a result of that

complexity, and that the conditions to the exemption for NMS Stock ATSs should be modified. 92

Commenters also express concern about the lack of operational transparency for NMS Stock

ATSs. 93 Given the complexities of NMS Stock ATS operations, the lack of information about

the ATS’s order types, priority rules, segmentation procedures, use of market data, and fees, for

example, may impede the ability of market participants to adequately understand how their

orders in NMS stocks would interact, match, and execute.

We are also concerned that the lack of available information about the ATS-related

activities of the broker-dealer operator and its affiliates may hinder the ability of market

See, e.g., CFA Institute Letter at 2; ICI Letter at 3; Better Markets Letter at 2; Investor Advocate Letter at

14; Luminex Letter at 1.

See, e.g., SIFMA Letter at 2; Investor Advocate Letter at 4; LeveL ATS Letter at 2. Other commenters

also recognized that the role of NMS Stock ATSs has changed since the adoption of Regulation ATS. See,

e.g., Schneiderman Letter at 1; Virtu Letter at 2; UBS Letter at 1; Fidelity Letter at 1; ICI Letter at 2-3;

STANY Letter at 2-3.

See, e.g., Consumer Federation of America Letter at 4; ICI Letter at 2; HMA Letter at 18; Schneiderman

Letter at 1-2; Better Markets Letter at 2; CFA Institute Letter at 2; SIFMA Letter at 8. See also infra

Section V.D (describing comments on proposed disclosures required by Form ATS-N).

See, e.g., CBOE Letter at 1; CFA Institute Letter at 3; Consumer Federation of America Letter at 2; ICI

Letter at 3. See also Investor Advocate Letter at 14; Luminex Letter at 1; Consumer Federation of America

Letter at 4; UBS Letter at 5-7; AI Letter at 2. One commenter critiques both the current regulatory regime

for ATSs, as well as the Proposal, but describes issues with the lack of transparency and states that the

Proposal represents an important enhancement in the oversight of ATSs. See Better Markets Letter at 1-2.

participants to evaluate potential conflicts of interest, and thus limit their ability to protect their

interests. Because of overlap between a broker-dealer’s ATS operations and its other operations,

there is a risk of information leakage of subscribers’ confidential trading information to other

business units of the broker-dealer operator or its affiliates. 94 Several commenters describe NMS

Stock ATS operational structures that exemplify the kinds of relationships about which the

Commission expressed concern, or otherwise reinforce our belief that the complex relationship

between an NMS Stock ATS and its broker-dealer operator, or its affiliates, creates potential

conflicts of interest. 95 Further, in recognizing the current potential for conflicts of interest that

exist as a result of the complexity of the operations of NMS Stock ATSs, the relationship many

have with their broker-dealer operator or its affiliates, and the lack of transparency about those

In the Regulation ATS Adopting Release, the Commission recognized the potential for abuse involving a

broker-dealer that operates an ATS and offers other traditional brokerage services, and expressed concern

about the potential for the misuse of confidential trading information. See Regulation ATS Adopting

Release, supra note 3, at 70879. See also Proposal, supra note 2, at 81041-81042 n.367 and accompanying

text.

See, e.g., Consumer Federation of America Letter at 4; LeveL ATS Letter at 3; Fidelity Letter at 2 n.4. See

also KCG Letter at 2; Luminex Letter at 3-4; Liquidnet Letter at 11.

Not all NMS Stock ATSs, however, are operated by multi-service broker-dealers. See, e.g., BIDS Letter at

1. This commenter describes itself as the owner and broker-dealer operator of an NMS Stock ATS that

does not engage in any proprietary trading and does not have any trading affiliates.

The rules being adopted today would not require a broker-dealer that operates an NMS Stock ATSs to limit

it business only to operating the ATS. We believe that the Form ATS-N disclosures will inform market

participants about the ATS-related activities of the broker-dealer operator and its affiliates that give rise to

potential conflicts between the interests of the broker-dealer operator and subscribers that use the services

of the NMS Stock ATS. See infra Sections X.D.7 (discussing the alternative of requiring NMS Stock

ATSs to operate as limited purpose entities) and V.C.8 (discussing comments stating that the Commission

should prohibit conflicts of interest arising from the other business activities of the broker-dealer operator

of an NMS Stock ATS, and those of its affiliates, and the Commission’s response to those comments).

See also HMA Letter at 3 and attachment The Dark Side of the Pools: What Investors Should Learn from

Regulator’s Action, September 15, 2015, at 10; Investor Advocate Letter at 8; Better Markets Letter at 2;

infra Section V.C (discussing comments related to disclosures about the activities of an NMS Stock ATS’s

broker-dealer affiliate and those of its affiliates).

operations and potential conflicts, many commenters also highlight recent enforcement actions

brought by the Commission. 96

NMS Stock ATSs, which meet the definition of “exchange” but are not required to

exchanges and operate with similar complexity. Unlike national securities exchanges, NMS

Stock ATSs are not required to, among other things, publicly disclose their operations and fees. 97

In addition, because we review the rules of national securities exchanges, a process which

requires, among other things, that to approve certain rule changes, the Commission find 98 that

See, e.g., Schneiderman Letter at 2; Better Markets Letter at 2-3; Consumer Federation of America Letter

at 5; and HMA Letter at 12, 16-17. See also CFA Institute Letter at 2; Fidelity Letter at 4; Investor

Advocate Letter at 5; Citadel Letter at 1-7.

One commenter, however, observes that in the recent settlements cited in the Proposal, there were conflicts

of interest related to commercial relationships that had nothing to do with affiliates, and believes that all

differential treatment of subscribers should be disclosed and recommends limiting disclosures regarding

affiliate relationships. See Markit Letter at 8. Under the requirements we are adopting today, NMS Stock

ATSs must disclose on Form ATS-N differences in treatment of subscribers and the broker-dealer operator

and affiliate, and we have, in response to commenters, revised questions of Form ATS-N to narrow the

scope of information related to affiliates to be disclosed. See infra Sections V.C and D.

See also Proposal, supra note 2, at 81042-81043 n.374 (citing prior settled enforcement actions against

ATSs that trade NMS stocks). Since the Proposal, we have entered additional settlements regarding NMS

Stock ATSs. See In the Matter of Barclays Capital Inc., Securities Exchange Act Release No. 77001 (Jan.

31, 2016), https://www.sec.gov/litigation/admin/2016/33-10010.pdf (order instituting administrative and

cease-and-desist proceedings, making findings, and imposing remedial sanctions and a cease-and-desist

order); In the Matter of Credit Suisse Securities (USA) LLC, Securities Act Release No. 77002 (Jan. 31,

2016), https://www.sec.gov/litigation/admin/2016/33-10013.pdf (order instituting administrative and ceaseand-desist proceedings, making findings, and imposing remedial sanctions and a cease-and-desist order)

(“Crossfinder Settlement”); In the Matter of Credit Suisse Securities (USA) LLC, Securities Act Release

No. 77003 (Jan. 31, 2016), https://www.sec.gov/litigation/admin/2016/33-10014.pdf (order instituting

administrative and cease-and-desist proceedings, making findings, and imposing remedial sanctions and a

cease-and-desist order); In the Matter of Deutsche Bank Securities Inc., Securities Exchange Act Release

No. 79576 (Dec. 16, 2016), https://www.sec.gov/litigation/admin/2016/33-10272.pdf (order instituting

administrative and cease-and-desist proceedings, making findings, and imposing remedial sanctions and a

cease-and-desist order).

See infra notes 34-40 and accompanying text (discussing the regulatory framework applicable to national

securities exchanges, including that national securities exchanges are self-regulatory organizations

(“SROs”)). See also Regulation ATS Adopting Release, supra note 3; infra Section II.B (discussing the

current requirements of Regulation ATS applicable to all ATSs).

See Proposal, supra note 2, at 81042 n.372 and accompanying text.

the national securities exchange’s proposed rule changes are consistent with the Exchange Act, 99

each existing national securities exchange has implemented rules that restrict affiliation between

the national securities exchange and its members to mitigate the potential for conflicts of interest.

We believe that the regulatory differences between NMS Stock ATSs and national securities

exchanges with regard to disclosure obligations may create a competitive imbalance between two

functionally similar trading centers that trade the same security.

Transparency has long been a hallmark of the U.S. securities markets, and is one of the

primary tools used by investors to protect their interests. 100 We believe that one of the most

important functions the Commission can perform for investors is to ensure that they have access

to the information they need to protect and further their own interests. 101 The amendments that

we are adopting to Regulation ATS and Exchange Act Rule 3a1-1 are designed to address the

concerns identified above and provide benefits to a wide range of market participants. Public

disclosures on Form ATS-N will provide market participants with information about the

operations of an NMS Stock ATS, which they can use to understand how orders interact, match,

and execute in an NMS Stock ATS and compare to other NMS Stock ATSs and national

securities exchanges. Form ATS-N will also provide the public with information about the ATSrelated activities of the broker-dealer operator and its affiliates, which can be used by market

participants to assess potential conflicts of interest and information leakage. 102 Collectively, the

Form ATS-N public disclosures will allow market participants to better evaluate an NMS Stock

See 15 U.S.C. 78s(b).

100

See id.

101

See Proposal, supra note 2, at 81010.

102

See id. at 81042. We believe that to understand the operations of an NMS Stock ATS, it is necessary to

understand the relationship and interactions between the NMS Stock ATS and its registered broker-dealer

operator as well as the relationship and interactions between the NMS Stock ATS and the affiliates of its

broker-dealer operator.

ATS as a potential trading destination for their orders and help them better protect their interests.

The Form ATS-N public disclosures are also designed, in part, to bring the operational

transparency requirements for NMS Stock ATSs more in line with the requirements for national

securities exchanges. Finally, we believe that our process for reviewing Form ATS-N filings,

which provides for Commission review of disclosures for compliance with the requirements of

Rule 304 and Form ATS-N, and a potential declaration of ineffectiveness of a Form ATS-N,

after notice and opportunity for hearing, will facilitate better Commission oversight of NMS

Stock ATSs and thus, better protection of investors.

III. Heightened Regulatory Requirements for NMS Stock ATSs

A. Exchange Act Rule 3a1-1(a) Exemption: New Conditions for NMS Stock ATSs

ATSs that trade NMS stocks operate pursuant to the exemption provided by Exchange

Act Rule 3a1-1(a)(2), which exempts from the definition of an “exchange” any ATS that

complies with Rules 300 through 303 of Regulation ATS. 103 Given our concerns regarding the

lack of public transparency around the operations of NMS Stock ATSs and the ATS-related

activities of the broker-dealer operator and its affiliates, we proposed to expand the conditions of

the Rule 3a1-1(a)(2) exemption to enhance operational transparency and oversight for these

ATSs. We are adopting this requirement as proposed. 104 We proposed to require NMS Stock

ATSs to comply with proposed Rule 304, in addition to existing Rules 300 through 303 of

103

17 CFR 240.3a1-1(a)(2).

104

In Exchange Act Rules 3a1-1(a)(2) and (3), Regulation ATS is currently defined as “17 CFR 242.300

through 242.303.” We are amending the references to Regulation ATS to define Regulation ATS as “17

CFR 242.300 through 242.304.” We also proposed conforming Rule 3a1-1(a)(3) by changing the reference

to Rule 303 to Rule 304 to make clear that an NMS Stock ATS that meets the requirements of Rule 301(a)

is not required to comply with Regulation ATS, which would be amended to include proposed Rule 304.

No changes were proposed to Rule 3a1-1(a)(1), which exempts any ATS that is operated by a national

securities association.

Regulation ATS (except Rule 301(b)(2)), to be eligible for the exemption. 105 Proposed Rule

304(a)(1)(i) set forth two new fundamental conditions to the Rule 3a1-1(a)(2) exemption: (1) an

NMS Stock ATS must file Form ATS-N with the Commission (instead of the current Form

ATS), and (2) the Commission must declare the Form ATS-N effective before the NMS Stock

ATS can operate pursuant to the exemption. Adopted Rule 304(a)(1)(i) deletes the proposed

condition that the Commission declare the Form ATS-N effective, and provides that the Form

ATS-N must be effective pursuant to Rule 304(a)(1)(iii) or Rule 304(a)(1)(iv)(A). Adopted Rule

304(a)(1)(iii) has been modified to provide that Form ATS-N will become effective if the

Commission does not otherwise declare Form ATS-N ineffective – the Commission will not be

declaring Form ATS-N filings effective. 106

We proposed to amend Rules 3a1-1(a)(2) and (3) to require compliance with proposed

Rule 304 as a condition to operating pursuant to the Rule 3a1-1(a)(2) exemption. 107 We received

105

Proposed Rule 304(a) provided that, unless not required to comply with Regulation ATS pursuant to Rule

301(a) of Regulation ATS, an NMS Stock ATS must comply with Rules 300 through 304 of Regulation

ATS (except Rule 301(b)(2)) to be exempt from the definition of an “exchange” pursuant to Exchange Act

Rule 3a1-1(a)(2). We are adopting proposed Rule 304(a) with certain modifications. As adopted, Rule

304(a) will state, “[u]nless not required to comply with Regulation ATS pursuant to § 242.301(a), an NMS

Stock ATS must comply with §§ 242.300 through 242.304 (except §§ 242.301(b)(2)(i) through (vii)) to be

exempt pursuant to § 240.3a-1(a)(2)” (emphasis added). The adopted rule text specifies the subparagraphs

of Rule 301(b)(2) with which an NMS Stock ATS would not be required to comply. We believe that

specifying the applicable subsections of Rule 301(b)(2) provides greater clarity, because Rule

301(b)(2)(viii) will apply to NMS Stock ATSs that also trade non-NMS stocks. The reference to Rule

301(b)(2) in the proposed rule text could be confusing to market participants because it does not make clear

that Rule 301(b)(2)(viii) applies to certain NMS Stock ATSs. We believe that the added specificity in the

adopted rule clarifies that only Rules 301(b)(2)(i) through (vii) will not be applicable to NMS Stock ATSs.

See infra Section III.B.4. In addition, to reduce any potential ambiguity and improve readability, the

adopted rule text deletes the language that states that the NMS Stock ATS would need to comply with the

requirements to be exempt “from the definition of an ‘exchange’” pursuant to Exchange Act Rule 3a11(a)(2).

106

See infra Section IV.A.3.

107

In Exchange Act Rules 3a1-1(a)(2) and (3), Regulation ATS is currently defined as “17 CFR 242.300

through 242.303.” We proposed amending these references to Regulation ATS to define Regulation ATS

as “17 CFR 242.300 through 242.304.” We also proposed conforming Rule 3a1-1(a)(3) by changing the

reference to Rule 303 to final Rule 304 to make clear that an NMS Stock ATS that meets the requirements

of Rule 301(a) is not required to comply with Regulation ATS, which would be amended to include

several comments on the proposal to expand the conditions of the Rule 3a1-1(a)(2) exemption

for NMS Stock ATSs and require these ATSs to comply with Rule 304. We also received

comments on the application of the Proposal to ATSs that trade securities other than NMS

stocks, and, specifically, requiring these types of ATSs to file a Form ATS-N and operate

pursuant to the effectiveness process. Both sets of comments are discussed below.

1. Comments on the Rule 304 Requirements; Effectiveness

Nearly all commenters agree with our stated goal of enhancing operational transparency

for NMS Stock ATSs. 108 Several commenters agree that the Commission should adopt the

heightened disclosure requirements of proposed Rule 304. 109 In particular, several commenters

support enhancing the disclosure and oversight regime for NMS Stock ATSs as progress toward

increasing operational transparency in NMS Stock ATSs. 110 Specifically, some commenters

proposed Rule 304. No changes were proposed to Rule 3a1-1(a)(1), which exempts any ATS that is

operated by a national securities association.

108

See SIFMA Letter at 2; Barnard Letter at Public comment on IOSCO’s Consultation Report on Issues

Raised by Dark Liquidity; Anonymous Letter at 1; Luminex Letter at 1; MFA/AIMA Letter at 1-2; Fidelity

Letter at 1; UBS Letter at 1; Markit Letter at 3-4; Schneiderman Letter at 1; ICI Letter at 3; CFA Institute

Letter at 3, 6; CBOE Letter at 1; KCG Letter at 1; PDQ Letter at 1; STA Letter at 2; Liquidnet Letter at 1;

STANY Letter at 1; FINRA Letter at 1; HMA Letter at 1, 5; Citadel Letter at 1; Better Markets Letter at 34; BIDS Letter at 1-2; SSGA Letter at 2; T. Rowe Price Letter at 1; AI Letter at 2-3; Consumer Federation

of America Letter at 4; Morgan Stanley Letter at 1; Investor Advocate Letter at 2, 6; LeveL ATS Letter at

1; Virtu Letter at 2; MFA Letter 2 at 30. But see Morgan Stanley Letter at 1, 3 (stating that it is important

to balance public disclosure with disclosure more suitable for the Commission (see discussion below and

infra note 150 and accompanying text); that certain disclosure requirements, such as any disclosure around

broker trading infrastructure and order handling practices beyond ATS operations, should apply to all

brokers (see discussion infra note 217-218and accompanying text and infra Section III.A.2); and that the

Proposal treats all ATSs like exchanges and fails to account for distinct ATS models (see discussion below

and infra note 176 and accompanying text)). One commenter commented only on whether the Proposal

should apply to ATSs that trade only fixed-income securities. See MarketAxcess Letter; infra Section

III.A.2.

109

See generally Virtu Letter; T. Rowe Price Letter; Schneiderman Letter; ICI Letter; MFA/AIMA Letter;

Consumer Federation of America Letter; CBOE Letter; Citadel Letter; Anonymous Letter; Better Markets

Letter; Investor Advocate Letter. See also CFA Institute Letter at 6; SIFMA Letter at 3.

110

See SIFMA Letter at 3; Virtu Letter at 2; T. Rowe Price at 1; Schneiderman Letter at 1; MFA/AIMA Letter

at 2; MFA Letter 2 at 30; CBOE Letter at 1; Citadel Letter at 1; Consumer Federation of America Letter at

6; CFA Institute Letter at 3; Anonymous Letter at 1; KCG Letter at 3; Morgan Stanley Letter at 1; Investor

Advocate Letter at 6; Better Markets Letter at 1.

express support for NMS Stock ATSs to file Form ATS-N as a tool to improve transparency. 111

Several commenters assert that more transparency regarding ATS operations could help market

participants evaluate and compare trading venues so they can determine where to route orders. 112

One commenter states that “it is good for investors to have access to information on how their

orders are handled and with whom they are dealing.” 113 Several commenters believe that

making Form ATS-N filings public would encourage competition among trading venues, 114 and

one commenter asserts that the proposed transparency requirements could reduce competitive

imbalances between NMS Stock ATSs and national securities exchanges. 115

With respect to the Commission’s effectiveness determination for Form ATS-N, another

commenter states that “given the level of competition between exchanges and NMS Stock ATSs,

this effectiveness determination would better align the Commission’s oversight among different

types of trading venues.” 116 One commenter, however, believes that ATSs do not add sufficient

value to offset the regulatory inequity and market fragmentation they have created. 117 This

commenter also states that the Proposal represents “meaningful progress in the effort to increase

the operational transparency of NMS Stock ATSs.” 118 The Proposal was not designed to

eliminate the exemption from the definition of exchange that is currently available to all ATSs,

111

See ICI Letter at 4-6; Consumer Federation of America Letter at 6; CFA Institute Letter at 3; Citadel Letter

at 3; KCG Letter at 3; STA Letter at 2; MFA/AIMA Letter at 4; CBOE Letter at 1; Investor Advocate

Letter at 2, 8.

112

See Luminex Letter at 1; Fidelity Letter at 1; SSGA Letter at 2; KCG Letter at 1; Citadel Letter at 1; ICI

Letter at 3; STA Letter at 2; Schneiderman Letter at 2; Consumer Federation of America Letter at 6;

Investor Advocate Letter at 11.

113

See Luminex Letter at 1.

114

See STA Letter at 2; Consumer Federation of America Letter at 6; Investor Advocate Letter at 3, 11-12.

115

See Citadel Letter at 1.

116

See Investor Advocate Letter at 12.

117

See CBOE Letter at 1.

118

Id.

including NMS Stock ATSs. We believe that NMS Stock ATSs play a significant role in equity

market structure and provide market participants with a variety of trading models to facilitate the

interaction and execution of orders in NMS stocks.

We believe that the current market for NMS stock execution services, consisting of

national securities exchanges, NMS Stock ATSs, and other off-exchange venues, has resulted in

an improvement to market efficiency. 119 The changes to the requirements for NMS Stock ATSs

that we are adopting today will increase operational transparency for these ATSs, bringing it

more in line with the operational transparency for national securities exchanges, while

continuing to recognize the difference in the business structure of ATSs as registered brokerdealers. We also believe that while the rules adopted today will increase the regulatory burden

for NMS Stock ATSs and could result in some NMS Stock ATSs electing to no longer operate as

an ATS, those NMS Stock ATSs that remain may compete more heavily with each other and

with national securities exchanges, which could ultimately result in improvements to efficiency

and capital formation. 120

Another commenter believes that increased disclosure will aid in developing industrybased standards. 121 Three commenters state that increased disclosure will boost investor

confidence, 122 and according to one of these commenters, increased transparency and investor

119

See infra Section X.B.6 (discussing the effects of NMS Stock ATSs on the market for NMS stock

execution services, including fragmentation).

120

See infra Section X.C (discussing the expected economic effects of today’s rulemaking, as well as its

expected effects on efficiency, competition, and capital formation).

121

See STA Letter at 2.

122

See CFA Institute Letter at 3; Schneiderman Letter at 2; Investor Advocate Letter at 11-12.

confidence could lead to more investors using NMS Stock ATSs, and result in greater price

discovery and lower costs of capital formation. 123

We believe that a wide range of market participants will benefit from the enhanced

operational transparency, including, for example, fund managers and the many brokers that

subscribe to NMS Stock ATSs and route their orders, and those of their customers, to NMS

Stock ATSs for execution. Five commenters observe, for example, that more transparency

regarding ATS operations could assist market participants in achieving best execution. 124 One

commenter states that disclosure of material aspects of ATS operations that allow market

participants to weigh the costs and benefits of venues is “particularly important for asset

managers who are acting in a fiduciary capacity.” 125 Another commenter believes that making

Form ATS-N filings publicly available would provide a “valuable tool for funds to use to assess

NMS Stock ATSs, make informed routing decisions, and evaluate the performance of their

brokers.” 126

We believe that the information disclosed on Form ATS-N will help brokers meet their

best execution obligations to their customers, as they should be better able to assess the trading

venues to which they route orders. 127 We also believe that asset managers and institutional

investors, who subscribe to an NMS Stock ATS or whose orders may be routed to an NMS Stock

123

See Investor Advocate Letter at 11, 12.

124

See Citadel Letter at 1; Consumer Federation of America Letter at 6; HMA Letter at 10; Luminex at 1;

SIFMA Letter at 35.

125

See SSGA Letter at 2.

126

See ICI Letter at 3.

127

See, e.g., Proposal, supra note 2, at 81002 n.36 and accompanying text, 81013 n.187 and accompanying

text (discussing that the Consumer Federation of America previously commented that Form ATS should

require ATSs to provide “critical details about an ATS’s participants, segmentation, and fee structure”

because the “information will allow market participants, regulators, and third party analysts to assess

whether an ATS’s terms of access and service are such that it makes sense to trade on that venue”).

ATS by their brokers, should have more information about how NMS Stock ATSs operate,

including how orders and trading interest of the institutional investor may be displayed or made

known outside the ATS. This information also will enable asset managers to better evaluate the

routing decisions of their brokers, including whether their brokers routed their orders to a venue

that best fits their trading interests.

a. Comments on Form ATS-N Requirement

Some commenters, however, believe NMS Stock ATSs should not be required to comply

with new Rule 304 and the Commission should instead simply amend Regulation ATS to require

making Form ATS public for NMS Stock ATSs. 128 Two of these commenters assert that the

Commission should mandate disclosure of current Form ATS as a first step to increase disclosure

before considering implementing more burdensome disclosure requirements. 129

We are not adopting commenters’ suggestion to make Form ATS public rather than

requiring NMS Stock ATSs to comply with Rule 304 and file Form ATS-N. First, we believe

that new Form ATS-N requires important additional disclosures that are not made under existing

Form ATS. 130 While Form ATS-N will require NMS Stock ATSs to disclose more information

than Form ATS, in response to certain comments, we have reduced the burden of completing

Form ATS-N by narrowing the scope of several requests for information and, in some cases,

eliminating certain requests from the form. 131 We have also simplified Form ATS-N to make

128

See Luminex Letter at 2-3; PDQ Letter at 2; Fidelity Letter at 5; STANY Letter at 3; Morgan Stanley Letter

at 2.

129

See Fidelity Letter at 5; STANY Letter at 3.

130

See infra Sections X.C.1 and X.C.2. We have considered any additional burden that may result from

completion of Form ATS-N and the benefits of the additional information that will be made available to

market participants by requiring NMS Stock ATSs to file Form ATS-N, and making Form ATS-N public.

See id.

131

For example, we have narrowed a request for information regarding trading by affiliates of the brokerdealer operator on the NMS Stock ATS by requiring only the disclosures of affiliates that can enter or

completing and maintaining the form less burdensome and have modified questions so as not to

solicit competitively sensitive information. 132 We believe that Form ATS-N disclosures will

help market participants compare and evaluate NMS Stock ATSs and make better informed

decisions about where to route their orders to achieve their trading or investment objectives,

enhance execution quality, and improve efficiency and capital allocation. 133

Based on Commission staff’s experience reviewing disclosures made by ATSs on Form

ATS over the past 19 years and as discussed in the Proposal, we have observed that ATSs have

often provided minimal, rudimentary, and summary disclosures about their operations on Form

ATS. One commenter agrees with our assessment, stating that based on its review of publicly

available Forms ATS, the forms “often provide minimal and often generalized information” with

respect to classification and segmentation of subscribers, means of access to the ATS, matching

priority, order interaction, order types, and how the NBBO is calculated, and they are often

missing “critical details” about their operations. 134 Further, this commenter states that “[r]arely

do Form ATSs provide information relating to their fee structures and potential or actual

conflicts of interest.” 135 According to another commenter, current Form ATS is “not adequate”

to allow the Commission and market participants to “understand how NMS Stock ATSs operate

in today’s environment, given the complexity and the potential for significant conflicts of interest

direct the entry of orders and trading interest into the ATS. See infra Section V.C.1. We are not requiring

NMS Stock ATSs to provide proposed Exhibit 1 to Form ATS-N. See infra Section V.B.2. Exhibit 1

would have required that NMS Stock ATSs provide a copy of any materials currently provided to

subscribers or other persons related to the operations of the ATS or the disclosures on Form ATS-N, such

as frequently asked questions, manuals, and marketing materials.

132

See infra Section V.C.

133

See infra Section X.C.4.

134

See Consumer Federation of America Letter at 3.

135

See id.

with the broker-dealer operator.” 136 In addition, one commenter observes that market

participants currently receive “varying levels” of information about the operations of the NMS

Stock ATS. 137 As described in the Proposal, 138 we believe that the complexity of NMS Stock

ATS operations has increased substantially and in a manner that causes the current disclosure

requirements of Form ATS to result in an insufficient, and inconsistent, level of detail about the

operations of NMS Stock ATSs.

Two commenters argue that a new Form ATS-N is unnecessary because most of the

fundamental information required in Form ATS-N is currently covered by Form ATS. 139 In

addition, three commenters suggest that, as an alternative to requiring NMS Stock ATSs to file

and make public Form ATS-N, we should clarify the requests for information on Form ATS and

mandate that the revised Form ATS be made public. 140 One of these commenters believes such

an approach would help achieve the Commission’s goal of operational transparency, while

“maintaining a regulatory structure under which NMS Stock ATSs can continue to innovate.” 141

Even if we were to “clarify” the requests for information on Form ATS to standardize

disclosures and make current and past Forms ATS public, Form ATS does not require the

disclosure of certain information that will be required by Form ATS-N. For example, Form

ATS-N requires NMS Stock ATSs to disclose information about the ATS-related activities of the

broker-dealer operator and its affiliates that will allow market participants to assess potential

conflicts of interest and information about the NMS Stock ATS’s safeguards and procedures to

136

See Investor Advocate Letter at 8.

137

See Morgan Stanley Letter at 1.

138

See Proposal, supra note 2, at 81011.

139

See Luminex Letter at 2-3; STANY Letter at 3.

140

See STANY Letter at 3; PDQ Letter at 2; Fidelity Letter at 5.

141

See STANY Letter at 3.

protect confidential trading information. The disclosure requirements of Form ATS are not

sufficient to provide market participants with adequate information about the operational

complexity of NMS Stock ATSs and the ATS-related activities of the broker-dealer operator and

its affiliates that exist today. Form ATS-N is designed to provide market participants with more

robust, detailed, and standardized disclosures, and to enable market participants to better

understand the operations of NMS Stock ATSs and potential conflicts of interest between ATS

operations and the other ATS-related activities of the broker-dealer operator and its affiliates.

One commenter who suggests making Form ATS public as an alternative to requiring

Form ATS-N expresses concern that the “crippling amount of detail” required to be disclosed

under Form ATS-N would not be useful to market participants. 142 We do not believe that Form

ATS-N, as modified from the Proposal, will require a “crippling” level of detail that will only be

useful to the Commission, and several commenters agree that the Form ATS-N disclosures

would be useful for market participants in comparing trading venues and assessing conflicts of

interest. 143 While Form ATS-N will require NMS Stock ATSs to disclose more information than

Form ATS, we have recognized commenters’ concerns regarding the burden of completing Form

ATS-N by narrowing the scope of several requests, eliminating certain requests altogether, and

simplifying its format. 144

Other commenters discuss how market participants currently glean information about

ATSs, and suggest that such methods could serve as alternatives to the requirements of Rule 304,

or inform the Rule 304 requirements. 145 One commenter states that it performs periodic due

142

See id. at 4.

143

See supra notes 109-123 and accompanying text.

144

See infra Section V.

145

See SSGA Letter at 2; PDQ Letter at 2; Morgan Stanley Letter at 2.

diligence on ATSs because it believes that as a fiduciary, it should only trade on venues or

exchanges that further its goals of satisfying “best execution,” that protect client information, and

generally support principles of fair access. 146 This commenter also states that currently, market

participants perform such due diligence by sending ATSs questionnaires. 147 Similarly, another

commenter observes that ATSs are incentivized to respond to these questionnaires to attract

participants, and therefore, the Commission should not place additional disclosure burdens on

ATSs. 148 We do not believe that the practice of some market participants individually soliciting

information about the operations of NMS Stock ATSs and conflicts of interest through

questionnaires is an adequate alternative to Form ATS-N. We believe that disclosures on Form

ATS-N should be easily accessible to all market participants. This is particularly important for

NMS Stock ATSs given how orders in NMS stocks may be routed among various trading centers

before receiving an execution. Based on the Commission’s experience, responses to

questionnaires are generally unavailable to non-subscribers, including potential subscribers and

customers of current subscribers. Without this information, potential subscribers would be

unable to fully assess an NMS Stock ATS as a trading center and customers of subscribers would

be inhibited from assessing their broker’s routing decisions. In addition, we believe, as indicated

by comments, 149 that the publicly available, standardized disclosure regime that will result from

Rule 304 and Form ATS-N is critical for all market participants to receive equal information

about NMS Stock ATSs.

146

See SSGA Letter at 2. See also Fidelity Letter at 8 (discussing that, from a due diligence perspective,

subscribers may require NMS Stock ATS information).

147

See SSGA Letter at 2. See also PDQ Letter at 2.

148

See PDQ Letter at 2.

149

See Virtu Letter at 2; Schneiderman Letter at 1; ICI Letter at 3; Consumer Federation of America Letter at

6; and Citadel Letter at 1.

One commenter suggests that, as an alternative to the proposed Form ATS-N, the

Commission should mandate that ATS operators publicly disclose current and historical Form

ATS filings and related amendments, and responses to standardized, frequently asked questions

(“FAQs”) regarding ATS operations. 150 The commenter believes that this approach would be

“more balanced and appropriate” and “less burdensome and faster to implement.” 151 For the

reasons discussed above in this section, we believe that the requests on Form ATS are not

designed to produce adequate information for market participants about the operational

complexity of NMS Stock ATSs and the ATS-related activities of their broker-dealer operators

and their affiliates. We also believe that making public an ATS’s responses to standardized,

FAQs regarding its operations would not achieve the same level of disclosure that Form ATS-N

will require, and would not facilitate our oversight of NMS Stock ATSs. Based on Commission

experience, the information required to be disclosed on Form ATS-N exceeds the information

provided by NMS Stock ATSs in their responses to FAQs and will provide a greater benefit to

market participants. In addition, NMS Stock ATSs must file Form ATS-N disclosures with the

Commission, which will be subject to Commission review before they become public. As

discussed in the Proposal, the public disclosures on Form ATS-N are designed to standardize the

information available to all market participants about NMS Stock ATSs and facilitate their

ability to compare and evaluate these trading venues. 152 Finally, we believe that the burden

150

See Morgan Stanley Letter at 2 (asserting that “standardization is the key to concise, comparable and

meaningful information regarding ATS operations”). This commenter states that while it supports the

Proposal’s effort to mandate transparency, it is concerned that proposed Form ATS-N “will result in more

subjective, narrative responses that will not lend themselves to side-by-side comparison.” See id. at 1.

151

See id. at 2.

152

See Proposal, supra note 2, at 81123. See also infra Section V.A.1. We believe that requiring NMS Stock

ATSs to provide only “yes” or “no” responses would limit ATSs, which provide diverse services and often

operate uniquely, from accurately describing their operations and inhibit market participants from fully

resulting from filing a Form ATS-N would not be significant compared to requiring an NMS

Stock ATS to prepare disclosures on Form ATS and responses to FAQs.

We received four comments about the application of Rule 304 to some or all NMS Stock

ATSs. We received three comments expressing the importance of the Commission’s need to

heighten the regulatory requirements for all NMS Stock ATSs. 153 In particular, one commenter

states that the Commission’s additional disclosure requirements are important for creating a

consistent and fair set of obligations for all NMS Stock ATSs while providing market

participants and subscribers with complete information. 154 This commenter observes that

although an ATS may have a small share of volume relative to the overall equities trading

marketplace, it does not necessarily follow that such ATS has a similarly small share of each

subscriber’s flow. 155 Another commenter cautions the Commission about allowing exemptions

based on metrics such as dollar volume, trading volume, or number of subscribers because

allowing such exemptions could increase “incentives and opportunities” for regulatory arbitrage,

and may result in unintended consequences. 156 On the other hand, one commenter argues that

the Commission should take a tiered regulatory approach to NMS Stock ATSs by applying

certain of the enhanced requirements only to larger NMS Stock ATSs. 157 This commenter

suggests that to foster competitive innovations among NMS Stock ATSs, the Commission should

understanding the operations of the ATS or the ATS-related activities of the broker-dealer operator and its

affiliates. See id. (discussing the Commission’s belief that narrative responses are important for market

participants to understand the operations of NMS Stock ATSs given differences across ATSs, and provide

NMS Stock ATSs with the flexibility in their responses).

153

See CFA Institute Letter at 3; UBS Letter at 2. See also KCG Letter at 1.

154

See UBS Letter at 2.

155

See id.

156

See CFA Institute Letter at 3.

157

See STANY Letter at 2. See also Luminex Letter at 1.

only apply the requirement of prior Commission “approval” of changes before they are

implemented to “larger ATSs with a substantial market footprint.” 158

We continue to believe that requiring all NMS Stock ATSs to publicly file a Form ATSN, irrespective of the volume of NMS stocks transacted on the ATS is appropriate, and does not

agree that its objectives would be achieved by applying Rule 304 on a tiered basis to NMS Stock

ATSs. Given that broker-dealers can route their customers’ orders to any NMS Stock ATS for

execution, we do not believe that transaction volume in NMS stocks serves as a proxy for

whether customers of broker-dealers or subscribers to an ATS should have information about

how their orders would be prioritized, matched, or executed on an NMS Stock ATS or

understand the ATS-related activities of the broker-dealer operator and its affiliates that may

give rise to conflicts of interest. 159 As a result, customers of broker-dealers that route their

orders to NMS Stock ATSs with low volume will have the same level of information to assess

their broker-dealers’ routing decisions as customers of broker-dealers that may route orders to

any other NMS Stock ATSs. Amending Exchange Act Rule 3a1-1(a) to apply the requirements

of Rule 304 to all NMS Stock ATSs would promote efficient and effective market operations by

providing information all market participants can use to evaluate all NMS Stock ATSs that could

be potential destinations for their orders. We believe that these requirements, including the

requirement that NMS Stock ATSs file amendments to Form ATS-N in advance of adopting

158

See STANY Letter at 2.

159

National securities exchanges are subject to the same public rule filing and registration requirements

irrespective of the volume transacted on the exchange. While an NMS Stock ATS may not transact

significant overall volume in NMS stocks, that ATS may transact a significant volume of orders in certain

NMS stocks or orders for certain subscribers. Additionally, we also believe that applying the enhanced

regulatory requirements only to larger NMS Stock ATSs could create an opportunity for arbitrage without

appropriate benefit, in that an NMS Stock ATS may be incentivized to structure their operations to avoid

being subject to enhanced requirements. We believe that the burden of complying with the enhanced

regulatory requirements imposed on lower volume NMS Stock ATSs is justified by the benefits. See infra

Section X.D.4.

material changes, 160 would not place an undue burden on smaller NMS Stock ATSs or their

ability to innovate. 161 Smaller NMS Stock ATSs that are not operated by multi-service brokerdealer operators and do not engage in other brokerage or dealing activities in addition to their

ATS operations would have a lower burden than other ATSs because certain sections of Form

ATS-N (such as several items of Part II) may not be applicable to these NMS Stock ATSs. 162

We believe that the reduction in costs from exempting small NMS Stock ATSs would be

minimal as compared to the benefits that would result from requiring the same level of

transparency from small NMS Stock ATSs as from other NMS Stock ATSs. 163 Further, under

Regulation ATS, every ATS must currently wait 20 calendar days from the date of filing an

amendment to Form ATS-N before implementing a material change to its operations. 164 In

addition, we believe that the new process for NMS Stock ATSs applicable to filing material

amendments is appropriate, 165 and, like the other requirements of Rule 304, should be applied

consistently across NMS Stock ATSs, regardless of their size or trading volume. The

Commission review process for Form ATS-N amendments is designed to improve operational

160

One commenter expresses its concern that “small and innovative ATSs will be frustrated by the

requirement that changes to their technology must be approved by the Commission prior to

implementation.” See STANY Letter at 2. The Commission will not “approve” material amendments, but

instead, may declare amendments ineffective if the disclosures filed by an NMS Stock ATS on Form ATSN are materially deficient with respect to their completeness or comprehensibility. See infra Section

IV.B.2. In addition, we are requiring that NMS Stock ATSs publicly disclose a brief summary of a

material amendment upon filing, and after the Commission has had an opportunity to review the

amendment, the material amendment would be made public. This change from the Proposal is in response

to commenters who believe that an ATS may be placed at a competitive disadvantage if it is required to

publicly file a material change 30 calendar days before implementing the change. See infra Section

IV.E.2.c.

161

See infra Section X.D.4.

162

See infra Section V.C and Section X.C.4.a.

163

See infra Section X.D.4.

164

See supra note 58 and accompanying text.

165

See infra Section IV.B.1.a.

transparency for all market participants and not only for market participants that use NMS Stock

ATSs with significant trading volume as compared to other NMS Stock ATSs.

b. Comments on Effects on ATSs Relative to National

Securities Exchanges

We received comments regarding the competitive effect of Rule 304 on ATSs relative to

national securities exchanges. 166 Some commenters support public disclosure of Form ATS-N

on the grounds that the current differences in transparency requirements for ATSs and national

securities exchanges are competitively unfair. 167 On the other hand, other commenters express

concern about the competitive burden that the requirements of Rule 304 could place on ATSs. 168

Specifically, one commenter states that not extending the enhanced transparency requirements to

national securities exchanges may “result in a competitive advantage to exchanges.” 169 We

believe that the new disclosure requirements for NMS Stock ATSs are not more rigorous than

the disclosure standards for national securities exchanges and will not provide national securities

exchanges with a competitive advantage over NMS Stock ATSs. National securities exchanges

are required to publicly file proposed rule changes with the Commission to disclose, among other

things, their manner of operations and fees. 170 These proposed rules changes are subject to

notice and comment from the public, as well as Commission consideration, pursuant to Section

19(b) and 17 CFR 240.19b-4 (Rule 19b-4). 171 This is not the case for NMS Stock ATSs.

Furthermore, Form ATS-N is designed to solicit information about ATS-related activities of the

166

See, e.g., Anonymous Letter at 1, Citadel Letter at 1; Markit Letter at 4; STANY Letter at 3.

167

See Anonymous Letter at 1; Citadel Letter at 1.

168

See Markit Letter at 4; STANY Letter at 3.

169

See Markit Letter at 4.

170

See Proposal, supra note 2, at 81011.

171

See id.

broker-dealer operator and its affiliates to help market participants better understand potential

conflicts of interest and information leakage. In the context of national securities exchanges, we

have expressed concern that the affiliation of a national securities exchange with one of its

members raises potential conflicts of interest, and the potential for unfair competitive advantage;

and because the Commission reviews the rules of national securities exchanges, a process which

requires, among other things, that to approve certain rule changes the Commission find that the

proposed rule change is consistent with the Exchange Act, each existing national securities

exchange has implemented rules that restrict affiliation between the exchange and its members to

mitigate the potential for these types of conflicts of interest. 172 NMS Stock ATSs are not subject

to such restrictions with respect to the activities of their broker-dealer operator and its affiliates

that may raise conflicts of interests.

Another commenter states its view that requiring public disclosure of Form ATS-N will

“alter the competitive landscape…between NMS Stock ATSs and national securities

exchanges.” 173 We continue to believe that since the adoption of Regulation ATS, the market in

execution services for NMS stocks has evolved such that trading functions of NMS Stock ATSs

have become more functionally similar to those of national securities exchanges. 174 The

enhanced transparency requirements for NMS Stock ATSs are designed to allow market

participants to compare execution services of NMS Stock ATSs against national securities

exchanges, to appropriately calibrate the level of transparency between NMS Stock ATSs and

172

See Proposal, supra note 2, at 81042 n. 370-372 and accompanying text. In cases where we have approved

exceptions to this prohibition, there have been limitations and conditions on the activities of the national

securities exchange and its affiliated member designed to address concerns about potential conflicts of

interest and unfair competitive advantage. See id. at 81042 n.372.

173

See STANY Letter at 3.

174

See supra Section II.D.

national securities exchanges, and to foster even greater competition for order flow of NMS

stocks between those trading centers. 175

One commenter asserts that the Proposal treats all ATSs as stand-alone, exchange-like

price/time priority models and fails to account for distinct ATS models (e.g. price/capacity/size

priority and interval VWAP crossing) and does not consider that an ATS may be part of a

broader, integrated electronic offering available to clients choosing to access the markets through

a full-service broker-dealer. 176 This commenter also states that while Regulation ATS

recognizes the distinction between exchanges and ATS offerings, the regulatory structure

specifically tailored for exchanges can be seen throughout much of the Proposal and proposed

Form ATS-N, such as in the Proposal’s focus on: subscribers, in the way an exchange has

members; a subscriber manual, in the way an exchange has a rule book; and fees, similar to an

exchange fee schedule. 177

One commenter questions why the Commission has determined that NMS Stock ATSs

should be subject to “essentially similar disclosure requirements” as national securities

exchanges without affording NMS Stock ATSs benefits such as limited immunity and market

data revenue that national securities exchanges receive. 178 NMS Stock ATSs, unlike registered

national securities exchanges, are registered as broker-dealers and exempt from the requirements

of, among other provisions, Sections 6 and 19(b) of the Exchange Act. However, an NMS Stock

ATS that desires the benefits afforded to national securities exchanges can choose to register as a

175

See infra Section X.C.2.a (discussing the economic benefits of the new disclosure requirements). See also

Section X.C.4.a.i.

176

See Morgan Stanley Letter at 3.

177

See id. at 2-3.

178

See Fidelity Letter at 4.

national securities exchange under Section 6 of the Exchange Act 179 and be subject to the

requirements of, among other provisions, Sections 6 and 19(b) of the Exchange Act. In addition,

we do not agree with the commenter’s view that the disclosure requirements with which NMS

Stock ATSs must comply are “essentially similar” to the disclosure requirements imposed on

national securities exchanges. For example, a national securities exchange is required to file

with the Commission all rule changes establishing or changing a due, fee, or other charge

assessed to members, which the Commission reviews for consistency with the Exchange Act. 180

In contrast, an NMS Stock ATS will be required to provide disclosure on the types of fees and

charges of the NMS Stock ATS. 181 Further, disclosure is only one of the requirements to which

national securities exchanges are subject. Notably, the rules and changes to the rules of national

securities exchanges are required to be filed with the Commission and are subject to public

notice and comment. 182 NMS Stock ATSs are not subject to these requirements, as well as many

others, applicable to national securities exchanges. 183

179

See 15 U.S.C. 78f. An ATS is not required to comply with the requirements of Rule 301(b) if it is

registered as an exchange under Section 6 of the Exchange Act. See 17 CFR 242.301(a)(1).

180

See 17 CFR 240.19b-4(f)(2). Another commenter states that while Regulation ATS recognizes the

distinction between national securities exchanges and ATS offerings, the regulatory structure tailored for

national securities exchanges can be seen throughout much of the Proposal and proposed Form ATS-N, and

included as examples the Proposal’s focus on disclosures regarding subscribers, subscriber manuals, and

fees, as well as the public posting upon filing of amendments to Form ATS-N. See Morgan Stanley Letter

at 3-4. This commenter believes this approach is contrary to the objectives of Regulation ATS and urges

the Commission to reconsider aspects of the Proposal that have the effect of not recognizing the materially

different roles that ATSs and exchanges are intended to play in the U.S. marketplace. See id at 4. We

agree that registered broker-dealers that operate ATSs should continue to be able to avail themselves of the

exemption from the definition of “exchange” provided by Exchange Act Rule 3a1-1 and Regulation ATS,

but believe that due to changes in the role and operation of NMS Stock ATSs since the adoption of

Regulation ATS, it is in the public interest to update the requirements for that exemption applicable to that

subset of ATSs. Also many of the disclosure items identified by this commenter are the kinds of

disclosures other commenters have described as significant to their understanding of the operation of NMS

Stock ATSs.

181

See infra Section V.D.19.

182

See generally 15 U.S.C. 78s(b); 17 CFR 240.19b-4.

183

See 15 U.S.C. 78f(b).

While NMS Stock ATSs and national securities exchanges are subject to different

regulatory regimes, NMS Stock ATSs are trading centers that perform similar trading functions

as national securities exchanges and have evolved to become more like national securities

exchanges in their operations. We believe that Form ATS-N, as adopted, accommodates the

differences between the regulatory requirements for national securities exchanges and those of

NMS Stock ATSs while increasing public operational transparency for NMS Stock ATSs. The

Commission does not agree that NMS Stock ATSs are being treated like national securities

exchanges and believes that Form ATS-N is designed in a manner that allows ATSs to explain

their unique business models. For example, NMS Stock ATSs will be able to explain their

trading models, and associated facilities and procedures, in Part III, Item 11 of adopted Form

ATS-N (“Trading, Rules and Facilities”). In addition, Part III, Item 19 (“Fees”) requires an

NMS Stock ATS to identify and describe the types of fees or charges of the ATS and any

differences among subscribers, whereas national securities exchanges are required to publicly

post their complete fee schedules and any changes are subject to the SRO rule filing process

under Section 19 of the Exchange Act. The Commission also understands that some brokerdealer operators offer their NMS Stock ATSs along with other execution and routing services.

We believe that requests on Form ATS-N are appropriately designed, and provide narrative

flexibility, to elicit information about the varying NMS Stock ATS models, including those of

multi-service broker-dealers. 184

c. Comments on Effectiveness Requirement

184

See, e.g., infra Section V.D.11 (describing Part III, Item 11 of Form ATS-N, which asks NMS Stock ATSs

to provide a summary of their marketplaces and the means and facilities for bringing together the orders of

multiple buyers and sellers on the NMS Stock ATS).

We proposed that to qualify for the exemption from the definition of “exchange,” an

NMS Stock ATS’s Form ATS-N must be declared effective by the Commission; as adopted, a

Form ATS-N must be effective for the ATS to qualify for the exemption. 185 Several commenters

express their support for requiring that Form ATS-N be subject to Commission review, 186 and

some commenters support the proposed requirement that Form ATS-N be declared effective by

the Commission,187 while other commenters raise concerns about requiring that Form ATS-N be

declared effective by the Commission. 188 One commenter states that the proposed

effective/ineffective process is “unnecessary” and “will have a chilling effect” on, or stifle

innovation of, ATS operations. 189 Another commenter similarly questions the need for the

Commission to make a determination of effectiveness for Form ATS-N, and expresses concern

that such a process would increase the regulatory risk for new NMS Stock ATSs and stifle

innovation in the ATS marketplace by delaying the effectiveness of NMS Stock ATSs whose

features, while meeting regulatory requirements, do not meet industry norms. 190

We do not believe that requiring Form ATS-N to become effective after Commission

review is “unnecessary;” 191 rather, the review process will facilitate the Commission’s oversight

of NMS Stock ATSs and help ensure that information required by the form is disclosed in a

complete and comprehensible manner. We have modified the proposed effectiveness process for

185

See infra Section IV.A.1. As adopted, the Commission will not declare initial Form ATS-N filings

effective under Rule 304.

186

See Citadel Letter at 3; HMA Letter at 7-8; and Investor Advocate Letter at 11-12.

187

See MFA/AIMA Letter at 4; CFA Institute Letter at 4; and PDQ Letter at 2. Two commenters do not

object to the effectiveness process. See Liquidnet Letter at 3 and STANY Letter at 2.

188

See Luminex Letter at 1; Fidelity Letter at 8-9.

189

See Luminex Letter at 1.

190

See Fidelity Letter at 8-9.

191

See supra note 189 and accompanying text.

initial Form ATS-N so that the Commission will not declare initial Form ATS-N effective;

instead, initial Form ATS-N, as amended, will become effective, unless declared ineffective,

upon the earlier of: (1) the completion of review by the Commission and publication pursuant to

Rule 304(b)(2), or (2) the expiration of the Commission review period, or, if applicable, the

extended review period. 192 Form ATS-N will nevertheless be subject to Commission review,

and, as proposed, the Commission may declare a Form ATS-N ineffective if it finds, after notice

and opportunity for hearing, that such action is necessary or appropriate in the public interest,

and is consistent with the protection of investors. 193 We believe that requiring Form ATS-N to

be effective, which would occur only after being subject to Commission review, could

incentivize NMS Stock ATSs to make more detailed and informative disclosures than under

current Form ATS. While requiring Form ATS-N to be effective may have some impact on

innovation, 194 our review of Form ATS-N is designed to mitigate any effect on innovation, and

accordingly would focus on, for example, the completeness and comprehensibility of the Form

ATS-N disclosures and not include a review of the merits of the disclosures or whether such

trading functionalities meet industry norms. 195 We do not believe that requiring Form ATS-N to

be effective will unduly increase the “regulatory risk” of launching a new NMS Stock ATS as

one commenter suggests. 196 We understand that the Commission review process will generate

some uncertainty for NMS Stock ATSs as a Form ATS-N could be declared ineffective, which is

192

See infra Sections IV.A.3.c and IV.A.4.a.

193

See id.

194

See infra Section X.C.

195

See supra note 190 and accompanying text. See also infra Section IV.A.3.d.

196

See supra note 190 and accompanying text.

not currently the case with respect to Form ATS. 197 The Commission review process, however,

will not be merit based, and determinations of ineffectiveness will require the Commission to

make certain findings after notice to the NMS Stock ATS and opportunity for hearing. 198 In

addition, the rule provides that if the Commission does not declare the Form ineffective before

the end of a fixed time period, the Form ATS-N will become effective. We believe that these

factors will provide NMS Stock ATSs with greater regulatory certainty regarding the

effectiveness process.

2. Comments on Extending Rule 304 to Non-NMS Stock ATSs

Rule 304 of Regulation ATS, as proposed and adopted, would apply only to NMS Stock

ATSs, as defined in Rule 300(k) of Regulation ATS. We are concerned that, given the

significance of NMS Stock ATSs in equity market structure and their operational complexities,

the lack of transparency around NMS Stock ATSs operations could inhibit market participants’

ability to evaluate NMS Stock ATSs as potential routing destinations for their orders in NMS

stocks. As discussed in the Proposal, we did not propose to apply Rule 304 to non-NMS Stock

ATSs, which would include ATSs that trade corporate or municipal fixed income securities

(“Fixed Income ATSs”), U.S. Government securities (“Government Securities ATSs”), 199 or

OTC Equity securities (“OTC Equity Securities ATSs”). 200 We sought comment on whether

197

See infra Section X.C.4.

198

See infra Section IV.A.3.

199

The term “U.S. Government securities” is defined under Section 3(a)(42) of the Exchange Act. See 15

U.S.C. 78c(a)(42) (defining “government securities” as, among other things, “securities which are direct

obligations of, or obligations guaranteed as to principal or interest by, the United States”).

200

For purposes of this discussion, we are using the term “OTC Equity Security” as it is defined in FINRA’s

6400 rule series for quoting and trading in OTC Equity Securities. FINRA defines OTC Equity Security as

“any equity security that is not an ‘NMS stock’ as that term is defined in Rule 600(b)(47) of SEC

Regulation NMS; provided, however, that the term ‘OTC Equity Security’ shall not include any Restricted

Equity Security,” which FINRA defines as “any equity security that meets the definition of ‘restricted

security’ as contained in Securities Act Rule 144(a)(3).” See FINRA Rules 6420(f), (k).

Rule 304, in whole or in part, should apply to Fixed Income ATSs, Government Securities ATSs,

and OTC Equity Securities ATSs. 201 We also did not propose to apply Rule 304 to any other

type of trading center besides NMS Stock ATSs, 202 such as non-ATS OTC trading centers 203 or

national securities exchanges.

We received several comments generally supporting operational transparency and about

whether or not to apply Rule 304 to non-NMS Stock ATSs. 204 Of the commenters generally

supporting enhanced operational transparency, several encourage the Commission to make the

current Form ATS public for all ATSs. 205 Some commenters urge the Commission to amend

201

See Proposal, supra note 1, at 81018.

202

See Proposal, supra note 2. See also infra note 668 and accompanying text (discussing the term “trading

center”).

203

For purposes of this discussion, references to non-ATS OTC trading centers, as used herein, encompass all

executions that occur off a national securities exchange and outside an ATS, including when a brokerdealer is acting as an OTC market maker, block positioner (i.e., any broker-dealer in the business of

executing, as principal or agent, block size trades for its customers), or operation of an internal brokerdealer system. See 17 CFR 242.600(b)(52) (defining “OTC market maker” as any dealer that holds itself

out as being willing to buy and sell to its customers, or others, in the United States, an NMS stock for its

own account on a regular or continuous basis otherwise than on a national securities exchange in amounts

of less than block size); 17 CFR 242.600(b)(9) (defining “block size” as an order of at least 10,000 shares

or for a quantity of stock having a market value of at least $200,000); and 17 CFR 240.17a-3(a)(16)(ii)(A)

(defining “internal broker-dealer system” as any facility, other than a national securities exchange, an

exchange exempt from registration based on limited volume, or an alternative trading system as defined in

Regulation ATS that provides a mechanism, automated in full or in part, for collecting, receiving,

disseminating, or displaying system orders and facilitating agreement to the basic terms of a purchase or

sale of a security between a customer and the sponsor, or between two customers of the sponsor, through

use of the internal broker-dealer system or through the broker or dealer sponsor of such system). See also

2010 Equity Market Structure Release, supra note 13, at 3599-3600.

204

See Better Markets Letter at 3, 8; CFA Institute Letter; Citadel Letter; Consumer Federation of America

Letter at 6-7; Fidelity Letter at 6-7; HMA Letter at 5-6, 10, 12; ICI Letter at 11; Investor Advocate Letter at

2, 12-15; KCG Letter at 12-13; Liquidnet Letter at 3; Luminex Letter at 2, 4; MarketAxess Letter; Markit

Letter at 2, 4, 9; MFA/AIMA Letter 2-4; MFA Letter 2 at 30; Morgan Stanley Letter at 5-6; PDQ Letter at

2; SIFMA Letter at 3, 5; STANY Letter at 5; T. Rowe Price Letter at 2; Virtu Letter at 2.

205

See Fidelity Letter at 7; ICI Letter at 11; Luminex Letter at 2; Morgan Stanley Letter 2, 5; Investor

Advocate Letter at 2-3; PDQ Letter at 2; STANY Letter at 3; SIFMA Letter at 3-4.

Regulation ATS to apply Rule 304 to all ATSs. 206 Two commenters explicitly support applying

the Proposal solely to NMS Stock ATSs. 207

Several commenters specifically argue for extending Rule 304, including Form ATS-N,

to Fixed Income ATSs. 208 Several commenters, however, recommend against extending the

Proposal requirements for NMS Stock ATSs to Fixed Income ATSs. 209 Several commenters

suggest that the Commission require Fixed Income ATSs to make their Forms ATS public. 210

We also received several comments that specifically address enhancing operational

transparency for, or extending Rule 304 to, Government Securities ATSs. 211 Several

commenters support applying Rule 304 requirements to Government Securities ATSs, 212 while

several state that Regulation ATS should be amended to include electronic platforms for U.S.

Government securities. 213 Other commenters believe that the Commission should gather

additional information on fixed income markets, which include U.S. Government securities

206

See Better Markets Letter at 3, 8; CFA Institute Letter at 3-4; Consumer Federation of America Letter at 67; HMA Letter 5-6, 10, 12.

207

See ICI Letter at 11; Liquidnet Letter at 3.

208

See Consumer Federation of America Letter at 6; Better Markets Letter at 8; CFA Institute Letter at 3-4;

HMA Letter at 10; MFA/AIMA Letter at 2-3.

209

See Fidelity Letter at 6-7; KCG Letter at 12-13; Liquidnet Letter at 3; MarketAxess Letter at 3-4 ; Markit

Letter at 9; SIFMA Letter at 3.

210

See Fidelity Letter at 6; SIFMA Letter at 34-35; Markit Letter at 9; Investor Advocate Letter at 12-16; ICI

Letter at 11. See also Luminex Letter at 4.

211

See Better Markets Letter at 8; CFA Institute Letter at 3-4; Citadel Letter at 4-5; Investor Advocate Letter

at 16-17; KCG Letter; Liquidnet Letter at 3; MFA/AIMA Letter at 2-7; SIFMA Letter at 3, 5, 35-36; Virtu

Letter at 2.

212

Some commenters specifically support operational transparency and enhanced monitoring of trading

activity for Government Securities ATSs. See Virtu Letter at 2; Better Markets Letter at 8; CFA Institute

Letter at 3-4; Citadel Letter at 4-5; MFA/AIMA Letter at 2-7. See also Liquidnet Letter at 3 (stating that it

does “not object” to the requirements of Regulation ATS applying to systems that cross trades in U.S.

Government securities).

213

See Citadel Letter at 4-5; Liquidnet Letter at 3; Investor Advocate Letter at 16-19; Virtu Letter at 2. One

commenter combined its support for transparency of ATSs that trade U.S. Government securities and Fixed

Income ATSs. See MFA/AIMA Letter at 3-4

markets, and as an interim step, make the Form ATS filings for these ATSs public. 214 We also

received comments that specifically oppose applying the Proposal requirements to Government

Securities ATSs, 215 or more generally oppose expanding Rule 304 to non-NMS Stock ATSs. 216

We also received comments regarding enhancing operational transparency for other nonATS OTC trading centers – namely broker-dealers that internalize order flow. 217 In general,

these commenters point out the discrepancy in disclosure obligations that would result from the

Proposal, or the possibility that broker-dealers would route order flow to non-ATS trading

centers as a result. 218

Given the range of commenter views on these questions and our belief that it is

appropriate to take an incremental approach by first applying the amended regime to NMS Stock

ATSs before considering a further step, we are not amending Rule 3a1-1(a) and Regulation ATS

for non-NMS Stock ATSs. We intend to monitor the implementation and effectiveness of Rule

304 to NMS Stock ATSs, and should we decide to take further action with respect to non-NMS

Stock ATSs, we would do so in a separate rulemaking and take into account our experience with

Rule 304 and NMS Stock ATSs.

214

See SIFMA Letter at 34-35; Markit Letter at 9; Investor Advocate Letter, at 14. See also Fidelity Letter at

215

See KCG Letter at 13; SIFMA Letter at 3, 5, 36.

216

See supra note 209 accompanying text.

217

See ICI Letter at 12; Morgan Stanley Letter at 2-3.

218

See id. See also Fidelity Letter at 11-12. Another commenter recommends that the Commission be

required to conduct a review within a designated time-period to assess the effectiveness of the new rules

and determine if any refinements should be proposed. See T. Rowe Price Letter at 3. In addition, one

commenter suggests that regulators periodically monitor the development of the market and technological

developments, and take appropriate action as needed. See Barnard Letter at 3. In addition to the

Commission’s ongoing oversight responsibilities under the Exchange Act, Rule 304 provides a process for

the Commission to review disclosures filed on Form ATS-N, either through an initial Form ATS-N, Form

ATS-N amendment, or cessation of operations.

The Commission notes that the Fixed Income Market Structure Advisory Committee

(“FIMSAC”) was formed in 2017 pursuant to the Commission’s authority under the Federal

Advisory Committee Act to provide the Commission with diverse perspectives on the structure

and operations of the U.S. fixed income markets, as well as advice and recommendations on

matters related to fixed income market structure. 219 The FIMSAC recently issued

recommendations for the Commission to review the framework for the oversight of electronic

trading platforms for municipal securities and corporate bonds. Specifically, the FIMSAC

recommended that the Commission form, together with FINRA and the MSRB, a joint working

group to review the regulatory framework for oversight of electronic trading platforms used in

the municipal securities and corporate bond markets. 220 In light of recent recommendations of

the FIMSAC, and comments received, we will review the regulatory framework for fixed income

electronic trading platforms, including to consider whether we should propose amendments to

Regulation ATS (and any other applicable rules) to account for operational and regulatory

differences among electronic trading platforms for municipal securities and corporate bonds.

B. Amendments to Existing Regulation ATS Rules for NMS Stock ATSs

To operate pursuant to the Exchange Act Rule 3a1-1a(2) exemption, NMS Stock ATSs

will be required to comply with new Rule 304, in addition to the applicable existing Rules 300

through 303 of Regulation ATS. In light of the new requirements of Rule 304, we are adopting,

with modifications discussed below, amendments to several existing rules of Regulation ATS.

1. Rule 300(k): Definition of NMS Stock ATS

219

See 5 U.S.C. – App; Securities Exchange Act Release No. 81958 (October 26, 2017), 82 FR 50460

(October 31, 2017) (Notice of Federal Advisory Committee Establishment).

220

See Recommendation for the SEC to Review the Framework for the Oversight of Electronic Trading

Platforms for Corporate and Municipal Bonds (July 16, 2018) available on the Commission’s website at

https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-electronic-trading-platformsrecommendation.pdf.

Proposed Rule 300(k) of Regulation ATS defined “NMS Stock ATS” in new paragraph

(k) as “an alternative trading system, as defined in § 242.300(a), that facilitates transactions in

NMS stocks, as defined in § 242.300(g).” We received no comments on the proposed definition

of NMS Stock ATS and are adopting Rule 300(k) with modifications. We are replacing

“facilitates transactions in” with “trades.” The term “trades” is well understood in the context

Regulation ATS 221 and the term “facilitates” is not used in the definition of an ATS. This

change is non-substantive and will clarify the rule text.222 Accordingly, Rule 300(k), as adopted,

defines an “NMS Stock ATS” as “an alternative trading system, as defined in paragraph (a) of

[Rule 300], that trades NMS stocks, as defined in paragraph (g) of [Rule 300].”

2. Rule 301(a): Exemption from Compliance with Regulation ATS

We made explicit in proposed Rule 304(a) that NMS Stock ATSs must comply with

Rules 300 through 304, unless not required to comply with Regulation ATS pursuant to Rule

301(a). Pursuant to Rule 301(a), certain ATSs that are subject to other appropriate regulations

are not required to comply with Regulation ATS. 223 To the extent that an NMS Stock ATS

221

We believe that the concept of NMS Stock ATSs “trading” or “transacting” in NMS stocks, should be

familiar to existing NMS Stock ATSs as Form ATS requires disclosure regarding, among other things “the

types of securities the [ATS] trades” and “the name of any entity, other than the [ATS] that will be

involved in the operation of the [ATS], including the execution, trading, clearing, and settling of

transactions on behalf of the [ATS].” See Form ATS. Additionally, Form ATS requires disclosure

regarding “[t]he procedures governing execution, reporting, clearance and settlement of transactions

effected through the [ATS]”; and Form ATS-R requires NMS Stock ATSs to “[p]rovide the total unit and

dollar volume of transactions” in specified securities categories. See Form ATS and Form ATS-R.

222

As proposed, an NMS Stock ATS would include any ATS that effects transactions in securities that are

listed on a national securities exchange (other than options, debt or convertible debt). See Proposal, supra

note 2, at 81015-81016.

223

ATSs that are not subject to Rule 301(a) include those that are: registered as an exchange under Section 6

of the Exchange Act; exempt from national securities exchange registration based on limited volume;

operated by a national securities association; registered as a broker-dealer, under Sections 15(b) or 15C of

the Exchange Act, or that are banks, and that limit their securities activities to certain instruments; or

exempted, conditionally or unconditionally, by Commission order, after application by such ATS from one

or more of the requirements of Rule 301(b). See 17 CFR 242.301(a). See also Regulation ATS Adopting

Release, supra note 3, at 70859-63.

meets the criteria of the Rule 301(a) exemption, such ATS would not be required to comply with

Rules 300 through 304 of Regulation ATS. We received no comments on the application of

Rule 301(a) to NMS Stock ATSs and are adopting as proposed this language in Rule 304(a) to

make clear that Rules 300 through 303 of Regulation ATS, including Rule 301(a) continue to

apply to NMS Stock ATSs, unless otherwise provided by Rule 301(a).

3. Rule 301(a)(5): Exemptions from Certain Requirements of

Regulation ATS Pursuant to Application to the Commission

Rule 301(a)(5) of Regulation provides that an ATS shall comply with the requirements of

Rule 301(b) unless such ATS is exempted, conditionally or unconditionally, by Commission

order after application by such ATS, from one or more of the requirements of Rule 301(b), and

that the Commission will grant such exemption only after determining that such an order is

consistent with the public interest, the protection of investors, and the removal of impediments

to, and perfection of, a national market system. 224

When adopting Rule 301(a)(5), we stated that while the requirements of Regulation ATS

are appropriate for all ATSs, a system may develop in the future for which these requirements

may not be appropriate. The Commission expected to issue such an order only under unusual

circumstances, and only after making the applicable determination. 225 The requirements of Rule

304 were not part of Regulation ATS at the time the Commission adopted Rule 301(a)(5). We

believe that, given the amendments to Regulation ATS that will require NMS Stock ATSs to

comply with the filing requirements of Rule 304, including filing Form ATS-N, instead of the

Form ATS filing requirements of Rules 301(b)(2)(i)-(vii), it may be appropriate under certain

limited, unusual facts and circumstances for the Commission to exempt an NMS Stock ATS,

224

See 17 CFR 242.301(a)(5).

225

Regulation ATS Adopting Release, supra note 3, at 70863.

conditionally or unconditionally, by Commission order, from one or more requirements of Rule

304. As such, we are amending Rule 301(a)(5) to include exemptions from the requirements of

Rule 304. 226

In response to the Proposal, we received one comment regarding possible use of the

Commission Section 36 exemptive authority in connection with the requirements of Rule 304. 227

This commenter states that instead of modifying the requirements under the Proposal in such a

way that could result in less relevant information being provided to the Commission and to the

public, certain concerns of other commenters could be addressed through use of the

Commission’s Section 36 exemptive authority. Specifically, this commenter observes that an

NMS Stock ATS could seek relief tailored to its unique facts and circumstances pursuant to

Section 36(a)(1) of the Exchange Act, and that Section 36(a)(1) permits the Commission to grant

both conditional and unconditional exemptions from any provisions of a rule, to the extent

necessary or appropriate in the public interest and consistent with the protection of investors. 228

This commenter also states that using Section 36 exemptive authority would be consistent with

the manner in which the Commission generally treats requests it receives from regulated entities,

and encourages the Commission to consider providing guidance as to what factors it might

consider when evaluating a request for specific exemptive relief. 229 We believe that amendments

226

The Commission continues to also have general exemptive authority pursuant to Section 36(a) of the

Exchange Act to grant both conditional and unconditional exemptions from any provisions or provisions of

the Exchange Act, or any rule or regulation thereunder (including Rule 304 and any other provision of Rule

3a1-1 and Regulation ATS), to the extent necessary or appropriate in the public interest and consistent with

the protection of investors. See 15 U.S.C. 78mm(a).

227

See Investor Advocate Letter at 8.

228

See id. See also infra notes 723-725 and accompanying text (discussing this comment in the specific

context of disclosures regarding affiliates of the broker-dealer operator).

229

See Investor Advocate Letter at 9. For example, in the context of any exemptions from the requirements

applicable to disclosures regarding affiliates of the broker-dealer operator of an NMS Stock ATS, the

commenter encouraged the Commission to consider providing guidance as to what facts and circumstances

made to Rule 301(a)(5) make clear that the Commission could exempt an NMS Stock ATS,

conditionally or unconditionally, by order, after application by the ATS from one or more of the

requirements of Rule 304 of Regulation ATS provided that the Commission determines that such

an exemption is consistent with the public interest, the protection of investors, and removal of

impediments to, and perfection of the mechanisms of, a national market system.

We also received other comments regarding specific exceptions from the proposed

requirements of Rule 304. Specifically, three commenters suggest providing an exception to the

30-calendar day advance notice requirement for material changes in case of exigent

circumstances. 230 One commenter states that unless the Commission narrows the materiality

standard for material amendments, the 30-calendar day advance notice requirement could affect

an ATS operator’s ability to take “decisive action.” 231 This commenter further believes that

NMS Stock ATS operators often must take decisive action without time for a lengthy review and

approval process, given that the speed of response to technical or operational issues (including

cybersecurity) often is measured in seconds. This commenter believes there should be a carveout for exigent circumstances when an NMS Stock ATS must act swiftly. 232 Another commenter

states that there could be situations in which it would be difficult for an NMS Stock ATS to meet

the 30-calendar day advance notice requirement based on ongoing business changes, and that the

Commission should clarify that certain Form ATS-N disclosures may be subject to immediate

it might consider when evaluating a broker-dealer operator’s request for exemptive relief. See id. See also

infra notes 723-725 and accompanying text.

230

See HMA Letter at 10; SIFMA Letter at 31; KCG Letter at 10.

231

See SIFMA Letter at 31.

232

See id.

change without notice. 233 Another commenter states that the Commission should allow for more

rapid action (than the 30-day advance notice requirement) in the event of an “external

emergency,” such as an extreme market event, but that such circumstances should be rare and

only granted upon express approval of the Commission, upon a finding that such action is

necessary to protect investors and promote fair and efficient markets. 234

We believe that there may be unusual circumstances under which an NMS Stock ATS

may need to seek an exemption from the requirements of Rule 304 or the disclosure

requirements of Form ATS-N. For example, under exceptionally rare occasions, an NMS Stock

ATS may need to make a material change to its operations on an expedited basis to prevent

substantial harm to market participants, such as in response to a significant operational or

market-wide event. The amendments to Rule 301(a)(5) are designed to address these

concerns. 235 Applications for relief from a requirement of Rule 304 generally should explain

why the applicant believes the relief sought is consistent with the public interest, the protection

of investors, and the removal and impediments to, and perfection of the mechanism of, a national

market system. 236

233

See KCG Letter at 10. The commenter states that, for example, if a broker-dealer operator provides a

disclosure that it routes orders to the ATS from its algorithmic business, and the data center from which the

algorithmic business operates subsequently experiences systems issues that force it to stop routing orders to

the ATS, the disclosure would no longer be accurate and the broker-dealer operator would not be in

position to provide 30-calendar day advance notice of the change.

234

See HMA Letter at 10.

235

As amended, Rule 301(a)(5) will apply to ATSs that have received exemptive relief from one or more

requirements of Rule 304. See Rule 301(a)(5).

236

Applications for exemptive relief from the 30-calendar day advance notice requirement of Rule

304(a)(2)(i)(A) generally should, for example, contain a description of the circumstances that necessitate

the implementation of the material change on an expedited basis, and why, in the view of the NMS Stock

ATS, expedited implementation is necessary or appropriate in the public interest, and consistent with the

protection of investors, such as why the expedited implementation is necessary to prevent substantial harm

to investors. The Commission will not consider hypothetical or anonymous requests for exemptive relief.

As noted by commenters, circumstances may necessitate the implementation of a material

change to the operations of an NMS Stock ATS on an expedited basis. We believe that, based on

particular facts and circumstances, it may be appropriate to grant such an exemption from the 30day advance notice requirement of Rule 304(a)(2)(i)(A), for example, in the event of

extraordinary, unforeseen circumstances, and if delaying implementation pursuant to the 30calendar day advance notice requirement would cause substantial harm to subscribers or other

markets trading NMS stocks. By comparison, to the extent that an NMS Stock ATS may need to

change its operations in response to an operational problem, as suggested by one commenter, an

NMS Stock ATS could proactively develop and disclose in the relevant Form ATS-N Item

alternative procedures that the ATS would apply if the ATS experiences a systems problem that

causes it to be unable to perform a particular function. For example, an NMS Stock ATS that

routes orders and trading interest resting in the ATS to destinations outside the ATS could state,

for example, that the NMS Stock ATS will either execute or cancel orders and trading interest

submitted to the ATS if the ATS is unable to route orders and trading interest away from the

ATS due to a systems problem.

4. Rule 301(b)(2): Form ATS Reporting Requirements No Longer

Apply to NMS Stock ATSs

We proposed in Rule 304 to except NMS Stock ATSs from complying with Rule

301(b)(2) of Regulation ATS. Existing Rule 301(b)(2) requires an ATS to file with the

Commission a Form ATS initial operation report, amendments to the Form ATS initial operation

report, and cessation of operations reports on Form ATS, all of which are “deemed confidential

when filed.” 237 We proposed this exception to make clear that NMS Stock ATSs would not be

237

See Rule 301(b)(2)(vii).

required to comply with the Form ATS reporting requirements provided in Rule 301(b)(2)

because the NMS Stock ATS would file a Form ATS-N pursuant to Rule 304. We also proposed

Rule 301(b)(2)(viii) to make clear that NMS Stock ATSs must file with the Commission the

reports and amendments required by Rule 304 and that NMS Stock ATSs were not subject to

Rule 301(b)(2) of Regulation ATS. We also proposed that ATSs that effect transactions in both

NMS stocks and non-NMS stocks would be subject to the requirements of proposed Rule 304,

with respect to NMS stocks, and Rule 301(b)(2), with respect to non-NMS stocks.

We received one comment regarding proposed Rule 301(b)(2)(viii). 238 The commenter

states that requiring an ATS that transacts in both NMS stocks and non-NMS Stocks to file

reports on Form ATS-N with respect to NMS stocks but also file reports on Form ATS with

respect to non-NMS stocks could be unduly burdensome. 239 The commenter states that an ATS

should have the option to file reports on Form ATS-N for all U.S. equities that it trades, whether

listed or unlisted because an ATS operator would otherwise have the burden of maintaining two

separate ATS filings for what the commenter believes is essentially the same functionality. 240

We do not believe that requiring an ATS that trades both NMS stocks and non-NMS

stocks to file reports on Form ATS-N with respect to NMS stocks, but also file reports on Form

ATS with respect to non-NMS stocks, will be unduly burdensome. We recognize the additional

burdens for NMS Stock ATSs resulting from the requirement to file disclosures on new Form

238

See Liquidnet Letter at 3. We received two comments regarding the application of Rule 301(b)(2)(i)

through (vii) to Legacy NMS Stock ATSs that have filed a Form ATS-N that has not yet become effective.

See Liquidnet Letter at 3; BIDS Letter at 2-3. We are adopting a transitional rule that will not require a

Legacy NMS Stock ATS to amend its Form ATS under Rule 301(b)(2) if it has filed a Form ATS-N with

the Commission that has not yet become effective. We are instead requiring such Legacy NMS Stock ATS

to file amendments on Form ATS-N pursuant to the requirements of Rule 304(a)(2)(i)(A) through (C).

Rule 304(a)(1)(v)(C) is discussed below in greater detail. See infra Section IV.A.4.c.

239

See Liquidnet Letter at 3.

240

See id.

ATS-N; however, we estimate that the burden for these ATSs to maintain their Forms ATS will

decrease, because they will no longer be required to disclose information about their NMS stock

operations on Form ATS. 241 We also believe that allowing a broker-dealer operator to choose to

disclose information on Form ATS-N about trading in non-NMS stocks, as suggested by the

commenter, 242 would likely result in incomplete disclosures about the ATS’s non-NMS stock

operations that may be confusing or not useful to market participants. Form ATS-N was

specifically designed to solicit information about trading in NMS stocks on an ATS to allow

market participants to understand the ATS’s NMS stock operations and readily compare the ATS

against other ATSs and national securities exchanges that trade NMS stocks. 243 While many of

the requests on Form ATS-N could apply to Fixed Income ATSs or Government Securities

ATSs, the requests are not fully tailored to solicit information about trading in those types of

securities and the systems that trade them. For example, transactions in NMS stocks are, in some

cases, subject to different federal securities laws and Commission rules than transactions in other

securities, such as fixed income securities. 244 Because Form ATS-N is specifically designed for

NMS Stock ATSs, subscribers relying on Form ATS-N disclosures to assess a non-NMS Stock

ATS, such as one that trades fixed income securities, as a potential trading venue may not

receive a complete or comprehensible understanding of the ATS’s fixed income operations, or

241

An ATS that trades both NMS stocks and non-NMS stocks will be required to amend its Form ATS, after

the ATS files Form ATS-N, by removing information that pertains solely to the ATS’s NMS stock

operations. Amending Form ATS in this manner should help ensure that the Form ATS accurately

describes the ATS’s non-NMS stock operations.

242

See Liquidnet Letter at 3.

243

See supra Section III.A.

244

For example, Rule 611 of Regulation NMS, which requires a trading center to establish, maintain, and

enforce written policies and procedures that are reasonably designed to prevent trade-throughs on that

trading center, subject to certain exceptions, applies only to protected quotations in NMS stocks, and not to

non-NMS stocks. See 17 CFR 242.611.

fixed income activities of the broker-dealer operator and its affiliates as such activities relate to

the ATS, because Form ATS-N does not solicit such information. We believe that allowing

NMS Stock ATSs to choose whether to integrate information about trading in non-NMS stocks

on a Form ATS-N could make the disclosures confusing for users and make it difficult for them

to compare the operations of an NMS Stock ATS against other NMS Stock ATSs.

Because we are adopting rules that require NMS Stock ATSs to file Form ATS-N

pursuant to Rule 304, we are adopting Rule 304(a) with modifications to provide that an NMS

Stock ATS would specifically be excepted from compliance with Rules 301(b)(2)(i) through (vii)

of Regulation ATS, which govern the filing of Form ATS. 245 An NMS Stock ATS that is

operating pursuant to an initial operation report on Form ATS as of January 7, 2019 (“Legacy

NMS Stock ATS”) will be required to file a Form ATS-N no earlier than January 7, 2019 and no

later than February 8, 2019. 246

We are also adopting Rule 301(b)(2)(viii) to provide for how Legacy NMS Stock ATSs

transition from filing a Form ATS to filing a Form ATS-N. We are defining the term “Legacy

NMS Stock ATS” to mean an NMS Stock ATS that is operating pursuant to an initial operation

report on Form ATS as of January 7, 2019. We are also replacing proposed language that stated

that an NMS Stock ATS would not be subject to the requirements of Rule 301(b)(2) with

language stating that a Legacy NMS Stock ATS shall be subject to the Form ATS filing

requirements of Rule 301(b)(2)(i) through (vii) until the Legacy NMS Stock ATS files an initial

Form ATS-N with the Commission pursuant to Rule 304(a)(1)(iv)(A), and that thereafter, the

245

See supra Section III.A.

246

See infra Section IV.A.4.

Legacy NMS Stock ATS shall file reports 247 pursuant to Rule 304(a)(1)(iv)(A). We intended in

the Proposal to except a Legacy NMS Stock ATS from compliance with Rule 301(b)(2)(i)

through (vii) after it filed Form ATS-N, but also intended that a Legacy NMS Stock ATSs be

subject to Rule 301(b)(2)(viii), which requires NMS Stock ATSs to file reports required by Rule

304. 248 We believe that this modification will make clear that, until a Legacy NMS Stock ATS

files its Form ATS-N with the Commission, the Legacy NMS Stock ATS must amend Form ATS

in compliance with Rule 301(b)(2) of Regulation ATS.

We are also including language in Rule 301(b)(2)(viii) stating that as of January 7, 2019,

an entity seeking to operate as an NMS Stock ATS shall not be subject to the ATS filing

requirements of Rule 301(b)(2)(i) through (vii) and shall file reports pursuant to Rule 304. 249

Rule 301(b)(2)(viii) describes the reporting obligations of Legacy NMS Stock ATSs, and we

believe that this additional language will make clear that NMS Stock ATSs must file an initial

Form ATS-N, and that they do not need to comply with Rule 301(b)(2)(i) through (vii) and

therefore should not file Form ATS. 250

We recognize that an entity may wish to start operating as an NMS Stock ATS between

the time the final rule is adopted and January 7, 2019. During that time, an entity must file an

initial operation report on Form ATS and comply with Rule 301(b)(2); after January 7, 2019, the

247

To reduce redundancy, we are revising the proposed rule text to state that the Legacy NMS Stock ATS

must file “reports” (rather than “the reports and amendments”) required by Rule 304. Rule 304(b)(1)

provides that every Form ATS-N, which will include every amendment filed on Form ATS-N, shall

constitute a “report” within the meaning of sections 11A, 17(a), 18(a), and 32(a) (15 U.S.C. 78k-1, 78q(a),

78r(a), and 78ff(a)), and any other applicable provisions of the Exchange Act.

248

See Proposal, supra note 2, at 81022-24, 81027-31. Without this modification, Rule 301(b)(2)(viii) could

be interpreted, contrary to the Commission’s intention, to except an NMS Stock ATS from compliance with

all of Rule 301(b)(2), including Rule 301(b)(2)(viii) itself.

249

EDGAR will be ready to accept Form ATS-N filings on January 7, 2019, and we have conformed Rule

301(b)(2)(iii) to be consistent with the EDGAR ability to accept Form ATS-N filings.

250

See infra Section IV.A.1 (discussing the filing requirements for new NMS Stock ATSs).

ATS, which would operate as a Legacy NMS Stock ATS, must file an initial Form ATS-N

between January 7, 2019 and February 8, 2019 pursuant to Rule 304(a)(1)(iv)(A). 251 As of

January 7, 2019, an entity that seeks to operate as an NMS Stock ATS must comply with Rule

304 (and not with Rules 301(b)(2)(i) through (vii)) and file an initial Form ATS-N with the

Commission.

We are adopting, with a non-substantive modification, the proposed Rule 301(b)(2)(viii)

requirement that an ATS that effects transactions in both NMS stocks and non-NMS stocks be

subject to the requirements of new Rule 304 with respect to NMS stocks and Rule 301(b)(2) with

respect to non-NMS stocks. We are modifying the requirement to replace “effects transactions

in” with “trades.” As adopted, Rule 301(b)(2)(viii) requires that an ATS that trades both NMS

stocks and non-NMS stocks be subject to the requirements of new Rule 304 with respect to NMS

stocks and Rule 301(b)(2) with respect to non-NMS stocks. 252 By adopting Rule 304 and Form

ATS-N, we believe it has addressed concerns raised by NMS Stock ATSs, as discussed above

and in the Proposal, but that applying Rule 304 to the non-NMS Stock ATS operations of ATSs

that trade both NMS stocks and non-NMS stocks would impose unequal regulatory burdens

across ATSs that transact in non-NMS stocks. Finally, we are adopting as proposed nonsubstantive amendments to Rule 301(b)(2)(i) and Rule 301(b)(2)(vii) to delete outdated

references to dates for phased-in compliance with Regulation ATS for ATSs that were

operational as of April 21, 1999, and to update the name of the Division of Trading and Markets,

respectively. 253

251

See infra Section IV.A.4.a.

252

This modification is being made for clarity and consistency with the Rule 300(k) definition of NMS Stock

ATS. See supra Section III.B.1.

253

See 17 CFR 242.301(b)(2)(i) and (vii), respectively.

5. Rule 301(b)(9): Form ATS-R Quarterly Reports

We also proposed to amend Rule 301(b)(9) of Regulation ATS, 254 which provides that an

ATS shall report transaction volume on Form ATS-R on a quarterly basis and within 10 calendar

days after it ceases operation, 255 to require an ATS that trades both NMS stocks and non-NMS

stocks to separately report its transactions in NMS stocks on one Form ATS-R, and its

transactions in non-NMS stocks on another Form ATS-R. 256

We received two comments regarding Form ATS-R. One commenter states that in light

of information on FINRA’s website regarding ATSs, 257 and the detailed disclosures in periodic

disclosures required by Form ATS-N, the Commission should no longer require an NMS Stock

ATS to file Form ATS-R. 258 We are not amending Regulation ATS at this time to remove the

requirement for NMS Stock ATSs to file Form ATS-R. Notwithstanding the disclosure on

FINRA’s website of certain volume information for ATSs that trade NMS stocks, we continue to

belie

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