# Regulation of NMS Stock Alternative Trading Systems > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2018-15896 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** August 7, 2018 - **Citation:** 83 FR 38768 ## Text 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 3a1-1(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 require all ATSs to make and keep written safeguards and written procedures to protect subscribers' confidential trading information. 1 17 CFR 249.640. Table of Contents I. Introduction II. Background A. Role of ATSs in the Current Equity Market Structure 1. Significant Source of Liquidity for NMS Stocks 2. Operational Complexity; Conflict of Interests B. Exemption for Alternative Trading Systems C. Conditions to the ATS Exemption; Confidential Notice Regime D. Concerns Regarding the Lack of Operational Transparency III. Heightened Regulatory Requirements for NMS Stock ATSs A. Exchange Act Rule 3a1-1(a) Exemption: New Conditions for NMS Stock ATSs 1. 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 2. Comments on Extending Rule 304 to Non-NMS Stock ATSs B. Amendments to Existing Regulation ATS Rules for NMS Stock ATSs 1. Rule 300(k): Definition of NMS Stock ATS 2. Rule 301(a): Exemption From Compliance With Regulation ATS 3. Rule 301(a)(5): Exemptions From Certain Requirements of Regulation ATS Pursuant to Application to the Commission 4. Rule 301(b)(2): Form ATS Reporting Requirements No Longer Apply to NMS Stock ATSs 5. Rule 301(b)(9): Form ATS-R Quarterly Reports 6. Rule 303: Recordkeeping Requirements for Form ATS-N 7. Comments Recommending Changes To Other Existing Regulation ATS Rules IV. Form ATS-N Filing Process; Effectiveness Review A. Initial Form ATS-N 1. Rule 304(a)(1)(i): Filing and Effectiveness Requirement 2. Rule 304(a)(1)(ii): Commission Review Period 3. 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) 4. 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 B. Rule 304(a)(2): Form ATS-N Amendments 1. 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 2. Rule 304(a)(2)(ii): Commission Review Period; Ineffectiveness Determination C. Rule 304(a)(3): Notice of Cessation D. Rule 304(a)(4): Suspension, Limitation, or Revocation of the Exemption From the Definition of Exchange E. Rule 304(b): Public Disclosure of Form ATS-N and Related Commission Orders 1. Rule 304(b)(1): Form ATS-N “Report” 2. 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 3a1-1(a)(2) Exemption 3. Rule 304(b)(3): Disclosure of Form ATS-N on the NMS Stock ATS's Website V. Form ATS-N Disclosures A. Form ATS-N Disclosure Requirements and Definitions 1. Rule 304(c): Disclosure Requirements 2. Terminology a. Definitions for Form ATS-N (i) Proposed Defined Terms (ii) New Defined Terms b. Comments on the Definition of “Subscriber” B. Cover Page and Part I of Form ATS-N: Identifying Information 1. Cover Page 2. 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 C. Part II of Form ATS-N: ATS-Related Activities of the Broker-Dealer Operator and Affiliates 1. 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 2. Order Interaction with Broker-Dealer Operator; Affiliates 3. Arrangements with Trading Centers 4. Other Products and Services 5. Activities of Service Providers a. Shared Employees b. Third-Party Service Providers 6. Protection of Confidential Trading Information 7. Differences in Availability of Services, Functionalities, or Procedures 8. Other Recommendations From Commenters D. Part III Form ATS-N: Manner of ATS Operations 1. Types of ATS Subscribers 2. Eligibility for ATS Services 3. Exclusion From ATS Services 4. Hours of Operations 5. Means of Entry 6. Connectivity and Co-Location 7. Order Types and Attributes 8. Order Sizes 9. 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 A. Summary of Collection of Information 1. Requirements Relating to Rule 301(b)(10) and 303(a)(1) of Regulation ATS 2. Requirements Relating to Rules 301(b)(2)(viii) and 304 of Regulation ATS, Including Form ATS-N B. Proposed Use of Information 1. Amendments to Rule 301(b)(10) and 303(a)(1) of Regulation ATS 2. Rules 301(b)(2)(viii), 304 of Regulation ATS, Including Form ATS-N, and 301(b)(9) C. Respondents D. Total Initial and Annual Reporting and Recordkeeping Burdens 1. Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS a. Baseline Measurements b. Burdens 2. 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 (c) Part III (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 (c) Notice of Cessation on Form ATS-N (iii) ATSs That Trade Both NMS and Non-NMS Stocks (iv) Access to EDGAR (v) Recordkeeping Requirements E. Collection of Information Is Mandatory F. Confidentiality of Responses to Collection of Information G. Retention Period for Recordkeeping Requirements X. Economic Analysis A. Background B. Baseline 1. Current NMS Stock ATSs 2. Current Reporting Requirements for NMS Stock ATSs 3. Lack of Standardized Public Disclosure 4. NMS Stock ATS Treatment of Subscriber Confidential Trading Information 5. Competition a. Competition Between 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 Broker-Dealers That Do Not Operate NMS Stock ATSs 6. Effect of NMS Stock ATSs on the Current Market for NMS Stock Execution Services a. Trading Costs b. Price Discovery c. Market Efficiency C. Economic Effects and Effects on Efficiency, Competition, and Capital Formation 1. Economic Effects of Enhanced Filing Requirements of Form ATS-N a. Benefits b. Costs 2. 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 Broker-Dealer 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 3. Economic Effects of Written Safeguards and Written Procedures To Protect Subscribers' Confidential Trading Information a. Benefits b. Costs 4. 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 (c) Public Disclosure of Form ATS-N (ii) Effects on Changes in Number of NMS Stock ATSs on Market Participant Trading Costs (iii) Innovation b. Efficiency c. Capital Formation D. Reasonable Alternatives 1. Require NMS Stock ATSs To Publicly Disclose Current Form ATS 2. Require Form ATS-N but Deem Information Confidential 3. Require NMS Stock ATSs To Publicly Disclose Form ATS-N but not Declare Form ATS-N Ineffective 4. Initiate Differing Levels of Public Disclosure Depending on NMS Stock ATS Characteristics 5. Require NMS Stock ATSs To Register as National Securities Exchanges and Become SROs 6. Discontinue Quarterly Volume Reports on Form ATS-R 7. Require NMS Stock ATSs To Operate as Limited Purpose Entities 8. Prohibit Broker-Dealer Operators and Affiliates From Trading on the NMS Stock ATS 9. 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. 2 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. 3 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”). 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 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. 4 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. 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 5 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. 6 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. II. Background A. Role of ATSs in the Current Equity Market Structure 1. Significant Source of Liquidity for NMS Stocks 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 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. 7 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. 8 See id. at 23540 n.313 and accompanying text. 9 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. 10 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). 11 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. 12 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. 13 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. 14 See id. at 3598. 15 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 16 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. 17 See id. at 81009-81010. 18 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. 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 broker-dealer 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 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. 19 See Proposal, supra note 2, at 81010, 81041-81043. 20 See id. 21 See id. at 81010. 22 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. 23 See id. at 81041. 24 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. 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 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 broker-dealer 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. 25 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 broker-dealers.” See id. at 81001 n.30. 26 See infra Section V.D.19. 27 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. 28 See id. See also infra Section V.C (discussing comments on the proposed disclosure requirements of Form ATS-N). 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 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. 29 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). 30 See 15 U.S.C. 78f. 31 See 17 CFR 240.3b-16(a). 32 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. 33 See 17 CFR 240.3b-16(e). 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 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 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. 34 15 U.S.C. 78e. 35 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). 36 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/2014/33-9685.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). 37 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). 38 See, e.g., 15 U.S.C. 78f and 78s. 39 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). 40 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. 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 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 41 See 17 CFR 240.3a1-1(a)(2). 42 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. 43 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.” 44 See generally Sections 5, 6, and 19 of the Exchange Act, 15 U.S.C. 78e, 78f, and 78s. 45 See 15 U.S.C. 78e. 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 46 See 17 CFR 242.300(a). 47 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. 48 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 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 49 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). 50 See 17 CFR 242.301(b)(1). 51 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. 78 o (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). 52 Form ATS and the Form ATS Instructions are available at http://www.sec.gov/about/forms/formats.pdf. 53 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. 54 See Proposal, supra note 2, at 81005. 55 17 CFR 242.301(b)(2)(vii). See Form ATS. 56 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). 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 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 57 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. 58 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 ATS-N). 59 See 17 CFR 242.301(b)(2)(iii). 60 See 17 CFR 242.301(b)(2)(iv). 61 See 17 CFR 242.301(b)(2)(v). 62 See Regulation ATS Adopting Release, supra note 3, at 70864. 63 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. 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 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 64 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. 65 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. 66 See 17 CFR 242.301(b)(2)(vii); Form ATS-R at 2, General Instruction A.7. 67 See generally infra Section III. See also Section III.B.5. 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 68 See 17 CFR 242.301(b)(3)(i). 69 See 17 CFR 242.301(b)(3)(ii). 70 See 17 CFR 242.301(b)(3)(iii). 71 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 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. 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 72 17 CFR 242.301(b)(5)(i). 73 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). 74 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). 75 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 76 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”). 77 See 17 CFR 242.301(b)(6). 78 Regulation SCI does not apply to ATSs that trade municipal securities or corporate debt securities. See SCI Adopting Release, supra note 76, at 72262. 79 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. 80 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. 81 See SCI Adopting Release, supra note 76, 79 FR at 72252. 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 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 82 See 17 CFR 242.301(b)(7). 83 See 17 CFR 242.301(b)(8). 84 See 17 CFR 242.302. 85 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. 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 86 See 17 CFR 242.301(b)(10)(i). 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 87 See 17 CFR 242.301(b)(10)(ii). 88 See 17 CFR 240.301(b)(11). 89 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. 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 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. 90 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. 91 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. 92 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). 93 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. 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 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 operations and potential conflicts, many commenters also highlight recent enforcement actions brought by the Commission. 96 94 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. 95 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). 96 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 cease-and-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). NMS Stock ATSs, which meet the definition of “exchange” but are not required to register with the Commission as national securities exchanges, compete with national securities 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 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. 97 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). 98 See Proposal, supra note 2, at 81042 n.372 and accompanying text. 99 See 15 U.S.C. 78s(b). 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 ATS-related 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 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. 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. 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 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. 106 103 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. 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 3a1-1(a)(2). 106 See infra Section IV.A.3. 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 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. 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 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. 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 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. 115 108 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 3-4; 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. 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. 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, 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. 116 See Investor Advocate Letter at 12. 117 See CBOE Letter at 1. 118 Id. 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 broker-dealers. 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. 120 119 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). Another commenter believes that increased disclosure will aid in developing industry-based standards. 121 Three commenters state that increased disclosure will boost investor confidence, 122 and according to one of these commenters, increased transparency and investor confidence could lead to more investors using NMS Stock ATSs, and result in greater price discovery and lower costs of capital formation. 123 121 See STA Letter at 2. 122 See CFA Institute Letter at 3; Schneiderman Letter at 2; Investor Advocate Letter at 11-12. 123 See Investor Advocate Letter at 11, 12. 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.” 126 124 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. 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 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. 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”). 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. 129 128 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. 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 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. 133 130 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 broker-dealer operator on the NMS Stock ATS by requiring only the disclosures of affiliates that can enter or 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. 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 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. 134 See Consumer Federation of America Letter at 3. 135 See id. 136 See Investor Advocate Letter at 8. 137 See Morgan Stanley Letter at 1. 138 See Proposal, supra note 2, at 81011. 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 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. 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. 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. 144 142 See id. at 4. 143 See supra notes 109-123 and accompanying text. 144 See infra Section V. 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 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. 145 See SSGA Letter at 2; PDQ Letter at 2; Morgan Stanley Letter at 2. 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 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. 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 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). 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 only apply the requirement of prior Commission “approval” of changes before they are implemented to “larger ATSs with a substantial market footprint.” 158 153 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. 158 See STANY Letter at 2. We continue to believe that requiring all NMS Stock ATSs to publicly file a Form ATS-N, 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 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 broker-dealer 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 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. 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. 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 ATS-N 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. 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 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. 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. 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. 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 national securities exchanges, and to foster even greater competition for order flow of NMS stocks between those trading centers. 175 173 See STANY Letter at 3. 174 See supra Section II.D. 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. 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. 177 176 See Morgan Stanley Letter at 3. 177 See id. at 2-3. 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 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. 183 178 See Fidelity Letter at 4. 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 broker-dealer 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. 184 184 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). c. Comments on Effectiveness Requirement 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. 190 185 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. 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 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 appl [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2018-15896. Public record. Not legal advice.